Mortgage Lending a Lot Like Musical Chairs
Mortgage Lending – Déjà Vu…All Over Again
Philosopher George Santayana once said, “Those who cannot remember the past are condemned to repeat it”.
In light of recent actions in the mortgage lending industry, we all may be able to experience the thrill ride of 2007-2009 all over again…soon. You may wonder what actions I am referring to so let me share a brief list of what I will call the top ten contributing factors to the downturn I see happening by July of 2017.
- By 2017 it will have been 10 years since the start of the last collapse in the real estate marketplace. Since institutional memory is roughly 10 years, most of the people in charge of the big banks and the GSEs in 2017 will not remember what happened in 2007.
- Virtually all government mortgage lending programs have reduced down payment requirements to 3% of the purchase price. This is simply not enough skin in the game to keep borrowers from taking on more debt than they can handle. Not that many years ago buyers were expected to put 20% down so how do we get to 3% and feel good about it?
- Wall Street firms, money center banks, large home builders, mortgage banks, and big real estate firms are hungry for more profits and have successfully avoided being held responsible for the last downturn. These groups have also spent millions on lobbying to water down new regulations which would prevent another free fall and now you have ideal laboratory conditions for another collapse driven by greed.
- The current “recovery” is largely illusory due to the artificial means and methods deployed to create it. The Federal Reserve has manipulated interest rates to prop up price recovery for too long and, in doing so, not benefited the people mostly hurt by the collapse. To the contrary, most of the wealth created since 2009 has been concentrated in the hands of very few people and they are not interested in sharing.
- The same few who control the wealth in the US not only spent millions lobbying against much needed regulatory changes, they also spent millions (billions?) buying the latest round of Congressional elections so they could control the Senate and the House. Recently, two brothers held a not so secret meeting with “their candidates” to announce they will only have $900 million available for buying offices in 2016. Whatever happened to “we, the people” and who among us actually believes a corporation should have the same rights as a live human being?
- Big banks have gone back to regulators and requested permission to turn to the derivatives market once again, allegedly to hedge their loan portfolios. The last time these same big banks used derivatives to “protect” their investments, the losses incurred from the use of these highly volatile “investments” nearly wiped them out. The truth is that banks really use derivatives to goose their operating income so that management can earn bigger bonuses while risking your deposits.
- Real estate brokers and agents are running around proclaiming that appraisers are undervaluing real estate and killing their deals left and right. This has led to brokers and agents bringing appraisers stacks of what they think are comparable sales in an attempt to “help” the appraiser arrive at the “correct” value…which brokers and agents naturally believe is the contract price. The fact that one is born every minute and is willing to over pay for a property does not make what they pay the fair market value. When brokers and agents attempt to influence a licensed professional appraiser in determining value, it is akin to showing up at the doctor’s office with a list of tests you got from WebMD and want the doctor to order. It is also a sign another apocalypse is not far off.
- Years ago, virtually all mortgage lending was controlled by local banks and savings & loans (remember them?) that knew both the borrower and the home being purchased. Today, mortgage bankers who have never set foot in Iowa are funding and selling millions in mortgage loans with the loan process being done largely online. Under the now “old” system, the primary source of repayment was the borrower’s income and having good credit was something you earned and not something you paid an online service to help you create. Under the system today, mortgage lending is a lot like musical chairs…you run around in a circle as fast as you can and hope there is a chair to sit in when the music stops. Hmm…I wonder what song was playing when Lehman Brothers went under. Perhaps “Another One Bites the Dust”?
- Many people trying to profit from increased real estate sales and lending activity still want the rest of us to naively believe that home ownership is the American dream, but this does not make sense any longer. We are now a country influenced by many first and second generation immigrants who came to us from countries where home ownership was and is a foreign concept. Add to that fact the increased mobility of the 25-35 year old age group and the high price of even entry-level homes and it’s no wonder first time home buyers have disappeared into the shadows. Years ago these were the two groups that drove the demand for affordable entry-level homes and we have not figured out how to replace them. My peers are retiring from jobs they have held for 25-35 years, but today very few of our children will stay with any one job for more than 10 years. This does not bode well for the demand for new, for sale housing.
- Last, but not least, by July of 2017 the current Congress will have had 2+ years to pass as many watered down housing bills written by special interest groups and filled with pork as possible plus we will have a new President who will have just finished his/her first 6 months in office. To me this signals the arrival of another perfect storm in the capital markets. I hope I am wrong and that we are not condemned to repeat the past, but if I had to wager a few dollars I know how I’d bet. How about you?
Unfortunately, our government officials and our financial institutions give us a lot of reasons to doubt them — not only as real estate professionals, but also American citizens. The possibility that they will lead us back down a path of regret and anguish is strong, especially given the conditions that exist today. There are too many questions that are unanswered. So, what can we do to make sure we don’t repeat the issues from the past? Make sure you are heard. Write your elected representatives and voice your concerns. If you aren’t willing to do that, then align yourself with the many organizations out there that do.
At the Foundation of Real Estate Associates (FREA), we continue to fight for the real estate industry. We’re working to get answers to your unanswered questions and we’ve got your back.
Executive Vice President and Chief Operating Officer at FREA
A former practicing attorney with more than 30 years experience in real estate and risk management. The Foundation of Real Estate Associates (FREA) has specialized in providing Errors & Omissions Insurance to appraisers and home inspectors since 1993. As a membership organization with over 6,000 members, FREA is one of the largest and most well respected professional associations in the country, providing E&O Insurance for appraisers and inspectors as well as educational opportunities, member benefits, and legal support.
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Image credit flickr -Paolo
To busy to get into details. This is just a damn great article.
Another really great AppraisersBlogs article. Thank you. / Per point #5, that is the “Citizens United” issue, which in fact means that corporations are identified as people, and money is qualifiable as free speech. Money is not free speech and corporations are not people, and we all know it. The tag line there is; We the citizens, stand against Citizens United. (Be a pal and sign a petition about that one today, won’t you please?) / Colorado has seen strongly increasing markets for around a year now, some of them dramatically increasing with no end in sight. A consequence of us being a destination state and other issues which have created apparent market imbalance. Like the Joe Legal vs Jose Illegal sort of arguments, that being only one example from a broad range of such external influences that result in market purchase power imbalances. I’m very much in favor of sensible immigration allowances, but without them the comparative value for SF housing in one locale to the next has become remarkably imbalanced. And now with silent investors, LLC’s, and various remote interests who are pushing the envelopes and driving prices much further upward than they probably should reasonably be. We’re officially reaching pricing and value points established by recent sales, which are higher than the mid 2000’s pricing points. Some agents have stated to me, they’re seeing another round of something akin to the NINJA loans, and everyone qualifies! It won’t be long with these external pressures before whole markets ride the wave created from a handful of aggressive participators, which will proverbially solve the issue of appraisers having to say no to those value points. However, this has consequences and truth be told it’s all about the cumulative influences of all lending decisions, not the appraisers individual value analysis. Over availability of credit may have returned, and soon to be in full speed again, probably nationally. On another note, I’m still waiting on someone to answer the mythical question regarding how amc’s are in compliance with C&R rules, when there is absolutely no consistency amongst their fees, and their payment offerings are clearly 25% or more less than without their presence, regardless of which non amc outfit you may be fortunate enough to work with. / Please take heart and remember that home and land ownership is the ultimate goal, and ultimate achievement for the regular citizen. ‘The secret to the Joneses,’ is they put half down on that same type of home the other guy is leveraged to the hilt with. The solution for citizens to aggressive lending is to stop borrowing as much, and make a very serious push to have more equity, smaller monthly payments, and seek complete home ownership in shorter periods. Like my dad told me once; The secret to being rich in real estate, is to never sell. Ha! That just might be true after all. / Another great article, thank you.
Thanks admin for clearing up the posting issue. AppraisersBlogs is the best!
Most welcome!
An experienced appraiser who quit cold turkey once said:
“Those who cannot see the future of appraising are condemned to experience it”