On Sunday I blogged about the run on the sub-prime market... it was not intended to focus on the collapse of the market but rather the circumstances behind it. The reason foreign investors liked sub-prime investments was they paid high returns and the US economy was so strong, besides, they were houses, people will do whatever they can to keep their homes. Besides the common knowledge was that real estate in the US never goes down.
It overlooked a few small details. The competition between loan companies was so strong they were offering amazing deals to get people to sign with them, not so much for the interest, but to get more investments by having more loans in effect. The interest is nice, but loans increased the value of the mortgage house, making it look more attractive to investors.
These banks, along with their winged monkeys, real estate companies, conspired to drive up housing costs by convincing people there were so many buyers and just a limited number of houses available. In order to help the Realtors make their commissions the mortgage houses began giving out no money down loans to anyone who had enough to pay for the first month's payment and the closing costs. They even resorted to interest only loans where the first few years people only paid off the interest on the loan, the payments would later balloon as principal was added in, and shortly after that go up again as the interest rates adjusted.
This in fact caused a run on the housing market, where people were selling fixer uppers for well above their actual value and receiving multiple offers above their asking price.
As with any housing boom comes the foreclosures. There is a pretty constant rate between foreclosures and housing sales. However, the foreclosure rate will appear to go up or down if you compare the number of foreclosures from year to year with no regard to increases or decreases in housing sales.
What I didn't know until I started looking into this, was the number of foreclosures in areas of California and Nevada where land speculating had been going on. Areas of San Bernadino County, Stockton, and Las Vegas, were being descended upon by speculators banking that there would be phenomenal growth. One of the commenter in my Sunday blog mentioned that no one was being thrown out of their homes. While not entirely true, there are some people being dispossessed due to a failure to pay anything for months at a time or failing to communicate with the bank, (foreclosure is a legal process, not an automatic one) the majority of foreclosures are on investment properties, not primary residences.
What amazed me were the number of uncontested foreclosures and "jingle mail." Jingle mail is the term used by the banking industry to describe when home owners chose to mail the keys to the house instead of making payments. The vast majority of this jingle mail is by people who I will assume watch too many late night infomercials and believe you can flip a house in less than 30 days and make a profit. The key is to buy a house, no money down and limited or no closing costs, paint the exterior, mow the lawn, and sell the house before the first mortgage payment is due.
There are other speculators who don't necessarily look to flip, they buy a house where it looks like there will be a spike in demand. They buy cheap, wait for the property value to increase and sell it (often to people who are looking to flip the houses). The long term speculator is not looking at the house as a short term money maker but can afford to sit and wait for the market to catch up. Some speculators do not have the resources to wait for the demand to increase and are walking away from these investments.
Don't get me wrong, there were quite a bit of bad loans given to bad risk customers, and some people bought the house in bad faith knew they would not be able to make payments when the interest went up. But also there were a number of people who were promised that when the payments increased they could refi but the mortgage writer knew there would be no appreciable equity to make a refi realistic.
So the real victims are not the people who were taken advantage by the "big bad banks", or the poor banks that just wanted to help people realize the "American Dream". The real victims are the taxpayers who will be acting as underwriters to bail out the banks.
You see Hillary's Universal Housecare is not about protecting homeowners facing foreclosure, its about bailing out the banks who have so many houses they are virtually worthless as collateral.
No comments:
Post a Comment