Friday, November 14, 2008

Don't Blame Homebuyers and Homeowners!!

In reflection on the events of last week; the election; the government bailouts; and my own employers announcement that to remain fiscally responsible they too will have to consider a reduction in workforce as part of an overall plan for 2009. I understood over a year ago that we were in a recession, but with credit rates lower than savings rates it's hard for 'regular Joes' to see the danger. The fact is our government has failed us. It is their job to protect individual rights from violation by force or fraud. Many American's who are facing foreclosure were defrauded, and now that they have woken up and walked away from what I think should have been 'illegal' loan terms, they are being blamed as the deadbeats who didn't make their mortgage payments on time.

I understand the rationale of that because most people who have average credit scores buy a home for 20% down over a 30 year fixed rate and don't understand what's been happening over the last decade. I've been in real estate about 5 years now, and it was clear that things were different from when I bought my first house, almost 35 years ago. Loan instruments were being created and marketed to home buyers, home owners and investors at a frenzy. These weren't mortgages. The lender never had any intention of lending you money to buy a home, ala the Bailey or Potter model. These were instruments being created in the minds of pirates and thieves who had every intention of wrapping them in with real mortgages and bundling them as 'financial instruments'. They were duping both the home buyer and the investment banks. [The loan market itself is interesting and I'll post about that another time.] Let me share this quote from By Yaron Brook and Don Watkins of the Ayn Rand center, who believe it is absolutely false to blame capitalism for today's economic troubles.

"The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, [as well as the rate on savings], thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on."

I can't agree more with the sentiments of these gentlemen. I know first hand as a Realtor in a booming community in southern California that there were a ton of people making money along the way. Not even Realtors or loan officers could stay on top of all the different lending products. Was anyone responsible, other than the geniuses and their lawyers who created these loan products? I say, yes. The government is in place to protect individuals from theft and fraud, and these instruments were exactly that. Adjustable rate mortgages have been around a long time, but have you ever heard of rates adjusting for absolutely NO REASON!!! save the greed of the note holder? Check your Credit Card contracts and you'll see what these new homeowners had to deal with. They wrote home loans that could adjust the way your credit card adjusts. They get to change the deal whenever they feel like it, and when borrowers realized what was happening, they either defaulted or were forced out of their homes. We've seen mortgage payments go from 2K to 4K over 2 years. I don't really know who could have anticipated that type of aggressive acceleration on any kind of home loan.

The crisis occurred because they weren't able to steal any more equity from defaulting homeowners. Do you really think that if the real estate market hadn't begun to drop in value that the banks would be crying right now. If they can force a foreclosure on balance due of 150K and sell at auction for 200K we wouldn't have a crisis. In fact all of last year they were doing just that. This year that same 150K note is only worth 75K and now they are crying foul. Shame on them.

Wake up America and do what you know in your gut is right. Get your own house in order, save more, spend less and pay down your debt. Guess what will happen, the economy will still go into recession...deep, deep recession. The bailout can't work because it assumes everyone wants to maintain the status quo. We don't. We're done. The government and wall street should take a lesson from the American people and get off the credit kick. It's my hope that prices will drop so low, you'll be able to buy that home or car or business for just the right price. Credit is how they defraud us....and all we need to do is stop playing the game.

1 comment:

Anthony said...

I agree with you. Care to retract, then? :) I totally agree that predatory lending was a component, but I also believe it would have been relatively contained had it not been for the unbridled credit expansion by the fed.

So I don't tend to blame the homebuyers or homeowners for the impetus of the loans, the moral hazard was created by the government and seized upon by the predatory lenders.