Are Foreclosures Good For America? Part 2 by Bill Roberts
The whole mortgage mess can be laid at the feet of Alan Greenspan and his zero interest rates which caused a huge run up in real estate prices, but it was swamped by the tidal wave of foreclosures brought on by accelerating price decreases when the rates went back up.
We all remember the Hay Days of the real estate market in 2002 through 2005. Interest rates were coming down on a daily basis. House prices were going up by the minute. Sellers were getting multiple offers on their homes with the lowest being the asking price. Home buyers were primarily concerned with how much they would have to pay each month, not the purchase price. As rates came down they could afford to pay higher prices.
Speculators saw what was happening. They realized that they could make an offer on anything and probably be able to sell it again even before it closed escrow. They could "flip" the house and make a fast, easy profit with no effort and no risk. Lenders facilitated this process by making 100% loans to these flippers. After all, there was no risk!
Then the party ended. The Fed began their program of raising interest rates. Home buyers could no longer pay higher prices for homes. The market leveled off.
Speculators could no longer buy something with any assurance of being able to sell it at a profit. They were now faced with trying to cover their transaction costs (both in and out) plus their holding costs (interest and maintenance) out of the difference between purchase price and sales price. With a flat market this just wasn't possible anymore.
The flippers bailed out of the market. This caused a surplus of inventory. It was just a matter of supply and demand. Prices had to come down. And down they came. Faster and faster they came down as more and more property was put on the market.
Unintended Consequences
Congress wanted easier loans to extend home ownership. It is Public Policy that everyone should be able to own their own home. Expanding home ownership was the goal, but they didn't take into account what would happen if these people saw their situation as hopeless and stupid when they found that they owed more than their house was worth. Some just walked away, some tried to "sell short," and others waited until they were foreclosed. The dream of home ownership was extinguished for many people and some will never get it back.
It's the flippers that shouldn't have been in the market, not the first-time home buyers. We sucked them in and then blamed them for buying what they couldn't afford. Many here have called them undeserving and say that they shouldn't have been allowed to buy a home anyway. What a bunch of arrogant crap.
Now we are all paying the price
Bank foreclosures are threatening to totally destroy our whole financial market. Banks that foreclose are finding themselves bankrupt because of the foreclosures.
What if there were no foreclosures?
If we look very hard at this issue we can see that foreclosing on somebody's home is destructive to all involved. We now have a homeless family, a vacant house, and a weakened bank.
First we need to deal with the homeless family. We don't want them living on the streets or in our parks, do we? If they couldn't make their mortgage payments they probably can't pay rent either. Maybe they can afford to pay rent but the landlords don't want to rent to them because the credit is not good. In any event we are going to need to step in and help them. Maybe we will have to put them into subsidized housing (section 8) or otherwise assist.
Secondly, we have the problem of the foreclosed house. It is an "attractive nuisance" that invites crime. Vandals come in and strip the house of everything of value. Other criminals come in to do drug deals or "shoot up." And then there are the squatters who move in. All of this activity has a tremendously negative impact on the neighborhood.
Finally, we are faced with the problem of the banks which are dropping like flies. Every foreclosure depletes some of their capital. Once enough capital is depleted the bank examiners are forced to declare the bank bankrupt and take it over. Who is next? Will it be your bank? Will you lose something if your bank is taken over? Are you getting the credit you need or want or has that credit dried up? Would your business be better if more people could get credit?
Something to Think About
Our irresponsible foreclosure policy has hurt everybody. And it hasn't done what it was designed to do. It has not protected those that provided the credit to purchase those homes.
If we had just left them in their home everything would have been better.
I hope we learn something by this. I hope that the foreclosure rules are changed before the next down market.
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I have been a real estate broker since 1975. I specialize in commercial real estate, business opportunities, and finance. I coach real estate investors and teach retirement strategies. DRE #00527512
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Bill R
You bring up countless excellent and very salient points that should open a nice line of discussion.
It is great to see you back.
Here is the new foreclosure policy after this weekend. No bank is going to sell a foreclosure at a loss, when they can sit back and give a loan (that was probably obtained by fraud) back to the government at an inflated market value...and as soon as they get paid they will start it all over again. The US taxpayer will bear the brunt of the US government giving these homes away for pennies like they did in Houston years ago. Sad isn't it?
Jan, Thank you for your contribution. We might have had a completely different outcome if foreclosures had been stayed and a program like HOLC put in place. It would have assisted those home owners that were in trouble but it would have also helped the banks and the rest of us by extension.
Bill N. Thanks for the kind words. Please feel free to chime in.
Jim, I think you have missed the point here. The problem is with foreclosures. Anything that stems the flood of foreclosures is welcome.
As I understand it the new Federal program for Financial Institutions applies to under-performing mortgages, not REOs. It looks like the government program will concentrate on workouts instead of foreclosures.
Thank you all for your thoughts.
Bill Roberts
Bill, excellent article. I couldn't agree more. Leaving folks in their homes and renegotiating the loans to something workable would make this so much better. It would solve several situations whereas now we have no solution except devastation.
You did a spectacular job writing this and deserve a feature...great job!
Gena, Thank you very much. I was beginning to think that nobody got it.
Bill Roberts
Bill, those of us who have watched this unfold over the past year have been saying this for a long time. It makes absolutely no sense to tackle this problem from the top up. It has to be tackled at it source, the homeowner. The only way to do that is through a moratorium on foreclosures and workouts.
The workout concept makes sense, I just don't see a timeline or how it's going to be implemented. Everything I've read says that there is little or no help for consumers in this bill.
Loan modification is a huge benefit.
p.s. - I'm not sure that I buy Alan Greenspan as the bad guy here. I've read several of his articles and seen him interviewed. It sounds like the pressure came from white house policy. I think he saw what was coming round the bend and retired when he did for that reason. Smart Man!
Kate, I don't buy Greenspan ducking resposibility for what he did to us. I've posted the next installment in this series: Are Foreclosures Good For America? Part 4
Thanks for your comments.
Bill Roberts
When I read the first sentence about Greenspan I thought I might add a comment. I don't blame Greenspan. I blame the property assessors all over the country who decided, sometime on the heels of the reassessment cycles around 1999, that it was easier to artificially inflate the values of homes so they could tap the increased equity for the tax base rather than face oppostion for proposing tax increases, which is what every town and city council in America has to put up with when they pass their needs for schools, highways and other community needs on to the homeowners. It was double whammy...the tax assessor got more money for the county and city coffers, the homeowners got additional equity and an opportunity to almost go to the bank and write a blank check, but a higher property tax base at the same time.
Now, the country and the real estate industry is starting to realize that the values were fraudulent and misleading in appearance. I predicted this disaster in 2000. To much to talk about in the columns section. The foreclosures won't destroy the market. They'll stabilize it and bring values back in line with reality.
Dreams become nightmares. I like to say that, "A Home Is Real Space for Life's Essentials, expanse in which everything is located". Rather than a home become the product of a bad dream, it should be a place where good dreams are housed. Dreams become dust. A home should be placed in the realm of reality, not the surreal. That's my prime directive as a real estate professional. Let those who can afford them buy the foreclosures, relieve the burden of debt, and offer hope to a dying economy.
David, Thank you for stopping by.
Bill Roberts
It's a privilege to know you, Bill. Thank you for allowing me to comment.
Hey Bill, it's funny I don't have an opinon on Greenspan one way or the other, unusual for me I know. Did he play a role? Of Course, it just seems illogical that one man did this. Seems to me that legislatures, wall street, and our president played a major role.
Not that it matters at this point, now we just need to get it fixed!
Kate, It matters because we need to learn something from this or we will undoubtedly relive it.
Bill Roberts
Bill, your preaching to the choir, I 100% agree that this can't happen again - but something like it will happen again, 20 -30 years from now.
As I see it what is going on today is fundamentally the same thing that happened in the 80's with the formation of the RTC - different dynamics - but the fundamentals that allowed it happen are the same. Lack of government oversight (deregulation), combined with the greed of a few that understood how to work the system for personal gain at the expense of the greater good, all in the name of free markets!
The only way this won't happen again is if we, as Americans, fundamentally change our political system and our economic policies TODAY.
INHO, our two party political system has completely failed at this juncture. Our founding fathers never intended for this country to be a two party system. It was intended to have three or more powerful parties to keep things in check.
The only way to change this is to fire both Republicans and Democrats. I don't mean replace them with new Republicans and new Democrats - I mean fire them by changing our current party affiliations to Independent, Centrist, Libertarian, Green or something else. Then and only then will the message be strong enough that American people want permanent fundamental change.
Did Greenspan play a major role, of course he did, but he didn't do it alone or without pressure.