Lonnie Glessner

According to today's Realty Trac Report on foreclosure activity around the country, Realty Trac reported that both Colorado's and Denver's foreclosure activity have dropped for 2 quarters in a row! This is great news!

In the third quarter foreclosure filings of all types dropped 11% from the 2^nd quarter at the state level and in Denver foreclosure filings dropped 13% in the 3^rd quarter!

As of September 30^th foreclosure filings in the state are down 31% from September 2007.

In Denver the percentage of household units with a foreclosure notice dropped to .91% in the 3^rd quarter. The highest in the nation was Stockton, CA at 3.69%. In March, Denver's ratio put it at the 11^th worst in the country; now Denver is only 26^th worst in the country. We are moving our way down this terrible list.

As the Case-Shiller Index has shown it appears that March 2008 was the bottom of the market here in Denver and this data supports this conclusion as well.

What a great time to buy a home in Colorado! I will leave with this quote from Warren Buffett last week, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."

It's time to be buying.

"Affordable Mortgages" Led to Un-Affordable Home Prices

In 1999 David Glenn the President and COO of Freddie Mac "confessed his company was pushed by a federal agenda." (Source: Drew Zahn at World Net Daily 9/19/08)

Here are 3 direct quotes from Mr. Glenn according to Drew Zahn-

•· "The mortgage industry intends to pursue minorities with greater intensity as federal (CRA) regulators turn up the heat to increase home ownership."

•· "The federal government in the meantime has increased pressure on lenders to seek out minorities, as well as low-income groups and borrowers with poor credit histories."

•· "Fannie Mae recently reached an agreement with HUD to commit half its business to low and moderate income borrowers."

In 1999, "Freddie Mac warned of the logical pitfalls of pursuing loans on the basis of skin color and not credit history," states Drew Zahn. Drew goes on to say, "The Washington Post reported that the company (Freddie Mac) conducted a study in which it was found that far more black people have bad credit than white people, even when both have the same incomes." This study "came under brutal attack in Congress and was ridiculed with charges of racism," says Drew.

Drew continues with, "such data demonstrated that when federal (CRA) regulators demanded parity between racial groups in lending, the only way to achieve a quota would be to begin making intentionally bad lending decisions."

From my last two posts banks and especially Fannie Mae and Freddie Mac were put under incredible pressure by the Clinton Administration to make loans that were not sound lending decisions. This social activism or social engineering was done with good intentions: to help more people become home owners, which I applaud.

However, there was and is a better way to do it and it must start with education I believe and I will cover this topic in a later post.

Now, let's look at the Law of Supply and Demand and how the CRA on Steroids affected house prices in our country. In 1999 when this snowball really started rolling the national median home price was $144,441. In 2005 the national median home price reached $234,736 an increase of 62% in 6 years! (Source: HUD) Now, how much did wages rise in those 6 years? They rose by 32% according to the Bureau of Economic Analysis.

Home prices rose by nearly the double the rate that wages grew during the time period. In a twist of irony these "Affordable Mortgages" as they were called by politicians led to un-affordable home prices and un-affordable mortgages. Thus, this housing bubble was going to pop or explode soon and it did.

You may be asking now where were the regulators? I will cover that in my next post.

CRA on Steroids

In 1994 President Clinton rewrote the Community Reinvestment Act or CRA of 1977. It was called the National Homeownership Strategy. Why? To help more "deserving" minority families buy a home-a noble idea. At this time the national homeownership rate was about 64% according to The Denver Post (Source: The Blame Game by Greg Griffin 10/5/08).

In 1995 after Republicans took control of Congress, Clinton ordered Treasury Secretary Robert Rubin to re-write the rules of the CRA. Whereas the CRA was initially approved by Congress in 1977, at this time President Clinton bypassed Congress and took control himself; knowing that the Republicans would not approve of his plan. (source: Terry Jones in Investor's Business Daily 9/24/08)

This rewrite of the CRA made getting an acceptable CRA rating much more difficult for banks. Terry Jones states, "banks were given strict new numerical quotas and measures for the level of ‘diversity' in their loan portfolios. Getting a good CRA rating was key for a bank that wanted to expand or merge with another."

President Clinton also got HUD involved in the issue as they issued new rules for Fannie and Freddie. First, Fannie and Freddie could now buy huge amounts of subprime loans. In 1995, Fannie Mae bought an estimated $18.6 billion in subprime loans from banks and this number grew exponentially over time.

Second, Andrew Cuomo, Secretary of HUD, reduced the capital requirements for Fannie and Freddie. Now, Fannie and Freddie only needed 2.5% of capital to back their investments; whereas, banks needed 10%. This was a HUGE step of deregulation by Clinton's administration.

Thus, the nation's banks and lenders faced incredible pressure to lend to minorities from 1995 on from the Treasury Department, HUD, and Fannie Mae and Freddie Mac.

In 1995 Jeff Jacoby of the Boston Globe wrote, "our banks are knowingly approving risky loans to get the feds and activists off their backs." (Source: "Democrat Fingerprints..." article by Dominic Lawson at The Independent)

In 1998 the Federal Reserve Bank of Boston "wrote a document entitled ‘Closing the Gap: a Guide to Equal Opportunities Lending', which instructed banks that an applicant's ‘lack of credit history should NOT be seen as a negative factor' in obtaining a mortgage." (Source: Dominic Lawson)

WOW! This soon became the standard in the lending industry and not just for minorities; but for everyone. In 1999 Fannie and Freddie began purchasing huge numbers of subprime mortgages. By 2007 Fannie and Freddie bought nearly $1 billion of subprime loans. (Source: Terry Jones article on Crony Capitalism from 9/22/08)

I will end today's post with this story written by Steven A. Holmes of the New York Times on September 30, 1999 in which he said, "Fannie Mae has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people."

Steven goes on to say, "In moving into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But, the government subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."

What a prophet!

Great Intentions

Now we begin to uncover the fifth party responsible for this Mortgage Mess and this party has the most fault in my opinion. It is our elected officials and this goes all the way back to 1977.

In 1977 President Carter signed into law the Community Reinvestment Act or CRA, which was a noble idea to end "redlining". Redlining is when banks open branches in low-income or minority areas; but do very little lending in the area, starving the neighborhoods of capital and the ability to buy homes.

The CRA was written to force banks to lend to borrowers in the areas where they had branches in these communities. This is a great idea if banks are discriminating against people because of race. Initially under the CRA banks were urged to lend in these communities with "safe and sound lending practices." (source: Terry Jones article in Investor's Business Daily 9/23/08).

Banks took this law very seriously and they were required to keep huge amounts of paperwork on their performance in this area and to report it to the community and the federal government every year.

Back in 1989 and 1990 I worked for a small community bank in their accounting and compliance department. I was part of the team to help open a second branch in a new community and to do so we had to prove to the government that we were complying with the CRA. This required the bank to make loans to lower income and higher credit risk people that they would not have made otherwise.

In fact, one of my Dad's cousins received a loan from the bank even though he had had 2 bankruptcies in the last 10 years. Why? My Dad's cousin fit the CRA profile of lower income and the bank needed to lend to him to be able to open a second branch. And the bank had to do this a few more times as well to get approval to open a second branch.

Now this was just with one small community bank. Earlier this decade when WAMU was buying banks and S&L's around the country they were forced by the government to quit these purchases and to open no more branches nationwide until their CRA rating improved. Now the community bank I worked for only had to 5 or 6 CRA type loans. Imagine how many WAMU had to do? It was probably in the tens of thousands.

In my next post I will reveal how the CRA became a much bigger monster in the 90's.

The Insanity of Americans

Last week I covered the first three parties at fault in the Mortgage Mess that has turned into a global financial catastrophe. No doubt that the Federal Reserve, the mortgage industry, and Wall Street played a huge part in this mess; but if borrowers were making their house payments there would not be a Mortgage Mess.

Yes, some borrowers were taken advantage of by predatory lenders; but, borrowers have let themselves be taken advantage of by their naiveté or what I call financial insanity. Here are 5 points that I want to make on this topic of consumers' financial insanity--

First, our savings rate was negative for several years this decade, meaning we were borrowing more and more and saving less and less. Why did consumers do this? I believe it is our desire to keep up with the Joneses' (our neighbors) who we don't even like. They buy a better car and we must do the same we feel. At some point in time the Piper must be paid.

Second, borrowers took on too big of mortgages that they could not afford. For the last 6 or 7 years we could approve people for more mortgage than they could afford. Why? Looser underwriting standards from Fannie and Freddie and Wall Street investors.

This is why I always ask my clients what their budget says they can afford for a mortgage payment. For example, a client may tell me they can afford a mortgage payment of $1500 and I can get them approved for a $2500 mortgage payment. I tell them don't spend the entire $2500 a month as they are the ones that will have to make the payment each month.

Next, related to this idea are the millions of Americans who took out Liars' Loans in which they lied or misstated their actual monthly income. I have heard of dozens of stories where a borrower who was a clerk at WalMart stated that he or she made $90k a year on their loan application, when in reality they made $30k a year.

Besides committing fraud, these people must have been financially insane. Here's why: you buy a $300k home with no money down and your monthly payment is $2300; but your monthly income is only $2500. "How the heck are you going to make that monthly payment? You know what your REAL income is and you believe you can make this big monthly payment? You're CRAZY!" If in your deception to your mortgage lender about your real income you then believe your own lie this makes you a lunatic or insane. I am sorry to be so harsh; but it is true.

Fourth, borrowers took out mortgages they did not understand. First, the sub-prime ARMs that many people have a fixed rate for only 2 or 3 years and then the rate can skyrocket and people did not understand this risk. Also, I am sure this risk was minimized by many mortgage brokers.

Also, millions of people have interest only loans and they are improperly using this tool and like any tool used improperly it can hurt you severely. Many people used this tool's lower payments to buy a more expensive home. Insane!

Finally, millions of people used the most toxic of all mortgages the Option ARM. All the borrowers saw was the super low interest rate of 1% or 2% and they thought WOW! But, they did not understand that these loans feature 2 different interest rates, a payment rate and the real rate which was always much higher. Plus, these loans feature Negative Amortization meaning that you will owe more in one year than you do today.

Borrowers should have asked more questions and done more research before signing their loan papers. It is amazing to me in the Golden Age of the internet with billions of pages of information that we as Americans have become even more financially insane than any previous generation. I will end with this thought about Option ARMs and borrowers: "if it sounds too good to be true, it probably is".

Fifth, is a belief that home prices will always increase. Now borrowers were not alone in this belief as Wall Street and the mortgage industry believed this too it appears by their actions. People with short term fixed rates on their subprime ARMs thought they would easily be able to refinance in 2 or 3 years into a fixed rate loan because their home would be worth 20% or 30% more by then. And of course mortgage brokers reaffirmed this belief in their clients.

Maybe my biggest gripe with our country's education system is that there is no training in personal finance. Teens get sex education slammed down their throat; but no training in money or finances. This is true even in college. My undergrad degree was in accounting; but even in college I learned very little about personal finance and money. I have learned what I know on my own through my desire to learn.

One of my deepest passions is teaching about money and personal finance and later this year I will be developing a Real World curriculum on money and personal finance for all Americans.