Home Ownership & Mortgages
This post is two posts in one. The first part is a guest piece by regular reader Jim Zavist. The second part is a press release about a related event at SLU this Friday.
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The Mortgage Crisis
A guest editorial by Jim Zavist, AIA
The current mortgage “crisis” has generated a lot of discussion and created a lot of potential “solutions”. I’m also old enough to remember the previous “crisis”, the Savings and Loan Meltdown of the 1980’s, and I’m seeing one big difference between then and now. The biggest change now is that there seems to be an assumption that homeowners who can’t pay their mortgages somehow “deserve” to be given a way to stay in “their” homes. Back in the ’80’s, homes were foreclosed, people were evicted, and because the S&L’s couldn’t deal with the volume of foreclosed properties, the federal Resolution Trust Agency ended up with a lot of properties that were resold at whatever the market said they were worth. So, while some people lost their homes, just as many people got some great deals and were able to start down their path to the American Dream.
Bottom line, if you’re still able to make either your original or your current mortgage payment, you won’t be living on the street. Yes, you’ll probably be paying rent instead of a mortgage, but guess what, if you can’t sell your home and you can’t refinance your home, because its value has dropped, maybe substantially, you don’t have any equity! Whatever money you put down and whatever you invested in improving the property is gone. It’s the big downside to investing in anything – sometimes things go poorly and you lose some or all of your investment! Sure, it affects your credit rating negatively if you have to give up your home to foreclosure or a short sale. It may even seem that it’s not “fair”. But it’s part of being an adult – it’s time to cut your losses and move on.
As has been noted multiple times in the media over the past few days, 92% of the mortgage holders today are still making their payments on time – only 8% are falling behind. I’m one of those 92%. I’ve been making mortgage payments for 25 years; unfortunately, not all on the same property (otherwise it could be close to being paid off). But, before I bought my first place, I became educated. I’ve always put at least 10% down and always had a fixed-rate mortgage (including one at 12%!), so I’ve never had to face rates that adjusted upwards, as many ARM’s are apparently prepared to do soon. I also never bought into refinancing every time the rates dropped half a point or to finance extraneous luxuries (like a car or a cruise) by pulling out the last couple of years’ appreciation. And I’m not alone – 9 out of 10 people are riding out the current drop/correction in home values, even though it may mean cutting back in other areas. Real estate shouldn’t be viewed as a piggy bank. It should be viewed as a long-term investment, one that will, hopefully, eventually be completely paid off.
With the clarity of 20/20 hindsight, we’re relatively fortunate that the St. Louis area didn’t see the huge increases in home values that other parts of the country experienced, since we’re not seeing a huge drop, either. Sure, we have pockets where too many property owners succumbed to the lure of easy money, but, overall, we don’t seem to being hit nearly as hard as places like, say, Tampa, where property values are down nearly 40%. Because of that, and even though I agree the government needs to do “something” to “fix” the economy, I’m not all that comfortable with several of the President’s proposals to “help people stay in their homes”. The fundamental problem is that home values simply became higher than actual buyers were willing to pay. They will continue to fall until buyers are willing to buy. And while there are concerns being expressed about the availability of credit, in the world of home buying, if you have good credit and an appropriate down payment and you want to buy a home around here, you can do it! Realistically, there is no “right” to home ownership. It’s something that’s earned, and we’re all learning a hard lesson.
Jim Zavist
Local Architect Jim Zavist was born in upstate New York, raised in Louisville KY, spent 30 years in Denver Colorado and relocated to St. Louis in 2005.
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Property Ownership and Economic Stability Focus of Symposium
at Saint Louis University School of Law
WHO: Saint Louis University School of Law and Saint Louis University Public Law Review
WHAT: Property Ownership and Economic Stability: A Necessary Relationship? This symposium brings together a group of leading scholars and practitioners to examine the relationship between property ownership and economic stability.
WHEN: 8:30 a.m. to 4 p.m.; Friday, Feb. 27, 2009
WHERE: Saint Louis University School of Law, William H. Kniep Courtroom, 3700 Lindell Blvd., St. Louis, MO 63108
WHY: The recent instability in America’s housing markets has demonstrated the complex relationship between property ownership and economic stability for lower-income families. Until recently, many experts argued that low-income families could not hope to achieve the “American dream” without owning their own homes. Increasingly, events from the past year are calling the assumptions underlying these assertions into question.
Leading scholars from prestigious law schools across the country join real estate and urban planning experts — including Richard Baron of McCormack Baron Salazar — to discuss an array of pressing property ownership issues, including barriers to creating affordable housing, property rights in the international context and the changing definition of property ownership in the United States.
The symposium offers 6.0 CLE credits in Missouri.
For a detailed schedule of speakers and topics or to register, go to law.slu.edu/news/conferences/property.
With ownership comes risk. But our governmental entities (federal, state and local) have for decades formulated policies which materially impact home values. Tax deductions, zoning, code regulations (how enforced), eminent domain (abusive?), MoDOT’s highway designs, the County’s willingness to expand streets without consideration for residential market values, willingness of courts to uphold property rights (works for Claytonians but not for others), real estate taxes, employment opportunities, school district management, crime trends, etc. all materially impact housing values beyond the control of homeowners and their personal responsibilities.
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I’ve been making mortgage payments on homes for over 25 years and I have had mortgages with 16% interest rate too. But never before have I seen the growth of extraneous variables beyond homeowners control impacting home values as is evident in this region. The liquidity crisis will past but the abuse of property rights locally is a very disturbing trend. The other disturbing trend is the rapid loss in employment opportunities in the region as major local companies are dissolved or taken over by outside corporations.
Well put, Jim.
Some scattershot observations–
The 8% greatly do effect the other 92%, in that the home values move as a block/neighborhood. The aid given should be with 92% in mind to protect them from the millstone that the 8% put on the neighborhood.
I would be in favor of eliminating the unconscionable terms, like outrageously high interest rates resulting from ARMs, of home mortgages. I do believe that some people were defrauded. However, I would not ‘give’ the homeowner a lower mortgage principal.
If mortgages are written down, I would make sure that when the house is sold, the government participates in any upside if the house price surpasses the ‘re-written’ mortgage value.
I don’t mean to demonize the 8%, as they are in a pickle enough. However, they did get in over their heads (with some help) and they have to be responsible for their actions.
I have a friend who has studied mortgage fraud and predatory lending extensively and there is a considerable amount of the problem that is outright crooked behavior. With job loss along side of the fraud, you have many people who are losing their homes for events beyond their control.
I’m sure there are people who have taken on more house that they could handle, even if circumstances were decent. However the whole society and its structure is a real problem. As John points out urban sprawl and its underlying need for infrastructure support has created a system that undermines home ownership, driving especially those on a fixed income to refinance their homes just to stay afloat. (reverse mortgages anyone?)
This is coupled with a capitalistic system that rewards corporate thieves, who use American corporations as their personal piggy bank, while demeaning the wages of working men and women.
In short this is not really a crisis in foreclosures, but a crisis of the capitalistic system, of democracy and what is now apparent, the rampant corruption that greed has brought on in America.
When I say corruption, it should be understood that many legal acts, such as incredible executive pay, are in fact immoral, unethical and essentially legalized thievery. Much of capitalism today is defined by such unethical behavior.
Another good example is Paul McKee’s personal 100 million dollar+ tax credit for north St. Louis development. It required the cooperation of the state legislature. It is all legal, but corrupt as hell. Examples are endless.
Foreclosures are symptoms of a more serious disease. I have no problem with President Obama trying to keep people in their homes, the real question is whether other much needed actions will be taken that helped set the stage for the current crisis.
To put it another way, would all of these foreclosures have happened at all if Wall Street wasn’t making piles of money off the misery of others leading up to the crisis? The economic system encouraged the crisis. Perhaps helping people prevent foreclosures won’t solve the problem, but it is better than doing nothing at all.
JZ, I can understand why you are uncomfortable, but letting nature take its course not only is inhumane, it is disruptive to the economy. Stability is needed. If it was simply a matter of qualified home buyers buying homes, there wouldn’t be a crisis right now. The idea that home prices will fall then home buyers will buy is fine in normal times.
Eventually the only home buyers left will be the millionaires who created the crisis, and they would never buy enough homes to matter, although I guess they could and then everyone in society would be renters. Sort of like 16 tons and what do you get?, another day older and deeper in debt.
I toured about 30 foreclosed homes in South St. Louis a couple of weeks ago. If home prices dropped any further they would have to give them away. Replacement value is the key, we are already at or below replacement value in most cases, even without considering land prices.
There is a crisis, the free market never has worked, and it sure isn’t going to work now. The task at hand is to undo the corrupt corporate/governmental system of policy making that pretends to be free market capitalism, but in fact is nothing else but welfare for the rich.
The whole society has been skewed for decades, the proof is the condition of America, dropping further behind in the world in everything from health care to transportation to education. Waiting for housing prices to drop until buyers buy is simply not going to work and will likely doom America.
GMichaud, to state that the free market never worked really lacks a perspective on the histor of home ownership in this country. Prior to 2001/2002 we had 64-65% home ownership at most, the average home appreciated 3-4%, it wasn’t considered an investment nor did many people have the resources to finance a second home, and lenders, mostly local institutions, made money by actually keeping the loan themselves (Heck, 12 to 16% return for a bank is a pretty heft return).
However, I will agree on a number of items you bring up. Simply put, allowing securization of loans as well as dropping the Fed percentage rate among others created a massive bubble in a relatively short period that absolutely looked great in 2006. Home values were skyrocketing, mortgages became exotic, everybody was either buying into it or scamming the money out of someone else in the name of the economy. Politicians and policy makers were more then willing to go with it when a contributor like National Real Estate Association or American General Contractors are telling them how great it is and someone was either getting a commission or a paycheck to build the house. Guess what, your rich include the neighborhood the real estate agent or a mortgage broker. Their is good chance that they are out of a job.
Now what to do about it? Personally, I don’t think you can do a whole lot about it in the short term. Propping up values will take money out of my pocket nor will it necessarily rise my property value. Since I value my home as a place to raise my family instead of an investment. I don’t necessarily want unsustainable rises in value in the first place (why pay more property tax). Many individuals were not in the position to own a home in the first place. What I would do is allow bankruptcy judges to adjust terms of a mortgage. It is going to hurt in the short term. However, this levels the playing field between Lender and home owner. Their should absolutely no reason why a business can declare protection from creditors and allow a judge to change terms of a contract (even collective labor agreements are not protected in bankruptcy) when an individual has no such recourse in bankruptcy. This will change the landscape dramatically. However, it will take an act of god to give politicians the courage to act on behalf of individuals.
The “irresponsible” 8% is concentrated in four states and the majority of the properties are in areas dominated by sprawl. Take for example Maricopa AZ, a small town 20 miles south of Phoenix on highway 347 as a reservation is in between. Builders rushed into this one-time agricultural crossroads during the housing boom and lured young people who couldn’t afford homes in nearby Phoenix. The population soared to 37,000 in ’08 from 1,400 a decade ago, making Maricopa one of the nation’s fastest-growing towns.
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In 2005, Maricopa collected fees on nearly 800 single-family home-building permits a month and homes sold for $180-250K, Home Depot moved in, strip malls built and WalMart announced plans to join the party. Revenues of the governmental unit ballooned to $45 million/year and consultants advised that the town should plan for a population of 350,000 by 2020. But when the construction boom abruptly ended, so did many other jobs and the party was over. Local government revenues have fallen to $31 million/year.
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Do a real estate search and find out that they are now 100s of these $250,000 homes (5 BRs, 3 baths) for sale, listed as low as $70,000, pool included, and most are less than three years old. For many that now have mortgages which are more than 2-3 times resale values, the owners have a strong incentive to turn the property over to the mortgage holder. Empty homes are being filled with a lower class of renters, a prevailing trend in the StL region too, causing further deteriorations in value. Sprawl works in the short term but often creates much more difficult problems in the long term and once responsible homeowners become considered irresponsible, by design.
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My original comments were about numerous factors that impact the value of all homes and are beyond the control of even responsible homeowners. This story is about how quickly a perfect storm can develop and harm families, communities and the image of many for years to come due to factors also beyond their control. Perhaps irrational exuberance was shared by too many?
Yes, how bold. Blame the non-“adult” mortgage-holders, not – of course – any of the other actors in this sordid play.
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Were there “deadbeat” people who bought way more house than they could afford? Probably.
Were there honest, hardworking but financially unsophisticated people who were scammed? Sure.
Were there shady mortgage brokers who had no incentive to be honest with their clients or do any due-diligence on the repayment capacity of their customers? Yep.
Were there mortgage bankers who failed to perform due-diligence on incoming notes from brokers because they were just passing the risk on to the next guy? Clearly.
Were there frauds of the highest order on Wall Street who packed up a bunch of bad loans into securitized instruments and had Moody et al rate them AAA+? Absolutely.
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At this point, it is irrelevant who did what to whom or when. As the old saying goes, a neighbor does not ask a homeowner if he was smoking in bed before calling the fire department, not if he doesn’t want the fire to spread to HIS house.
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As has been pointed out in other comments, the question is how do we get out of this mess? One of the core problems is falling home values. Foreclosure hurts EVERYONE; the bank owning the note because they can never get even close to their money back, the (former)homeowner because they A) no longer have a home and B) have their credit trashed, all the homeowners in the area due to falling home values of a foreclosed empty shells in their neighborhood. Multiply this affect by millions and that’s where we are now.
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So to pick on one component of this crisis is both unfair and disingenuous.
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Most importantly, it’s pointless. Even if your extremely inaccurate worldview was 100% correct, we STILL have to fix this problem. Even if every single mortgage is owned by the most undeserving sots in the world, we STILL have to stop this slide into zero sum. Before we all lose everything.
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Clearly having a degree in Architecture doesn’t make the author qualified to speak as an expert on this issue any more than my old EMT-P paramedic certification makes me an expert to talk about universal health care. I only point this out due to the repeated reference to Jim being an “Architect” before and after the article, not as an ad-hominem.
I would agree with comments from each of the above posts, but not all of them in their entirety. Where did this problem pop up? From us. Each of us. Yes, the ones that brought only a house they could logically afford, but kept watching their portfolio returns grow and grow to the ones that refinanced and refinanced to buy that new gizmo.
Free markets are based on greed. How much can I get for so little? now it is time to pay the piper.
We are all going to have to suffer. Do I think it’s fair? Hell no. Give me my share of a trillion and I’ll be content, but that isn’t the case. I have to pay for my neighbor down the street who couldn’t read or wouldn’t read the fine print. Even a senior who took out a reverse mortgage to stay in the house they’ve had for 40 years so they could pay the property taxes and other expenses that they had no/little say in determining (tax breaks, credits, utility increases, etc etc ).
Just like a pendulum, we are now swinging backwards, soon we will start swinging the other way. It’s just that, like the pirate ride at Six Flags, everyone gets the hebie gebies, others get a thrill, and some get sick.
Mr. Zavist, your post is well stated.
This problem is going to go away the same way it was created, over time. Like every other downturn in our economy, we will find ways to restore the order and get back on our feet. It’s my own opinion that, as American’s, we have to readjust this idea of the American Dream back to one that is more realistic. To keep this on topic, I’m only discussing the “dream” of home ownership.
Every American should not expect to own a home. That’s the reality of life. There is a reason that you can’t get a traditional mortgage without at least 10% down, because if you’re not capable of saving up ten percent of the cost of a home, you’re probably not ready to be handling the budgetary restraints that come with a home mortgage. The FHA program in theory is a good idea, but it’s my opinion that it’s been expanded to a point at which we (taxpayers) are giving people loans that are not deserving.
I’ve had the chance to truly get to know the housing market pretty well over the past year. I look at foreclosures about once a week, and most of those foreclosures are homes that are under $120,000. My point here is simple, we were giving loans to people via FHA, ARMS, etc that had no right to own a home. They probably had no savings, put nothing more that 5% max down on the home, and still couldn’t afford the monthly payments.
Hopefully, through this mess we (Americans) learn how to save again, and we get away from the idea that we’re entitled to having everything when we want it and get back to the idea that if I want that TV, I’ll save for it, and then buy it. It promotes hard work, it promotes sound financial living, and at the end of the day, it will make us as individuals and a country stronger.
That’s just my opinion though.
I’m not sure FHA’s belong in the same basket as ARM’s, but I see how a realistic down payment can give homeowners more incentive to make the payments, as well as lowering them.
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Something in all of this I rarely see mentioned is the appraisal process / realtor process of determining the value of a home. Basing the value of one house off of others in the neighborhood only stands true if they were built in the same manner, at the same time, and have had the same updates, obviously. So, do we have a system in place that overvalues homes easily in good times, spirals the downhill slide in bad, and overall makes rehabbing older neighborhoods more difficult? This all started in housing, and people in the know, knew things were overpriced, so, does the the appraisal process need reformed as part of this recovery?
I agree, being an architect, doesn’t make me an expert on this subject. I also agree that the one, fundamental issue is falling home values. IF you get laid off or your ARM adjusts upwards or your interest-only note is coming due AND your property is worth more than when you bought it, you have both equity and options – you can probably refinance or you can likely just sell and walk away – both you and your bank will leave “whole” (and it ain’t news). But if your property is worth less than what you owe, as in no one is willing to pay as much as you paid, you’re essentially screwed. You likely can’t refinance and you can’t sell without bringing cash to the table to make up any shortfall. You have two poor options. You can either continue to make payments under whatever terms you agreed to (good or bad, and hope that someday the value returns) OR you can walk away, take the hit on your credit rating and leave it to the bank to figure out what to do with their bad asset. And it really doesn’t matter if it’s your property or your neighbors’ – the real estate market is both brutal and Darwinian. The government can’t fix stupid, and the government can’t set home values. A home is worth today only what a buyer is willing to pay and what a bank is willing to finance. Period. It doesn’t matter that you paid 10% or 30% more two years ago or what its replacement value is. It’s only worth what someone is willing to pay for it! Got it?
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Spreading foreclosures are simply a symptom of the bigger issue. Just because you’re able to make your payments doesn’t make your loss of value any less real, nor does a reduction in the number of mortgages indicate that the banks are somehow trying to kill the economy. The ONLY way anyone in their right mind will lend money on a mortgage is if the value of the asset exceeds the loan amount. And unfortunately, with property values down and apparently continuing to fall, mortgages are hard to find and qualify for (as it should be). The point of my original post was that we need to find that bottom. There is some point where buyers will be willing to pay the lower prices, the market will stabilize, and the banks will start to lend in increasing numbers. It’s happening in parts of Florida already, with people buying homes for $80,000 that sold for $240,000 two years ago. Their sustainable reality is probably closer to $120,000 – $140,000. The government can try and prop up values, but I have yet to hear of any solution that will actually work short of letting the market determine what the value should be. And I continue to question the wisdom of trying to figure out how to keep someone in the home next door with a $180,000 or $200,000 mortgage.
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One final point, the antithesis to the real estate market is the energy market. It’s a matter of perspective and whose ox is getting gored. There was little outcry when home values were headed up 5% or 10% or more per year, but when oil spiked last year, we all screamed. Since then, both home prices and oil prices have deflated, significantly. The only pity talk I hear is aimed at the real estate industry; I’m hearing no sympathy for the folks who’ve invested in oil futures and petroleum exploration, nor am I hearing any sympathy for the ethanol industry facing its own economic crisis. Investing, whether it’s in stocks, real estate, energy or Beanie Babies is, by definition, risky. There will always be winners and there will always be losers. And if you’re not comfortable with that level of risk, well, there’s always renting . . .
Jim, your last comment brings up another interesting suggestion. At what point is renting a more viable, economically as well as lifestyle consideration, answer for individuals or even families, empty nesters, etc. A quick look at the loft district and pending developments shows how quick the pendulum swinged from condos to apartments as far as what the economics will dictate. How many of those condo buyers should have been renters? What is the right mix? Having some ownership downtown in the end is desireable, etc. Obviously, renting a single family dwelling is different and not as desireable in my mind except for a few (families, pet owners). Why overbuild single family housing stock to a point where a relatively large share might end up in rental. I believe we will see that near term solution unfavorable in the long term.
Tim,
There is an economic case for renting. Government, through mortgage interest deduction and other things, encourages home ownership, picking winners and losers in the market place.
The libertarian in me says, let the market work and people will find the right situation for them. The realist says that too much non-owner occupied property isn’t in too many people’s best interest. Of course, ‘private’ streets’ could emerge where the owner must live in the house, no renters allowed. Similar covenants work with such things as age. I believe some downtown loft buildings had a no renters provision at the outset.
The agency set up to deal with the S & L crisis was the RTC, or Resolution Trust Corporation. JZ, it sounds like you’re scolding people about buying homes with small down payments. FHA insured loans allow people to buy a home with less than 5% down, and they generally work out fine.
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We bought our first house FHA with a minimum FHA down payment. The loan had monthly fixed rate payment we could afford. 15 years later, we have about 50% equity in a move up home we bought with a substantial downpayment, thanks in part to the equity we accumulated on our first house. FHA and a minimum down payment loan was our ticket to home ownership and household wealth creation.
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Should government get out of the housing business? Maybe when it is subsidizing sprawl. If it leads to a more sustainable St. Louis, then maybe government has a role. I’m just glad that first house we bought FHA was in the city of St. Louis. Maybe I’m not so dumb after all? Nah. Dumb me.
dumb me – no, I’m not “scolding people about buying homes with small down payments”. Like you, I started of the same way in the 1980’s. I am trying to make two points, one that “creative” loans (zero down, 105% financing, balloon payments and unlimited ARM’s, to name a few) are “sucker bets” and that the way people bought into the refinancing frenzy that included stripping out their equity was, with the clarity of 20/20 hindsight, stupid! The only people that are needing to be “bailed out” are either those that bought at the peak of the market or used their homes as virtual ATM’s. People like you and me, who have fixed-rate or limited ARM’s loans and have continued to chip away at paying off the principal aren’t having trouble making our payments – our payments have remained relatively constant and predicatable, and we have enough equity, especially in St. Louis, that if we have to or want to sell, we can probably still do so.
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The unfortunate reality is that a large part of the current “crisis” is being driven by people facing either a not-undisclosed upward adjustments in their ARM loan payments or an impending, not-undisclosed, balloon payment coming due. In either situation, the buyers were either betting that the market would continue to inflate / appreciate or were simply naieve enough to assume that there would never be any depreciation in the real estate market, plus they assumed (or were assured) that “refinancing at lower rates” would always be a future option. IF, in retrospect, they had chosen a fixed-rate mortgage (which would’ve required that they buy a slightly-less-expensive property), they would still be looking at the same paper losses, but wouldn’t be facing the increasing payments that they can’t afford.
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Whose “fault” is it? In my mind, those buyers, their lenders AND their regulators. But it’s also not my fault. Those buyers were either uninformed, greedy and/or victims of poor timing. The lenders, given their new-found ability to securitize the loans they generated (and to essentially no longer be responsible for their performance) were encouraged to get more and more creative and to move away from the proven track record of fixed rate loans and the fundamental concept of actually paying off your mortgage. And the regulators failed miserably to both limit these abuses and to forsee the outcome that we’re experiencing now. Yes, greed played a big part, for everyone involved. I just have a hard time accepting that it’s in my best interest help somone else avoid a big black mark on their credit report when they were able to live better than I was during the recent boom times . . .
JZ – I tend to disagree. With fixed interest rates relatively low for the past ten years, most buyers had the option of locking in at low fixed rates. The places where we are seeing the greatest amount of foreclosure are those markets where appreciation in the 1998-2003 time period was insane.
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At the same time, affordability in those areas (sunbelt, high growth, etc), has been a problem for 20 years or more. So desperate buyers, trying to get any foothold they could in the homeownership/equity train, would stretch however necessary to qualify for that first loan.
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How could they ever have predicted that 20+ years of housing price increases would all of a sudden come crashing down? When we are witnessing 25-40% depreciation in home prices in a 12-18 month period, it wouldn’t have made much difference if these buyers would have had a fixed rate or ARM.
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Yes, there is a percentage of the crisis tied to subprime loans, speculation, flippers, etc. Indeed, in these cases, greedy lenders and borrowers have themselves to blame. And from the sound of things, these troubled loans are not the ones aimed at for assistance through our national economic recovery efforts.
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Instead, it’s more the genuine homebuyer, owner occupant, faced with a drop in value driving up foreclosures, creating a cycle that is feeding on itself. If it would be possible to restructure some of these loans by reducing a portion of the principal loan amount or lowering the interest rate, it could help to slow down the downward spiral.
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Meanwhile, forcing banks to use “mark to market accounting” is wreaking havoc on the balance sheets of financial institutions. Marking down the value of the asset to current market values is wiping out the financial position of banks. Based on a regulators analysis of a banks asset/liability ratios, many banks are no longer in a position to make loans, leading to a freeze in credit markets, exacerbating our economic crisis.
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Intervention is needed or our economic problems will continue to mount. There is much more to this issue than fixed vs. adjustable rate loans and individual borrower/lender transactions and LTV ratios.
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Our entire economic system is wrapped up in this, which unfortunately for us in STL is mostly being driven by falling housing prices in select regions, especially those fast growth, sprawl regions like Phoenix, Las Vegas, east LA, and Florida. At least that’s how things appear to me. Dumb me.
dumb me, I think for the most part we agree, except for one important thing – “Instead, it’s more the genuine homebuyer, owner occupant, faced with a drop in value driving up foreclosures, creating a cycle that is feeding on itself.” No, the last thing the average homeowner wants to do is to screw up their credit rating simply because they’ve lost paper value. If they were smart or lucky enough to obtain a fixed-rate loan, they’ll likely continue to make the payments, for as long as they can, and will wait out the market correction. Unfortunately, in most hyper-infalted markets, where affordability for first-time buyers was a very real issue, guess what, most of these “desperate buyers, trying to get any foothold they could in the homeownership/equity train, would stretch however necessary to qualify for that first loan.” And, because many of them were novices, they believed the line that “you can always refinance in 2 or 3 years, once you have some equity”, so go ahead and sign up for this zero-down, interest only loan that has a ballloon payment in 36 or 48 months.
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That’s the real problem – they can’t sell, they can’t refinance, and no one, not even the government, can save them from being this upside down. Personally, and probably because I’m way too pragmatic, I really don’t know why so many are trying to hang onto their homes – even if they figure out how to make payments for another 10 years, they’ll still have little or no equity (unless there’s some miracle rebound). For most of them, since whatever they’ve put into the home is long gone, just walking away and renting for the next ten years and saving up another down payment makes way more financial sense than throwing good money after bad and trying to stay put!
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How could they ever have predicted that 20+ years of housing price increases would all of a sudden come crashing down?” Simple – by looking at a longer horizon, something like 40 or 50 years. Or, by doing the math – 10%-20% annual inflation is never sustainable for decades on end, especially when its only a regional anomoly. And unfortunately, in these hyper-inflated markets, the ones with “25-40% depreciation in home prices in a 12-18 month period, . . . [it’s] these troubled loans [that will not be] the ones aimed at for assistance through our national economic recovery efforts”! The only ones that might benefit are places like St. Charles County, where values haven’t hyper-deflated and a few owners might actually qualify for the proposed 105% loans. Places like “Phoenix, Las Vegas, east LA, and Florida”? Never.
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Finally, while I agree that mark to market is an underlying issue, I’m still of the opinion that banks are primarily reluctant to lend for the simple reason that they’re not seeing the bottom of the market. Sure, if you want to put 40% or 50% down, why not? But for the typical buyer, wanting to put only 5% or 10% down, there still remains a real risk that the collateral value could lose more than the value of the down payment over the next year, leaving the banks with the same bad exposure that they face now. Much like the S&L crisis, this won’t be changing until supply and demand become balanced.
I would like to speak up in favor of ‘mark to market’. It basically just says that you must put on the balance sheet what the market says your asset is worth. Jim, even you said that an asset is worth was someone is willing to pay for it (or a bank is willing finance). If it is worth more, why don’t they sell it, or at least point to recent, like sale to justify their valuation.
I see the alternative as what is called ‘mark to make believe’. In mark to market’s absence, bank will cook a number that will meet the projections that they gave to Wall Street. That is no one’s best interest.
Those looking for an article about the problems with mark to market accounting written by a person a lot smarter than me should read here:
Forbes story
http://www.post-gazette.com/pg/09058/951956-30.stm – this is from Pittsburgh, but does a great job of framing the asset-valuation issue.
There’s a subtle distinction in the valuation story reported in the Pittsburgh article and the mark to market story in Forbes.
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The Pittsburgh story pertains to home purchases (or refinances), and appraisals made to support new loan originations.
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The Forbes story deals with loans already closed and on the books of banks (or the real estate acquired through foreclosure).
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The Forbes story questions the method of valuation used for mark to market accounting, and whether the method is forcing banks to overly degrade asset value of their portfolio.
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Conservative appraisals for new purchases or refis is absolutely a necessity, and had it been done in the first place would have probably saved us from some of the problems were facing now.
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That 4 family in the _____ neighborhood, appraised for $100,000, loaned out at $80,000 and then needing major rehab is one example of how lousy appraisals are sometimes part of the chain of events leading to a foreclosure and neighborhood blight.
I am unimpressed by the articles’ reasoning for suspension of the rules. The Forbes article says that the rule hurts too much, so must be suspended. Also, that the market is not a true gauge of what the asset is worth, but ‘cash flows’ should be used. Hello!! If a bank could unload the asset at the price they value it at, that would be no problem. I believe the problem is that the instrument is so complicated (and so able to be presented fraudulently [see AAA ratings]) that no one wants to touch it. I would be more persuaded is Investment Bank X president (or somebody) with recent high bonuses would step in and buy some securities from Investment Bank Y. That would establish a market, and put someone at risk if the securities don’t pan out as they say they would. Investment Bank Y would probably take a hit on the sale, but it would put a floor under the portfolio as well.
Furthermore, the accountants duties are to the shareholders, and potential shareholders. Not the economy as a whole. Yes, the rule does hurt the balance sheet of the banks. They bought assets that the market doesn’t value the same way they do. That is a failure of management. Please don’t call them illiquid. They can be sold, just maybe not at the price the bank wants.
As for the Pittsburgh article, I sold a house in Soulard in 2008. I asked my agent, ‘Is the appraisal going to be a problem getting the sale through?’ My agent replied, ‘my appraisers don’t let me down.’ Hmm. For work, the company bought some heavy equipment that had to be appraised. The lending side of the bank told the appraiser what level the credit side of the bank needed for the loan to go through. Double hmm.
I look upon the appraisers as being as responsible as anyone in this mess. Of course, they are not that well paid, and can be out of job with too many low appraisals. The people will just go to someone else.
The problem is “only with the 8%”? Looking in the rear view mirror misses what’s ahead. 20% of all US mortgaged residential properties were underwater at the end of December, that’s more than 8.3 million mortgages. An additional 2.2 million mortgaged properties are approaching negative equity and these properties are within 5% of being underwater. As home prices continue to drop these properties will be underwater soon and unemployment is rising. Without jobs the ability to make mortgage payment falls.
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The worst state is where gambling and highways rule. Conditions in Nevada are rapidly deteriorating as the casinos grew on massive amounts of debt and revenues are declining. More than 50% of all mortgage borrowers in Nevada are underwater and the average loan/value ratio for properties with mortgages is 97%. The data is from First American CoreLogic. The Chief economist states “the scope of this is so large, I think policy actions, while they will help, the scope is so large that the size of the problem will increase.” No doubt.
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Forecasts by industry experts are that close to 16 million homeowners will have negative equity by the end of 2009, triple the number in such dire straights in 2007. Mobility, a primary component of our prosperity, is then reduced. Most do not want to realize the loss of equity in their home and homes, in a more prosperous and growing communities, seem too expensive. In St Louis, leadership has welcomed casinos with open arms and our real estate values continue to get less expensive relative to other cities.