Deja Vu 2: Not Crying

In this post I will tell you why I am not crying for big builders and big lenders.

As for the big lenders, it is important for the consumer to understand where mortgage money comes from. Today, it mostly comes from Wall Street, in the form of bond investment. Billions of dollars in bonds, sold with the promise of repayment by homeowners, securitized by the home they are living in. There is absolutely nothing wrong with this, and the basic process is not going to change. The problem arises when Wall Street gets greedy. Mortgage loans are made available based on the premise that home values will rise, and, in the event of a homeowners need to sell, there will equity available to pay off the mortgage. When there is no equity, and homeowners have to move, foreclosures occur. The greed part is 2 year ARM’s and high pre-payment penalties. The 2 year ARM that adjusts from a functional 3 to 5% interest rate to a 7 to 9% interest rate can double the size of the monthly mortgage payment. The pre-payment penalty makes it prohibitively expensive to refinance before the 2 year ARM escalates. Once a neighborhood begins a foreclosure cycle, is is difficult to stop until the homes have been revalued, usually at 5 to 25% less than the original purchase price, which is roughly equal to the financial and improvement concessions offered by many production builders.

Because of a complete lack of understanding by bond rating agencies and the bond buyers of the mid 2000’s, large investors went nuts chasing the high interest rates offered by poorly secured mortgages (100% loans do not represent good security). The sad part is that the leaders of some large investors (like Citicorp) are dismissed with their large golden parachutes attached. Loose your company 8.5 BILLION, get fired but wealthy.

I am not crying for large national builders either. Many of them became focused on the company stock prices, and not on home building. The more homes you sell with a good margin, the higher the stock price goes. If the leadership of these companies receives much of their compensation in company shares, the goal of management is increasing the company stock value. Build, build, build, go,go,go, especially if you can sell homes to unsophisicated buyers with loans that will go south in 2-3 years.

The classic case of the sophisticated taking money from the unsophisticated. That used to called the “shell game”. The losers: employees of financial institutions, builders, lenders, title companies, real estate brokerages and a whole bunch of erstwhile homeowners that are focused on the prize with no understanding of the process.

Since the prevailing cultural norm in the United States is to own a home, might we start teaching high school students something about how the whole thing works?

-that’s30-

Written by Larry D. McGee, Denver Realtor - Visit Website Sphere: Related Content