When I first started researching the property records for my daily posts, I was astounded by all the mortgage equity withdrawal. I still am. At first I was surprised that borrowers would do it. It would have never occurred to me to actually increase my mortgage indebtedness (yes, I have had a mortgage before). I can understand taking out a loan for home improvements, but never for consumer spending. Then, the more I pondered the issue; I came to realize that borrowers are like drug addicts: if you make money available to them, they will take it. Combine that tendency with a drug as addictive as kool aid, and you get people who truly believe their house is providing them with free money, so it is OK to borrow this money. Once the fear of debt is gone, even fiscally conservative people get into the act.
Finally I came to realize it was the lenders who were the stupid ones. Rational lenders want to make sure they are going to get their money back with interest. They are supposed to be the experts at determining the creditworthiness of a borrower because they are the ones ultimately taking on all the risk. Lenders started drinking the kool aid and began giving out any amount of money to just about anyone. They also believed they had no risk because they believed house prices would always go up. Even if people defaulted, they would not experience any default losses. It is the stupidity of lenders and investors in mortgage-backed securities that is truly mind-boggling.
You never give me your money You only give me your funny paper
Most of the houses for sale today have some amount of mortgage equity withdrawal. The conservative ones only added a little, but the average Irvine homeowner who bought before 2001, and who is selling today, doubled their mortgage. That’s right, most of them doubled their mortgages. However, some people really got carried away. Some people borrowed every penny of equity as it accumulated and spent it.
Usually when people go on an irresponsible borrowing and spending spree, there are consequences for this action. People get burned, and they learn not to repeat their mistakes. However, those people who were the most egregious HELOC abusers, are the ones being punished the least. Borrowers who took out all their equity have transferred 100% of the loss in value to the lenders (remember Mortgages as Options?) What have these people learned? And what lesson is being taught to everyone else?
The worst HELOC abusers have learned there are few consequences for their behavior. Yes, they will lose their homes and face bad credit issues, but they still got to spend all the money. Perhaps they will suffer the loss of their lifestyles as the free money dries up, but I imagine they will be first in line to buy another home and start the process all over again when their credit clears up. The rest of us witnessing this behavior have to be asking ourselves, “Why won’t we max out or debt during the next cycle and pass the losses on to the lenders?“ Based on what we are seeing, perhaps the fiscally conservative ones were the fools.
Out of college, money spent See no future, pay no rent All the money’s gone, nowhere to go Any jobber got the sack
Today’s featured property is a particularly bad case of HELOC abuse enabled by Stearns Lending Inc. (Bears Stearns?). The peak appraised value of this property based on the loans attached was $1,138,500. The asking price is 40% off this figure. I have profiled this property before, but since the discount is so large, it is worth revisiting.
Lawrence
Roberts, the Housing Bubble Cassandra, Proposes National Association of
Realtors Regulation and Outlines Future Housing Bubble Prevention in New Book
Authored by real
estate insider, Lawrence Roberts, who is considered a housing bubble Cassandra due
to his prediction of the housing price crash, the book, The Great Housing
Bubble, calls for National Association of Realtors regulation through the
Securities and Exchange Commission. The book also outlines proposals for future
housing bubble prevention, and it is among first to examine the causes of the collapse
of U.S. home values.
Irvine, Calif., Dec.
3, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
believes the members of National Association of Realtors (NAR) should be
subject to oversight by the Securities and Exchange Commission (SEC) due to the
false statements they routinely make concerning the investment potential of
residential real estate. Financial services professionals are strictly
regulated as to the representations they can make regarding the financial
performance of certain investments by the SEC. Roberts believes their
activities should be similarly regulated since the false investment
representations of the NAR contributed to the housing bubble.
Roberts proposes a
series of changes to our current system of appraisal, lending and sales of
residential real estate. He contends our system of property appraisal needs to
be overhauled to rely on valuations based on a properties potential rental
income rather than merely verifying and perpetuating irrational exuberance by
using the comparative sales approach.
Roberts believes lending
standards need to be tighter to ensure those who are loaned money to purchase
real estate can comfortably afford the payments necessary to sustain ownership.
The documentation standards of residential loans needs to be improved with both
parties having more stringent civil and criminal penalties for lending outside
of reasonable standards or committing fraud or misrepresentation on a loan
application.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
Liar I have drunk the wine (or kool aid) Liar time after time
Not long ago, we had a realtor trolling the forums. He tried all the standard hooks, but he found those fish were not biting. One of the more ridiculous ideas he put out there was the notion, “You can’t predict which way the market will go, so you should buy.“ WTF? Anyone with half a brain or any amount of investment experience would know the old truism, “When in doubt, stay out.“ Beyond that the remark is stupid for another reason: it is pretty obvious that the market is going to go down. The decline has momentum, we are entering a recession, and prices are still greatly inflated.
Realtors thrive by creating fear in buyers. They will use lines like:
It is a good time to buy!
Hurry. This one won’t last.
Don’t throw away your money on rent.
If you are serious, you had better buy now or you might be priced out of the market.
They are not making land anymore.
If you see a property you love, you really need to make an offer.
The more earnest money you put down, the more seriously your offer is taken.
Things have been a bit slower than last year, but the last two weeks we have seen a lot more traffic.
Rates are at all time lows and buyers have more choice than ever!
Rates are creeping up, so you better get in now.
If you wait until the bottom, you will miss out on getting a property that you really like.
This property is priced at below market value.
Incentives this good won’t be available after…
Don’t worry about the asking price - just offer what you’re willing to pay.
Don’t worry. You can afford this house.
I will show my client the offer, but I just want to let you know that we have another offer for more coming in this afternoon.
Trust me.
It’s not just the commission. I really care about you.
In a buyer’s market these ploys are all lies (the truthfulness of these statements is questionable in all market conditions). Don’t believe them.
Liar liar liar liar Liar that’s what they keep calling me
Do not forget that when you are buying a house, the realtor is the agent of the seller. The primary responsibility of the realtor is to serve his client by obtaining the greatest possible purchase price. The realtor may be nice and disarming, and you might honestly believe they have your best interests at heart. They don’t. In a perfect world (for them) they would lead you to believe they are looking out for you while they are extracting as much money out of you as possible. That way, you will be inclined to use them again when it is your turn as a seller to get as much as possible from your buyer.
Realtors are paid to say the things that would make you cringe with a straight face and a smile. That is how they get that extra few percent out of buyers that justifies their existence. Sellers pay them to say all of the things in the list above for one simple reason: it works. Buyers fall for it, almost every time. Financial manias are not enabled by realtors presenting rational arguments and objective advice. Housing bubble psychology is exploited by realtors to sell homes. That is their job.
When I sold my home before moving to California, I used a realtor. When it is my turn to sell a home here in California, I may do the same. If I find someone who I believe will get me at least 4% more in a sales price than I could on my own, I will hire them. I just won’t be there when they go into their sales pitch. My facial expression would give me away…
Today’s featured property is in the Northwood II neighborhood. The stress of the low end is working its way up to this next tier of the housing market. This one is going for less than $300/SF.
Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, however they did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.
Maybe I’ll win Saved by zero
Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the downpayment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.
Today’s featured property is another 100% financing deal, and get this: the lender was Zero Down Mortgage! I wonder if they are still in business…
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
