What REALLY Caused the Mortgage Crisis - And What to Do Now

The mortgage crisis …that caused the fall in home prices ...that exacerbated the credit crisis …that resulted in a crisis of confidence …that led the over-reaching national government to create an over-arching plan to throw trillions at the guilty and punish the innocent…

There is no question that ill-trained and ethically-challenged mortgage brokers, NINJA (No Income, No Job or Assets) liar loans, bankers who couldn’t decide if they were more stupid or more greedy and finally settled on both, and an avaricious Wall Street that packaged trash and called it trash internally, but marketed it as gilt, all played their role. As we said when I lived in Hawaii, “Yeah, yeah, yeah to all that.” They are all a piece of the whole but the big reason is the one that makes the most sense to those of us with a modicum of common sense -- and it involves the fewest variables, as well. In short, the biggest problem is simply buyers with no skin in the game.

It seems that all the above thieves, idiots, and boneheads working together still didn’t cause problems as long as the buyers made the standard 20% down payment. Putting $50,000 of one’s own simoleons into a $250,000 house gives a little pause before walking away from it.

The latest evidence that too many people with too little equity caused the bulk of the heartache comes from a study by Stan Liebowitz, professor of economics at the University of Texas, Dallas, in an article he wrote for the July 3^rd Wall Street Journal. As he wrote there:

The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house.

It seems that a lot of people moved into their houses with no skin in the game – or they took out home equity loans in abundance every time they had a merely paper rise in value. Professor Liebowitz notes that 51% of all foreclosed homes had prime loans, not subprime. He analyzed data from McDash Analytics, the biggest loan-level data source available, covering more than 30 million mortgages. Summarized, here’s what it looks like (click to enlarge):

Further research led Professor Liebowitz to conclude that the 12% of homes with negative equity comprised 47% of all foreclosures. That should be no great shock to even the most casual observer. In my earlier example, if you have $50,000 invested in the place in which you live, it doesn’t make sense to up and leave unless you’ve lost your job and can’t make the payments. Since you’re going to prefer living inside to living on the streets, it’s likely you’ll do the analysis and realize that renting isn’t exactly free, that real estate prices will come back at some point, and that every mortgage payment you make builds equity.

But if you started with 0% down and took out a home equity loan as prices for comparable homes rose, you are well-inclined to walk away rather than try to dig out of a very deep hole. Even if they were in identical homes, the former buyer lives on a hilltop, the latter in a swamp.

The good professor’s analysis only reinforces my belief that the government is throwing your money and mine at the wrong targets. Rather than insist that a quid pro quo for TARP funds be that banks insist upon more equity, they are instead jawboning interest rates down, creating an artificial and short-term “fix” that only delays the pain. Worse, the current Administration’s "Making Homes Affordable" plan actually pushes people into buying more home on less income!

It also tells me that people don’t necessarily walk away from their loan because they’ve lost their job or can’t make their payments – they walk because it costs them nothing and they can put their funds to better use elsewhere. Putting more people in homes they can’t afford, or keeping them there by forcing the banks to renegotiate their payments won’t keep a single “homeowner” from walking. They aren’t really homeowners – they’re renters and if they can find a cheaper rent for the same home, they’ll walk and foreclosures will continue to rise.

What’s an intelligent investor to do? I think that the American people are smarter than the yahoos in Washington who are trying to impose I’m-from-the-government-and-I-know-what’s-best-for-you top-down solutions. I think those among us frugal enough to have put substantial equity into our homes and who still have jobs (about 90% of us, maybe as low as 80% if you take with a grain of salt the governments’ hypotheses, suppositions, and heuristic analysis) will continue to make our mortgage payments.

By building equity we will be observing a quaint old custom they used to call “saving.” Those without a home will be “saving” in case they lose their job or, more hopefully, so they can get the down payment to buy a home with actual equity of their own. And we’ll all be “saving” more by traveling less frequently, eating out less frequently, trading in our cars less frequently, and so on.

If I’m correct, and we will all be “saving” more, there are sectors and stocks that will benefit and those that will suffer. For instance, rental apartment REITs like AIMCO (AIV), Mid-America Apartment (MAA), Avalon Bay Communities, (AVB), Essex Property Trust, Inc. (ESS) and Equity Residential (EQR) may well benefit.

Without having delved into specific securities, I recently wrote an article for SA giving a sector “overview” of those industries I thought we’d be wise to avoid as Americans pull in their horns and begin saving again. You can find it here if you like.

Full Disclosure: We are not long any of these securities – yet. But we’re salivating at the prospect of buying them even cheaper.

The Fine Print: As Registered Investment Advisors, we take our responsibility seriously to advise that, since we do not know your personal financial situation, the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, and it should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Finally, we will always disclose whether we own or are buying the investments we write about.

Comments

[Adam855:]

I agree with most of your points. Regarding the quote below, this mess was a team effort among many parties, and the buyer side of the equation has not been talked about enough. Additionally, if lenders had required 20% down in most cases, we wouldn't be in this situation. If there wasn't an implied Federal guarantee on Fannie Mae and Freddie Mac (which turned out to be true), there wouldn't have been such an appetite for risk in the mortgage resale and origination market. If the Fed hadn't applied such easy monetary policy, insane greed would not have been fueled at its base. Unfortunately none of these groups acted wisely as a whole. At this point, it's definitely rational behavior for those with negative equity to just walk, as you stated.

"It seems that all the above thieves, idiots, and boneheads working together still didn’t cause problems as long as the buyers made the standard 20% down payment. Putting $50,000 of one’s own simoleons into a $250,000 house gives a little pause before walking away from it."

Jul 05 03:13 PM

[Market Sniper:]

Also agree with most of your points. Well written. One fly in the ointment: what happens as prices continue to drop? Some very excellent reasons for that to happen. We are not even close to a price bottom. Partly due to banks holding foreclosed inventory off the market (shadow inventory, now estimated to be +800,000 single family residences nationwide), price have not, as yet, dropped to clearing level. More will walk even IF they have skin in the game. Example: purchase price..$250,000..$50,000 down..$200,000 loan. Value continues to drop and is now at $150,000. Why would someone continue to make payments on a $200,000 loan when the same resdence can now be purchased for $150,000? Buy the house down the street, move and either walk or do a short sale on your residence with the $200,000 loan. No, there is not going to be any easy way out of this mess.

Jul 05 03:49 PM

[D_Virginia:]

I agree that if everyone had been required to put 20% down, we wouldn't have as many of the problems that we have now -- however, now that we're where we are, even that won't necessarily help.

Some regions have seen home prices for 50% or more. Even with "skin in the game", if people can walk away without debt, they will.

And quite frankly, I don't blame them, they're not the ones who caused this mess.

Jul 05 03:52 PM

[Asif Suria:]

A nice summary of what occurred and I am with you about the apartment REITs and wrote an article about them (specifically AvalonBay) a few months ago,

seekingalpha.com/artic...

What are your thoughts about the effect of unemployment on these apartment REITs, especially the more leveraged ones like AIMCO and Equity Residential.

Jul 05 03:53 PM

[Joseph L. S...:]

On Jul 05 03:49 PM Market Sniper wrote:

Also agree with most of your points. Well written. One fly in the ointment: what happens as prices continue to drop? ...Why would someone continue to make payments on a $200,000 loan when the same residence can now be purchased for $150,000?


JS replies… All well-thought-out and valid concerns, Market Sniper. I believe a number of factors contribute to someone continuing to make payments on their current home, rather than flitting from house to house for the $50,000 net credit. Among them: the points, origination fees, lenders fees, FedEx fees, title insurance, and unexpected move-in expenses we all encounter when buying a new or existing home markedly narrow the $50,000 net credit.

But I think more important are the intangibles that led one to spend so much time selecting their home in the first place. Intangibles like your spouse just finished painting 3 rooms and is working on number 4, you just put $10,000 into new lawns and plants and spent countless hours watering and weeding, you really like your current neighbors, the kids have established playmates in the current neighborhood, you prefer the schools there, and so on.

Finally, perhaps less tangible but equally valid, are inertia (“a body at rest tends to remain at rest,”) confusion over the new rules of the road, stubbornness / common sense (“It may be down, but I put $50,000 into this place and it won’t stay down forever,”) and having to sell your current home to get the cash to buy the new one (and the disruption to your family’s lives – and additional expense -- as you live out of a motel between the sale and the closing on the new place.)

For all the reasons expressed herein, this is one’s home, not a stock most people will sell just because they find a cheaper one. For most people, if they believe their home will ultimately recover in value (as I do) they view their mortgage payments as money they would have spent on rent anyway, and this way they are increasing their equity. They are increasing their equity in a currently-diminished-v... asset but that’s really no different than putting more money into a stock you really like when it’s cheaper by dollar cost-averaging.

But it isn’t a stock. And it isn’t, when you have both cash equity and sweat equity in it, just a house. It’s HOME!

Jul 05 04:29 PM

[Joseph L. S...:]

On Jul 05 03:53 PM Asif Suria wrote:

A nice summary of what occurred and I am with you about the apartment REITs and wrote an article about them (specifically AvalonBay) a few months ago, seekingalpha.com/artic....

What are your thoughts about the effect of unemployment on these apartment REITs, especially the more leveraged ones like AIMCO and Equity Residential.

JS replies... Dear Mr. Suria, I just read your article on AVB and AIV and recommend it to anyone in this thread who wants more information on the subject.

I may be wrong but, with unemployment benefits, possible savings, and a spouse in the family often still employed, I don’t see all families with an unemployed family member living on the streets. I think they are locked out of the homebuying market, but they will still want a roof over their heads and a safe place for their kids. I believe they will rent.

The most fortunate of them, with enough cash flow to afford it, will rent from the upscale landlords you mention. As long as occupancy rates stay high (and with little building of new apartments, I actually see occupancy rates increasing) I imagine cash flow at these firms will continue to easily cover debt service and debt coming due.

People may sell their car and take the bus, wear the same clothes another year, or eat less expensively but, employed or unemployed, people will take care of the basics – food and shelter – first.

Jul 05 04:47 PM

[Jon Smirl:]

Little to nothing down allows you to gamble with "other people's money" (think hedge fund operator). You couldn't lose in this gamble. You captured all of the upside and if a crash occurs foreclosure has little cost (ie hedge fund shuts down). Everyone will always gamble with other people's money if given the chance.

Home owners should not have been given this chance to risklessly play with other people's money. The system broke down when these loans were made available, in a rational system you should not have been able to get zero down loans. Once these loans were available the sudden change in demand caused a feedback loop price spike (aka bubble).

The fraud occurred when these risky loans were obfuscated into AAA paper. It took very smart people to do that. Without this step the bubble could not have happened since there wouldn't have been a large supply of loans.

Did these obfuscators knowingly game the system and count on the "Fed put" to save everything after they had extracted billions in profits and retired?

Jul 05 05:08 PM

[Swashbuckler:]

Given the name of your firm, "Stanford Wealth Management", I would guess sharing the same name as "Sir Allen" has probably brought your people a few headaches they could do without. Enjoyed the article.

Jul 05 06:02 PM

[Asif Suria:]

Thanks for your response Mr. Shaefer and for recommending my article to everyone on this thread.

While I agree with you that keeping a roof over their head is the primary concern for most people, young renters have the option of moving back in with their parents or splitting an apartment with other renters instead of renting by themselves. This is something Avalon's management mentioned in their last conference call. I am long the apartment REITs and will most likely add to my positions but wanted to play devil's advocate to get your thoughts about them.

Regarding liquidity and the ability to cover debt coming due, this sector of REITs has been fortunate enough to be able to borrow from GSEs like Fannie and Freddie to not only lower their interest rates but to cover any debt that is coming due in 2009 or 2010. I have some additional information about debt maturity of these on my website, which was not reproduced in the SA article.

www.sinletter.com/spec...

Jul 05 06:19 PM

[D. McHattie:]

I agree with most of the article but disagree about REITs.

Housing supply is housing supply and we have too much of it.

Many homes currently stand vacant as they await sale or foreclosure. These units will eventually come back on the market, purchased either by

1) a renter, to live in, thus reducing demand for rental units
2) an investor, to rent out, thus increasing supply of rental units

Yes, former owners become renters but many of these units were purchased as 2nd homes and investments so their vacancy does not have a correlative increase in demand for rental units.

Also, many of these young former owner-occupiers will share rental units with roommates so they constitute less demand for rental units than they add to supply.

Any way you look at it increased demand for rental units will not keep up with increases in supply.

Econ101 says equilibrium price will fall in this environment.

Jul 05 06:56 PM

[Joseph L. S...:]

On Jul 05 06:02 PM Swashbuckler wrote:

Given the name of your firm, "Stanford Wealth Management", I would
guess sharing the same name as "Sir Allen" has probably brought your
people a few headaches they could do without. Enjoyed the article.

///// JS replies -- Thank you for your concern, Swashbuckler! No client or Investor's Edge subscriber was confused, but you never know who might have contacted us that didn't. We deal with that with equanimity and good humor, figuring that people who confuse, say, Stanford University with Allen Stanford, probably aren't going to get into Stanford! Below, for a not entirely without tongue in cheek comparison of our two firms, is my response to an SA reader who asked the question back when this story first broke...

Allen Stanford of Stanford Financial Group…
Organized in Antigua, one of the more “liberal” islands for lax banking laws

Joe Shaefer of Stanford Wealth Management LLC…
Disorganized at Lake Tahoe, and subject to lifelong SEC, NYSE, FINRA, State of Nevada and peer review scrutiny. Also holder of an Intelligence community TS clearance for his adult lifetime, and REALLY poked and probed regularly to gain that.

Allen Stanford of Stanford Financial Group…
Knighted in Antigua, not England. Gained his title of “Sir” Allen by spreading joy and Franklins around Antigua -- which gave him a title and passport in return

Joe Shaefer of Stanford Wealth Management LLC…
Got his titles (Private, Lieutenant, etc.) the old-fashioned way. Earned ‘em. Some in spots slightly less idyllic than Antigua.

Allen Stanford of Stanford Financial Group…
A dual citizen of the US, where he was born, and Antigua, where he plied his trade until the US Attorney asked him to not leave the US.

Joe Shaefer of Stanford Wealth Management LLC…
An American and proud of it. I don’t need no steenking “escape” passport.

Allen Stanford of Stanford Financial Group…
Claims to have assets under management of $50 billion. Unfortunately, some of that may have been garnered from new investors wowed by hypothetical returns presented as if they were actual returns. (This according to former employees who FOR YEARS tried to get the SEC to investigate, all to no avail. Note to SEC: How many employee affadavits does it take to get you out of your offices to check out FRAUD? Can you spell P-O-N-Z-I??)

Joe Shaefer of Stanford Wealth Management LLC…
Stanford Wealth Management has a slightly lesser amount of assets under management. On the other hand, our assets are real.


Allen Stanford of Stanford Financial Group…
Personal fortune estimated by Forbes at $2.2 billion.

Joe Shaefer of Stanford Wealth Management LLC…
Inexplicably, Forbes neglected to include Joe on the most recent list of US billionaires. I’ll contact my friend Steve Forbes and see what the problem is.

Allen Stanford of Stanford Financial Group…
“Sir” Allen is separated from his wife and six children, but has a girlfriend, Andrea Stoelker, he may or may not have been with for 7 years. He may or may not have fired her recently from her “job” as president of the Stanford Super Series (Caribbean cricket) after she did or did not have a “liaison” with Chris Gayle, the captain of the Stanford Superstars cricket team and a somewhat more athletic specimen than Sir Allen. He (Stanford, not Gayle) was also recently the defendant in a paternity suit in Miami, the plaintiff with whom he may or may not have had two additional children.

Joe Shaefer of Stanford Wealth Management LLC…
Positively boring by comparison. He’s been married to the lovely and talented Heather Williams for 14 years. Ms. Williams has also been thoroughly reviewed and registered with the SEC, the NYSE, the NASD, etc., etc. She is the Chief Compliance Officer of Stanford Wealth Management, LLC, and keeps its books, records, and policies in complete conformity with all regulatory rules and guidelines. I’ll bet right about now, “Sir” Allen wishes he had someone like Heather to keep him from having to hire fancy-pants lawyers to defend him against angry investors. You have chosen poorly, grasshopper.

Jul 05 07:35 PM

[Mark54:]

Boil it all down to 2 words... 'easy leverage'

Individuals with their homes and those that rode the equity takeout wave. Ratings agencies in leveraged credit support. We are experiencing the great de-leveraging right now. Falling asset prices are just a symptom of the world working off the excess leverage.

Jul 05 09:40 PM

[Third Party...:]

I would disagree with your assessment of "what really caused the mortgage crisis" (yes I know SA chooses the titles)

I would say that an over-reaching national government policies (artificially suppressed interest rates throughout Greenspan's tenure, both Clinton and Bush II Administrations policies that led/forced financial institutions to lend to low-income customers, etc.), that led to..., that led to..., that led to over-reaching national government to create an over-arching plan to throw trillions at the guilty and punish the innocent.

I would agree that the blood/sweat investment makes it somewhat harder to walk away from you home, but there is a tipping point somewhere.

Jul 05 09:43 PM

[davidma11:]

Lake Tahoe sure miss it. What a beautiful place..

I too believe some of the stronger apt reits will make great long term buys. I haven't taken a position in any apt reits yet but have been looking at AVB, EQR, BRE.

Does the Author have an opinion on BRE?

Jul 05 10:40 PM

[Steven Hansen:]

i am also going along with third party above - the lack of skin and system breakdown heightened the severity of the crisis and possibly the timing - but housing was a disaster waiting to happen.

it was theorized in studies over ten years ago that the baby boomers retirements were going to trigger a housing value crisis. the government's policies in the last decade heightened the oversupply to this group with their tax laws.

now the crap has hit the proverbial fan. there is no solution short of the government starting to buy houses and tearing them down.

Jul 05 10:44 PM

[Moon Kil Woong:]

The banks have grown too lazy and inefficient. Nowadays they won't write a loan unless they can dump it off to Fannie Mae and Freddie Mac meaning they only are good at making sure a loan qualifies for these "private company's" government backed blanket protection. Is this how a market should operate. We have effectively socialized the entire home mortgage market and called it private. In reality, Fannie Mae and Freddie Mac are government institutions operating not for profit but to fulfill some political fantasies at the risk and cost to taxpayers. Until the cancer is cut out from the market our problems will not go away. They may be supressed but they will inevitably just re-emerge again.

The cancellation of implicit government guarantees and the dissolution of Fannie Mae and Freddie Mac have become so prevalent and everpresent that they can't be wiped out instantly without destroying the entire mortgage market. We should face that fact and start forcing banks to address their complete lack of internal loan assesment now so that someday they won't need or want such a institutional crutch again.

Banks should only loan what they want to keep or what they themselves can sell off as securitized bond packages with them being the ultimate counterparty default risk. We don't need frankenbonds anymore that no one can afford to trace and value save by assuming that the taxpayer will pay because Fannie Mae and Freddie Mac packaged them and put a big taxpayer backed sticker on them.

Jul 05 11:19 PM

[OptimizedPrime:]

"Since you’re going to prefer living inside to living on the streets, it’s likely you’ll do the analysis and realize that renting isn’t exactly free, that real estate prices will come back at some point, and that every mortgage payment you make builds equity."

Not quite. The smart walk-aways realize that:

1. Renting IS way cheaper than owning your own house. Unless you disagree with #2.

2. Prices will NOT "come back at some point"--certainly not to Bubble prices in your lifetime. Prices will fall for another year or two then be flat for a long, long time.

3. Every mortgage payment WASTES money as you pay interest to the bank. Renting and saving is the way to save money.

4. In many areas, the rent-to-sales-price ratio is out of whack by upwards of 50%. Renting is an absolute STEAL in these areas if the prices are to be believed (and they aren't--rent is the corrected "price floor" for housing). However, in the short run, rents are a steal.


OP

Jul 06 01:40 AM

[Steve Soden:]

The Morgage market is totally out of whack now.
We need to look at values from a different point of view.

We should base values on how much a property would rent for.
Rent $1200
Value- $200,000 6%= $1199 Monthly Payment 30 years
This is a good Guideline for value and factors out current values that reflect Investor Purchases and Rigged Bank Owned and Short Sales.

Jul 06 02:59 AM

[thegrandibah:]

The real catalyst of this crisis was the change in incentive compensation for Sallie and Freddie to one based on VOLUME. Senior management was rewarded with hundreds of millions based on this rudimentary change. Barney Frank was the ax behind this change. How he has been able to walk away unscathed is beyond comprehension.

Jul 06 09:57 AM

[rrtzmd:]

...Leibowitz's article demonstrates gross abuse of statistics: "51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures"...that's both misleading and meaningless...perhaps more relevant, what percentage of prime versus subprime loans resulted in foreclosure?...probably a substantially smaller number...and comparing the foreclosure rates is meaningless as well since it will vary according to the number of loans made in each category as well as according to the time periods examined -- e.g. the rate presented could be due to a lot of prime loans relative to subprime loans being made before the crash...hence, the rate would simply be an artifact of a relatively higher number of prime mortgages being written...also, "12% of homes had negative equity, they comprised 47% of all foreclosures" is highly misleading...a statistician will tell you that is NOTHING but a CORRELATION...correlation DOES NOT translate into a CAUSE and EFFECT...moreover, he doesn't bother to explain HOW he did his analysis...HOW did he arrive at that graph?...how is anyone supposed to evaluate his analysis if they don't know how it was done?...he also fails to address the issue of the ratings' agencies...most mortgages are bundles and sold...they're supposed to be a pretty smart bunch...so why didn't Moodys, Fitch and the rest see the risk of negative equity?...next, he makes this ludicrous statement:

"A significant reduction in foreclosures will happen when and only when housing prices stop falling and unemployment stops rising..."

...well, duhhh!...I don't anyone needs a Ph.D. in economics to figure that one out...he then claims that "stronger underwriting standards are needed"...well, sure, MAYBE that could have averted the bubble...of course, he ignores whatever beneficial effects have arisen out of the almost TWENTY YEARS of prosperity we've enjoyed and whatever contribution "lax" underwriting standards may have contributed...then he concludes with yet another ludicrous statement:

"A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can't just walk away."

...well, maybe I'm mistaken but NO ONE can just "walk away" UNLESS the lender and/or bankruptcy court allows them...and IF someone has the financial resources, then the lender has recourse to civil action...similarly, bankruptcy is NOT a free ticket -- they WILL take whatever assets debtor has to settle the obligation....

Jul 06 09:57 AM

[tommm:]

I'm surprised that so few of the comments include the very first cause of the sub-prime loans was that our congress, "for the people", gave in to special interest groups, forcing the banks to make these loans -
Loans on properties in neighborhoods where no banker interested in his own skin would would walk even in broad daylight.

Jul 06 10:11 AM

[tommm:]

I'm surprised that only one or two comments alude to the fact that our "government for the people" gave in to special interest groups and forced the lenders to make the sub-prime loans in the first place - many of these loans in neighborhoods where no banker caring for his own skin would walk even in broad daylight.

Jul 06 10:15 AM

[SoCalGal:]

Joseph Schaefer wrote: I believe a number of factors contribute to someone continuing to make payments on their current home, rather than flitting from house to house for the $50,000 net credit.

There's so much misinformation in the blog entry and the responses, I hardly know where to begin, so I'll comment on just the statement above.

Mr. Schaefer, do you have any idea whatsoever about credit "seasoning" requirements when applying for a new loan? If a person walks from a property, he won't be getting another loan anytime soon, so how is "flitting from property to property" even possible?

Never mind...rhetorical question. Bleat on.

Jul 06 10:50 AM

[Joseph L. S...:]

On Jul 06 10:50 AM SoCalGal wrote:
Mr. Schaefer, do you have any idea whatsoever about credit "seasoning" requirements when applying for a new loan? If a person walks from a property, he won't be getting another loan anytime soon...

JS replies -- Ah, right. Requirements. On / in the banking and mortgage industry. "Banking requirements" is an oxymoron like jumbo shrimp. political leadership, and Congressional ethics. If the bankers et al followed any requirements or the regulators enforced them, rather than the former pursuing greed and the latter pursuing their next day off, we wouldn't be IN this miss. Apologists for the bankers and regulators can daydream about such things. In the real world, we have to think intelligently and act as if it were our money, not just numbers on a piece of paper.

Jul 06 10:59 AM

[friar tuck:]

author failed to mention the organized criminal activity perped by the appraisers and the century 21s of the world. i worked in construction all my life and i can't count the number of my coworkers who left the trade and all of a sudden they are real estate appraisers. most of these guys could not even spell appraiser and now they are one. one day they are tying rebar and the next thing you know they are appraising real estate for the mortgage brokers. what a country!!! and after all the harm they caused, they do not lose their license,( if there is such a thing). i recall filling out a mortgage app in 1993 (to appease the little lady of the house) and purposely tried my best to get turned down. it didn't work. we were handed the mortgage, which we could not afford and it only took three years before a divorce took place and i dropped off the keys back to the real estate agent and never looked back as i walked away scratching my head and wondering what just happened??? the agency has since sold the same property again, collecting his commision and laughing all the way to the bank along with the appraiser, who yes, got another appraisal fee. what a scam. as bernie found out, all scammers eventually show themselves as they really are unless the feds back them up. not much difference in losing your nest egg to bernie or the housing market except one goes to jail and the other just keeps going. there is a blatant and obvious need for more consumer protection and regulation in this area.

Jul 06 11:03 AM

[DFJ:]

The following anecdote may shed some insight into the current environment. I was talking to my sons soccer coach at a recent game. He and his wife purchased their home (in California) at the height of the market. They paid in the high $600's and used a fixed rate 30 year mortgage with 10% down. Their mtg payment is $4,400/month. Comparable sales in their neighborhood are now in the low 300's and he can rent his equivalent home for $2,200/month. He and his wife are currently employed and current on their mortgage payments. They did the analysis and decided it is better to walk away from the house and are negotiating a deed in lieu with the lender. Even though they had initial skin in the game, the price drop has been so dramatic that the current negative equity (high 200's) is no longer worth supporting at $4,400/month. They will rent at half the mortgage amount and save the balance. They are doing this fully aware of the negative impact on their credit rating.
These people are not the greedy speculators or NINJA borrowers. They are hard working individuals who saved but bought a house at prices inflated by all the causes mentioned. I don't know how representative they are but other people in similar situations coming to the same conclusion won't be good for the housing market.

Jul 06 11:20 AM

[Fred W:]

Been renting since early 2005--perhaps a little early but the writing was on the wall and my "greed" had been squeezed out by "fear" by then--just saw too many people previously working in "fast food" (if they had a job at all) move into the mortgage and real estate investment "industries" (flipping).
Current policies seem to be efforts that will only return us to this madness.


On Jul 06 01:40 AM OptimizedPrime wrote:

> "Since you’re going to prefer living inside to living on the streets,
> it’s likely you’ll do the analysis and realize that renting isn’t
> exactly free, that real estate prices will come back at some point,
> and that every mortgage payment you make builds equity."
>
> Not quite. The smart walk-aways realize that:
>
> 1. Renting IS way cheaper than owning your own house. Unless you
> disagree with #2.
>
> 2. Prices will NOT "come back at some point"--certainly not to Bubble
> prices in your lifetime. Prices will fall for another year or two
> then be flat for a long, long time.
>
> 3. Every mortgage payment WASTES money as you pay interest to the
> bank. Renting and saving is the way to save money.
>
> 4. In many areas, the rent-to-sales-price ratio is out of whack by
> upwards of 50%. Renting is an absolute STEAL in these areas if the
> prices are to be believed (and they aren't--rent is the corrected
> "price floor" for housing). However, in the short run, rents are
> a steal.
>
>
> OP

Jul 06 11:48 AM

[Gregman2:]

I don't buy Stan Liebowitz's argument. Missing from his thesis is the decline in real earnings and the resets on the OptionArms. The fact is, the mortgage backed security meltdown didn't cause the mess we're in. Jobs have been being outsourced at a fast pace for a long time. People without jobs or with reduced earnings have difficulty paying mortgages. (Which is why it's laughable when collectors from India call on behalf of the mortgage servicer to collect payments.)

Jul 06 01:13 PM

[Glen L.:]

The wild card in the rent vs. buy decision is inflation. If mass inflation occurs in the next couple of years, as I think it will, anyone who walks away from a fixed loan they can afford to take advantage of temporary cheap rents will be walking into a trap. First, they will NOT get a new loan, primarily because of market conditions rather than banks using prudent lending standards. Second, they will watch their cheap rent rise year-by-year in lockstep with inflation. The sale price of homes will also rise, albeit not as fast as rentals, unless and until the Fed allows interest rates to rise, which would put us in a real depression.

Mass inflation is the recipe for mass homelessness, circa 2011. Then again, a depression will do the same thing.

Cheers, everyone!

Jul 06 02:01 PM

[Joseph L. S...:]

On Jul 06 02:01 PM Glen L. wrote:

The wild card in the rent vs. buy decision is inflation. If mass inflation occurs in the next couple of years, as I think it will, anyone who walks away from a fixed loan they can afford to take advantage of temporary cheap rents will be walking into a trap. First, they will NOT get a new loan, primarily because of market conditions rather than banks using prudent lending standards. Second, they will watch their cheap rent rise year-by-year in lockstep with inflation.


Well said, Glen L. For many people, "Better the devil you know than the devil you don't." People "underwater" on their current property values have a FIXED, KNOWN monthly nut for their mortgage. Walk away to save a few bucks now and you subject yourself to the whims of the landlord and the possibility of getting locked out of getting another home, not because the price is too high (though that may happen as well) but because the terms are too onerous.

Jul 06 02:09 PM

[BRUCE E. W.:]

It's not so much that there was "no skin in the game" as much as it has been "other people's skin" which is a simple revision on the journalism that failed to cover the "too big to not pay homage to" financial reporting. Anyone that is interested in searching for greater foundations should check out Matt Taibbi's article that does risk some skin: www.rollingstone.com/p...
And they would be well advised that the "full article" in RollingStone Magazine is loaded with details and ten times more compelling in its historic breakdown of events. Quit blaming the victims, these are not honest mistakes we are suffering through and denial factory has been well financed in advance !

Jul 06 02:26 PM

[Chancer:]

IMO, the bubble run up in prices was caused (ignoring whose fault it was at the moment) by excessive demand by those who never should have bought homes they could not afford to pay for. Unfortunately, those who could afford loans, also paid inflated prices.

The excessive demand for the un-qualified (for loans) is not coming back. They will continue to be renters, which may help the rental property market.

The high prices may not return either until we get high inflation (after 24 months per Pimco's Bill Gross) caused by government policy.

Additional government policies that suck money out of the economy and the pockets of consumers in the form of higher cost of living are:

1- Higher taxes.
2- Higher interest rates (government debt).
3- Higher utility and energy costs ("crap" and trade, etc.).
4- Certainty of a VAT (value added tax) to pay for government spending (deficit) and the new liberal Obama Democrat socialist society.

VAT translates into significantly higher cost of living, reduction in living standards, and less discretionary income to buy a home. You have to pay higher prices to buy a refrigerator or a car to get to work, but you can rent instead of buy a home. Remember in Europe, most people rent and use public transportation.

I would not be an investor in stocks of home builders, as I believe large new housing developments will be a hard sell. It will take many years to absorb the national housing inventory that we have with those who can now qualify for loans. People will have to stop looking at homes as investments.

In states like CA with high taxes and anti-business policies, more business (jobs) will flee the state. The population who can afford homes will continue to decline. Senior citizens will also sell their homes to move to areas with cheaper home prices. This will continue downward pressure on home prices for a long time.

Jul 06 02:33 PM

[Swashbuckler:]

"good humor" is probably the BEST way to deal with it, and from the looks of this post, you have that covered.


On Jul 05 07:35 PM Joseph L. Shaefer wrote:

> On Jul 05 06:02 PM Swashbuckler wrote:
>
> Given the name of your firm, "Stanford Wealth Management", I would
>
> guess sharing the same name as "Sir Allen" has probably brought your
>
> people a few headaches they could do without. Enjoyed the article.
>
>
> ///// JS replies -- Thank you for your concern, Swashbuckler! No
> client or Investor's Edge subscriber was confused, but you never
> know who might have contacted us that didn't. We deal with that
> with equanimity and good humor, figuring that people who confuse,
> say, Stanford University with Allen Stanford, probably aren't going
> to get into Stanford! Below, for a not entirely without tongue in
> cheek comparison of our two firms, is my response to an SA reader
> who asked the question back when this story first broke...
>
> Allen Stanford of Stanford Financial Group…
> Organized in Antigua, one of the more “liberal” islands for lax banking
> laws
>
> Joe Shaefer of Stanford Wealth Management LLC…
> Disorganized at Lake Tahoe, and subject to lifelong SEC, NYSE, FINRA,
> State of Nevada and peer review scrutiny. Also holder of an Intelligence
> community TS clearance for his adult lifetime, and REALLY poked and
> probed regularly to gain that.
>
> Allen Stanford of Stanford Financial Group…
> Knighted in Antigua, not England. Gained his title of “Sir” Allen
> by spreading joy and Franklins around Antigua -- which gave him a
> title and passport in return
>
> Joe Shaefer of Stanford Wealth Management LLC…
> Got his titles (Private, Lieutenant, etc.) the old-fashioned way.
> Earned ‘em. Some in spots slightly less idyllic than Antigua.
>
> Allen Stanford of Stanford Financial Group…
> A dual citizen of the US, where he was born, and Antigua, where he
> plied his trade until the US Attorney asked him to not leave the
> US.
>
> Joe Shaefer of Stanford Wealth Management LLC…
> An American and proud of it. I don’t need no steenking “escape” passport.
>
>
> Allen Stanford of Stanford Financial Group…
> Claims to have assets under management of $50 billion. Unfortunately,
> some of that may have been garnered from new investors wowed by hypothetical
> returns presented as if they were actual returns. (This according
> to former employees who FOR YEARS tried to get the SEC to investigate,
> all to no avail. Note to SEC: How many employee affadavits does it
> take to get you out of your offices to check out FRAUD? Can you spell
> P-O-N-Z-I??)
>
> Joe Shaefer of Stanford Wealth Management LLC…
> Stanford Wealth Management has a slightly lesser amount of assets
> under management. On the other hand, our assets are real.
>
>
> Allen Stanford of Stanford Financial Group…
> Personal fortune estimated by Forbes at $2.2 billion.
>
> Joe Shaefer of Stanford Wealth Management LLC…
> Inexplicably, Forbes neglected to include Joe on the most recent
> list of US billionaires. I’ll contact my friend Steve Forbes and
> see what the problem is.
>
> Allen Stanford of Stanford Financial Group…
> “Sir” Allen is separated from his wife and six children, but has
> a girlfriend, Andrea Stoelker, he may or may not have been with for
> 7 years. He may or may not have fired her recently from her “job”
> as president of the Stanford Super Series (Caribbean cricket) after
> she did or did not have a “liaison” with Chris Gayle, the captain
> of the Stanford Superstars cricket team and a somewhat more athletic
> specimen than Sir Allen. He (Stanford, not Gayle) was also recently
> the defendant in a paternity suit in Miami, the plaintiff with whom
> he may or may not have had two additional children.
>
> Joe Shaefer of Stanford Wealth Management LLC…
> Positively boring by comparison. He’s been married to the lovely
> and talented Heather Williams for 14 years. Ms. Williams has also
> been thoroughly reviewed and registered with the SEC, the NYSE, the
> NASD, etc., etc. She is the Chief Compliance Officer of Stanford
> Wealth Management, LLC, and keeps its books, records, and policies
> in complete conformity with all regulatory rules and guidelines.
> I’ll bet right about now, “Sir” Allen wishes he had someone like
> Heather to keep him from having to hire fancy-pants lawyers to defend
> him against angry investors. You have chosen poorly, grasshopper.

Jul 06 05:33 PM

[MichaelJ007:]

I agree with "No Skin in the Game" being the prevailing buyer side cause to our current economic, housing, and mortgage misfortunes. NO DOWN PAYMENT is essentially a free spin of the wheel.

In terms of apartment rents there MAY be some short term growth in rates due to occupancy/demand. However, supply will eventually and surely knock down any rental growth. There is still a glut of condo and housing projects gone bust nationwide that WILL be converted into apartments. They currently sit in the shadows of balance sheets and special servicing mortgages. Once banks are willing to take a loss on their books and sell it to a REIT or another apartment owner the apartment supply will increase significantly. This scenario will start to gain more w/in the next year.

Jul 07 10:07 AM

[Troyhector:]

United States is observing one of the biggest downturns in the housing market in this recession period. The country and the global financial system came closer to a complete collapse this year than any time in our history with the possible exception of 1929.Chartists, technical analysts, real estate gurus, even soothsayers and tea leaf readers have all seen false bottoms and have predicted upturns in the market in the very near future.

Unfortunately, the worst is yet to come. We are not even halfway into this housing price decline. I think the situation would deteriorate even further since

* Massive Job losses
* Lack of Demand
* Since May, Mortgage Rates Have Gone Up
* Too Much Supply
* Option ARM – The Next Wave of Default
* Market Psychology

Read more www.housingnewslive.co...

Jul 07 01:53 PM

[Troyhector:]

United States is observing one of the biggest downturns in the housing market in this recession period. The country and the global financial system came closer to a complete collapse this year than any time in our history with the possible exception of 1929.Chartists, technical analysts, real estate gurus, even soothsayers and tea leaf readers have all seen false bottoms and have predicted upturns in the market in the very near future.

Unfortunately, the worst is yet to come. We are not even halfway into this housing price decline. I think the situation would deteriorate even further since

* Massive Job losses
* Lack of Demand
* Since May, Mortgage Rates Have Gone Up
* Too Much Supply
* Option ARM – The Next Wave of Default
* Market Psychology

www.housingnewslive.co...

Jul 07 02:36 PM

[Charlie Howard:]

"Buyers with no skin in the game" are only partly responsible for the mortgage crisis. The bulk of the responsibility lies with sellers who also had no skin in the game: The mortgage broker who got a commision regardless of whether or not the buyer turned out to be a deadbeat; the bank that immediately factored the paper to other institutions; and the investment house that created and sold "tranches" (how clever to use a French word that sounded good, but which none of us understood) and derivatives based on deeply flawed assumptions.

I agree with most of the rest of Joe's analysis and moral judgements on this issue, but then, my wife and I paid off our mortgage long ago, rather than using the residue of hard work to buy more toys and take expensive trips. Our depression-era parents trained us too well.

Jul 08 01:03 AM

[JerryR:]

Unemployment did not cause the mortgage crisis. Unemployment was one of the outcomes of the mortgage crisis. The causes of the mortgage crisis were stupidity,greed, and pride. When my wife and I went home hunting in 2003, we first decided to pay no more than $100 per square foot, and no more than 12% of our income on the mortgage. We ended up paying $90 per square foot for a very nice all brick home built in 1963. We sold it easily this year for a modest profit. We put the equity into a smaller but newer home which we bought for $18,000 below appraised value. In each case, we had more than 30% down payment and in each case we got a 4.5% mortgage because of our excellent credit.
The bottom line is that we buy well within our means and we look at a home first as a comfortable place to enjoy and secondarily as an investment. We could qualifiy for more home in a more up scaled neighborhood with perhaps a golf course, but we need only to impress ourselves.

Jul 13 05:51 PM

[Joseph L. S...:]

Charlie Howard and JerryR --

First, Mr. Howard, you hit on something I neglected to discuss. You're right, of course -- in addition to no skin in the game from the buyers there were no penalties for mortgage brokers who wink-wink-nudge-nudged buyers into falsifying documents, no reason for banks to be concerned about due diligence in terms of creditworthiness since they were only going to hold the loan 24 hours, and Wall Street -- well the less said the better.

Congratulations to you both for practicing something that has been out of fashion for too long -- fiscal prudence in your personal affairs. Like both of you, my wife and I figured what we could afford, put enough into it to keep the payments low, and are now reaping the benefits after having borne the slings and arrows of those who thought we just didn't 'Get' The New Economy. We didn't. We thought the old one, with regulation of the hucksters, a Chinese Wall between banks and brokers, and personal responsibility was just fine...
Joe

Jul 13 10:56 PM

[mikega:]

Would this have happened had it not been for the Government involvement in the Mortgage business i.e. Fannie Mae and Freddie Mac? The whole thing seemed to coalesce around those Government run entities. The securities issued were "backed by the government" or so it seemed! And don't forget that the Government encouraged pushing “affordable housing” code word for no money down to helped the financially disadvantaged! All of this was the catalyst that allowed the rest to follow. I agree with the skin in the game concept - but then that would not be "affordable housing" would it?


On Jul 06 01:40 AM OptimizedPrime wrote:

> "Since you’re going to prefer living inside to living on the streets,
> it’s likely you’ll do the analysis and realize that renting isn’t
> exactly free, that real estate prices will come back at some point,
> and that every mortgage payment you make builds equity."
>
> Not quite. The smart walk-aways realize that:
>
> 1. Renting IS way cheaper than owning your own house. Unless you
> disagree with #2.
>
> 2. Prices will NOT "come back at some point"--certainly not to Bubble
> prices in your lifetime. Prices will fall for another year or two
> then be flat for a long, long time.
>
> 3. Every mortgage payment WASTES money as you pay interest to the
> bank. Renting and saving is the way to save money.
>
> 4. In many areas, the rent-to-sales-price ratio is out of whack by
> upwards of 50%. Renting is an absolute STEAL in these areas if the
> prices are to be believed (and they aren't--rent is the corrected
> "price floor" for housing). However, in the short run, rents are
> a steal.
>
>
> OP

Aug 29 02:37 PM