The Reality of Real Estate and the Economy

Many of the readers here have heard of Robert Shiller, mostly due to the many, many references to the Case-Shiller Home Price Index. In my opinion, the Index is at best a trend indicator, not a measure of absolute accuracy. It is, however, widely referenced.

My point is that, a few years back, in 2004, the same Robert Shiller published a paper entitled “Household Reaction to Changes in Housing Wealth”. In this paper, he reported his conclusions resulting from a multi-national study relating the “wealth effect” on household attitudes and consumption from stock market growth versus housing appreciation.

While the paper contains a great deal of technical references to various economic studies and methodologies, there are some simple facts which stick out: He found that a 10% gain in stock values has no correlation to any increase in consumption in the economy. He also found that a 10% gain in housing values resulted in a measurable increase in consumption of 1% in the general economy. Shiller’s own comment: “We find a statistically significant and rather large effect of housing wealth on household consumption.”

This begs the question: If we know that housing appreciation and the economy are linked, why are we not fixing housing? Another way to ask the question is: What will be the effect on the economy of a 10%, 20% or greater decline in housing values? What will it do to consumption, jobs....etc?

Mr. Shiller finished his paper with: 

I conclude that although the “wealth effect” of national home prices on national consumption may be hard to prove, there is a serious risk of the consequences of home price declines at least regionally. The regional housing bubbles that appear to be going on in the United States ought to be concerns of the Federal Reserve Board.

This is not me making stuff up. This is Robert Shiller’s take on the housing problem, and where the economy was heading, four years ago. Aside for other “bubble talk” theories, this is a very compelling argument to resolve the housing issue, not cheer its erosion.

The “wealth effect” is referenced as the measure of changes in home prices (and stock prices) and the impact on consumption and hence on aggregate economic activity. I believe that he was connecting dots: real estate goes up, consumption goes up and the economy grows and jobs are secure; real estate goes down, consumption goes down and the economy suffers and jobs are in peril.

With this as a prelude, let me get into my subject - how to repair housing in America. My personal disclosure: I have spent 30+ years in mortgage lending and real estate. Over this time, I have held a variety of positions, licenses and been granted a variety of authorities in lending and real estate. I speak from my various experiences.

In June of this year I wrote a draft of a proposal entitled “The Plan to Repair Housing in America.” It was forwarded to: Chairman Bernanke; Secretary Paulson; the Wall Street Journal; the New York Times; the Washington Post; approximately 100 Senators and Congressmen, including Representative Frank, Senator Dodd; Senator Clinton; Robert Reich and the Obama campaign; and the McCain campaign. I received ONE actual response - from John McCain’s office. So, my conclusion was that no one really cares about the economy, except for John McCain, mildly.

When the housing rescue bill was passed in July of this year, I wrote a OP/ED piece called “Barney’s Purple Loaf”, and sent it to the Wall Street Journal, the New York Times, and the Washington Post. It was not published.

In the piece, I compared the Housing Rescue Bill to a “purple loaf of nutra-bread," a meal served to prisoners who have broken the rules in jail and are punished with this diet. It takes their scheduled meal, grinds it into a batter, and it is baked and served . That is what the bill represented to me. Real world problems, requiring real solutions, and they gave the American people a tasteless meal.

To understand why we need at this time a comprehensive housing repair plan is simple. Robert Shiller told us why; connect the dots. Housing health and the economy are linked arm-in-arm.

My plan was simple, as was the underlying reasoning. Here is the reasoning:

1. At the heart of the problem in housing and mortgage lending are mistakes made at the top of the food chain, beginning with Fannie Mae (FNM) and Freddie Mac (FRE). They set the tone for the expansion of lending criteria beginning in the mid 1990’s, at the urging of the Clinton Administration.
2. Fannie and Freddie (F/F) represented the gold standard in lending. Most lending criteria in the mortgage industry based on some sort of relationship to the F/F guidelines.
3. As F/F expanded their business foot print, it both signaled to all lenders that expanding lending criteria was acceptable, and they encroached on other lending businesses.
4. This encroachment left these ALT/subprime businesses with two choices: expand elsewhere for profit, or close up shop.
5. F/F and other lenders found a ready, willing and creative funding outlet in various Wall Street firms; they found the money.
6. Various governmental agencies have oversight broad enough to encompass 99% of the lenders, the lending and loan programs. All mortgage loans funded by any regulated lender is a federally regulated loan. Other than private party lending, all loans are federally regulated.
7. Congress actually has direct oversight of F/F and HUD, VA and FmHA.
8. There was plenty of oversight on what went on in mortgage lending; it was not exercised.

The government had the tools and the responsibility to manage the mortgage lending process; they simply ignored their duty. Because they failed in their defined duties, I believe that the government should sponsor a "plan". The plan is not a bailout; the plan is intended to stabilized housing, and hopefully the economy, to allow a more orderly market driven correction.

I do not believe that we had an orderly market for 1996 to 2006. And, I do not believe that we have an orderly market at this time. Markets cannot be orderly if key criteria (such as underwriting of mortgage loans) is subject to arbitrary and capricious manipulation.

I did my first conventional loan in 1978. At that time, the published income underwriting guidelines were 25/33, if I recall correctly. Underwriters would maybe give you 28/36 if they liked other aspects of the borrowers profile. 28/36 is still the published guideline for F/F loans. I cannot recall the last time I have a borrower who actually met the published guidelines.

When F/F began to expand, they did so via “automated underwriting systems" [AUS] developed to streamline the process and standardize decision making. Fast, efficient and non-biased was the hype presented to originator like me.

Using the income ratio guidelines to illustrate the changes, you can see how the AUS system was continually expanded to accommodate more loan production. 28/36 may be the guideline in print, but, in reality, in mid-2007, 60/65 was good enough, with other relevant factors, to get F/F’s highest level loan approvals. In December, 2007 a 605 mid credit score was also good enough for the best that F/F had, at 100% LTV.

F/F, with the Expanded Level approval process, encroached into the “best” of the subprime borrowers. F/F, with their “simple” products, encroached into the “best” of the stated income borrowers.

As I said above, other lenders, ALT and subprime, referenced themselves with F/F, and through the end of 2006, wrote the business that F/F left for them.

I am not saying that all was good, but these are the facts as I see them, based on 30 years of work in this industry. F/F set the standards, and they were wrong.

Before we can reform the mortgage industry, I truly believe that housing must be stabilized and mortgage lending restored to a more reasonable business foot print. And, I believe, that lenders must be “encouraged” lend. No more sitting on the sidelines.

Here is the plan:

1. That the Federal Reserve and the Department of the Treasury, in concert with the necessary and related federal agencies, announce a National Refinance Program [NRP]. All existing homeowners would be eligible for this program;
2. This program would be available to all homeowners regardless of their situation;
3. This program is only for owner occupants, no investors or second homes at this time;
4. This program would only payoff existing mortgage debt owed, excluding any prepayment penalties…strictly payment and rate reduction;
5. This program would finance the principle balance, back payments and interest;
6. This program would be mandatory for all lenders under the “federally regulated” umbrella;
7. This program would be voluntary for those homeowners choosing to participate, but it would be time-limited as to the time frames they can apply and be accepted;
8. The files would be processed without income, credit or appraisal documentation to expedite the process;
9. There can be no fees charged to the borrower by the lenders;
10. The homeowner would be responsible only for: payoff of any items to provide clean title to the lender, back taxes, if any, homeowners insurance, title insurance, escrow/attorney fees (these could be a fixed fees), and recording fees;
11. Only one program would be available for use…I am proposing that the only choice would be the FHA-245 in a modified form.
12. The Federal Court system would issue an immediate temporary injunction stopping all foreclosures in the US on all federally regulated loans to allow this process to be completed.

The general FHA 245 program mechanics are as follows:

1. Fixed interest rate, with the rate to be set by the Fed.
2. For the first 5 or 7 years, depending on the final plan implemented, payments will adjust predetermined per cent from the previous year’s payment. For example, if the per cent increase is finalized at 7.5%, then a $1,000 P&I payment year 1, becomes $1,075 P&I payment year 2, and so on.
3. When it was introduced around 1978-79, the FHA-245 program actually had 5 variations for borrower consideration when first introduced…this is Option #3 if I recall correctly. The option was most often selected by the marketplace as it had the greatest overall leveraging for the buyer. Others could be selected or designed.
4. The initial period will have a small amount of deferred interest during the early years (years 1-3 in the case of Plan III), and then the loan balance begins to amortized in a normal fashion.

There are very few situations that the NRP/FHA 245 cannot address and improve substantially. This program was selected because if addresses several issues which I see daily in my current business.

First, I truly believe was have an income and “under-employment” problem. People are not making the money they were in 2005-2006, and it will take time for the economy to adjust and to begin to grow income again. 90% of those I know personally who are in trouble with their mortgages have had their household incomes reduced by 25-50%, or more. This is a fact that gets no headlines.

Second, by lowering payments, and setting a schedule for future increase, we are giving homeowners clarity in the payment structure, and time to make adjustments. I truly believe that the economy needs to time to find new direction. My plan gives the economy that time.

Third, by stopping foreclosures, lowering payments and stabilizing the housing market, the inventory of homes for sale should fall dramatically. Demand should grow, in part because of the number of foreclosures slowing, because we have stabilized prices and because we have re-established a more realistic mortgage market. As supply and demand should fall into a more acceptable relationship, we may then see new home construction begin again…can we say JOBS. In my area, according to the mayor, every home sold, new or used, generated about $14,000 in gross revenue to the town. I am sure it is similar across the country.

All homeowners will benefit from the availability of this one-time effort, and the NRP could go a long way to bringing the consumer back into the marketplace.

How would the process work, in general?  

To secure a new loan plan under my program, all lenders would offer the program to all of their borrowers. The only benefit to the borrowers is generally lower payments. I would give homeowners a 30 to 45 window to apply. The lenders have all of the staff they need currently in place to process a one page request for the NRP loan, open title, review it, process a payoff statement, issue docs and wait to close. I would give the lender 90 days from receipt of the homeowners NRP request to complete the process. It would take 120 days to complete this process.

Why would the homeowner not have to prove income or qualifications at this time?

First, all of these are existing loans, no matter how or when they were closed. Because of falling home values, damaged credit and eroded earning levels, much of this the result of confusion, poor planning and mismanagement the lending community, this process needs to become a no-peek process for all who apply. FHA Secure, HOPE NOW and other efforts have failed because they require too much at a time and effort and cost…and they provide little, if any, true benefit. When we lower payments, payment history improves and therefore credit will eventually restore itself, as well value and, as the payments are reduced and real hope and optimism returns to the consumer, and spending improves, and the economy improves, so will income levels also improve.

The homeowners who choose to apply for the NRP loan PROCESS have to be automatically approved to gain the greatest percentage of participation…we want all of the old loans gone…we want all of the homeowners to live easier in the current economic climate…we want all of the lenders, GES’s and MI companies to quickly restore normality to the mortgage marketplace. We want and need this process to be simple, smooth and successful.

Why pay off bad loans in full?

Many lenders, investors and other professional level participants have already suffered greatly, along with many homeowners. This program cannot make them whole, or even attempt to do so. Given the complexity of the mortgage securitization process, and the various levels of CDO’s, derivatives and traunches, etc., there is just not enough control in any one place to effectively and efficiently manage and expedite any real solution to the problem. Therefore, all of the remaining loans must go away.

I would imagine that the various market participants would experience great improvement in their balance sheets, which is good and would encourage them to expand their operations in a more prudent manner.

Let me also address the angst I read on many blogs about the “liars” who lied on their loan application, about the “idiots” who bought more than they could afford, about the “flippers” who bought multiple homes, and those “greedy” realtors and mortgage lenders who jammed people into houses for profit. Hey, I’ll be the first to admit that there were probably some abuses. Every industry and every economic cycle will evidence abuses. It’s not good, but it’s a fact. It’s is also the exception, not the rule.

For every “liar” or “flipper”, there may be 1,000 who, viewing the real estate market, and made decisions to buy a home. I talk often of the client who, looking at his homes value, and his savings, retired. Now his home has lost value, he cannot get his job back, and he is short of money for retirement. He did nothing wrong, but he is a victim.

How about the buyer who relocated and paid cash? No loan fraud, no appraisal fraud, no nothing, except he has lost a lot of money when his home went down significantly. He is a victim.

My point is that, for all of the “wrongs” over the past several years, there were many more “rights." A lot of Americans are hurting, not just homeowners, and we need to address all of these issues to properly position the economy for the future. I made the point to Chairman Bernanke, fruitlessly, that the “pain-train” we are on as regards to housing and the economy is not necessary, nor is it good. We have a “top-down” problem, and the only solution is a “bottom-up” plan. My "Plan to Repair Housing in America” is the only real solution to address housing and the economy.

I welcome your feedback.

Comments

[Jimmy Lathrop:]

I respectfully disagree with the thesis of the article and the proposed plan.

As a real estate attorney, I have worked with buyers, sellers, mortgage brokers, underwriters, real estate brokers and builders and I too understand the interplay between all players in the system.

The most important counterpoint that should be brought to the discussion is the concept of "homeownership." This concept is centered around the word "home" - a place where you live, not visit. Warren Buffet remarked that the farmer does not get up in the morning to check to see if the value of his farm has increased in overnight trading. Homes are more than investment vehicles driving consumption in the domestic economy. Home ownership guarantee a place to raise a family, a sort of intangible security which I believe outweighs any GDP relevant number as to consumption or stock prices. Warren Buffet also famously remarked that in a ten year period, a farm will have two drought years. We are currently going through a drought period. People who have not leverage their home to an 80 percent loan-to-value ratio will be all right.

Mr. Preston correctly argues that lax underwriting standards set the stage for this current market condition. While making a passing reference to the obvious speculative buyer, he gives a pass to the average homeowner as a victim. This is incorrect. Everyone who leveraged their houses 80 percent LTV or took out an ARM was making an extremely risky bet that housing prices would always rise and interest rates would always be low. The blame cannot be laid at the feet of a lack of disclosure, Pick-a-Payment plans or some mysterious force of nature. There was greed on the part of underwriters and greed on the part of homeowners to live beyond their means. The more prudent homeowner who does not rely on credit to finance their lifestyle is not affected. You have not heard from them because their livelihoods do not rise and fall on the amount of loans being underwritten or sales commissions being generated. They get up and go to work, come home, and photosynthesis continues unabated. The fringe homeowner will be put back in the rental market where they belonged and the risky banks will lick their wounds or succumb to market pressure and fail. This is not a bad thing nor should it be avoided.

Home prices are inflated beyond their historic measures and still beyond affordability for the average first time homeowner. If credit and lending continues to tighten, it will spur saving which, due to the freewheeling credit cycle, has been at historic lows. Savings spur the rebuild of capital for financial institutions and allows for a readjustment, albeit violent, of the inflated housing market.

The most obvious problems with the program suggested is the price tag, which would run into the trillions of dollars. Next, even assuming the government would bail out overleveraged homeowners, the attitudes which caused the problem would remain, and these borrowers would go to another lender and get into the same problem again. The program would require an incredible amount of regulatory oversight which would be impossible to implement on a practical matter. It would result in a tremendous amount of waste that would make Medicare fraud look like a drop in a bucket. Incredibly, the article sets forth the idea that no income no documentation loans were a cause of a problem and turns around and advocates the same approach in order to expedite the loan process. I suspect that mortgage brokers would be offering this NRP program and by fast tracking borrowers who are not creditworthy at the expense of the taxpayer, that this would enable the mortgage broker to keep their Mercedes from being reposessed. I do not own a Mercedes, but I do not think a government program to keep real estate professionals in their luxury cars is a prudent use of limited resources, to put it mildly.

Many of my colleagues in title companies, mortgage lending, settlement services, real estate brokerage and real estate law are starving. Through the boom of lending in the last 7 years, they reaped the benefit of low rates and increasing home prices, but, from a ground level, most of them have very little to show for it. True, there was a lot of consumption, some daughters had some big weddings, some nice cars were bought and a lot of steak dinners were consumed. In retrospect, it is seen that all of the job creation from 2000 to 2006 were in this phantom real estate industry. The phantom is disappearing. Rationality is returning to the market. Affordability and tightening lending requirements will shake out marginal homeowners and the excess real estate professionals. We live in a country where a person can smoke two packs of cigarettes a day and then have the government pay for their medical care for the ensuing emphysema and lung cancer at the taxpayers expense. This plan would make things worse.

There is only one plan which would solve the real estate crisis in this country. This would be legislation that would mandate that mortgage professionals have the same fiduciary relationship with a borrower as a stock broker. This would take the mortgage process from the cat and mouse game that it currently is and would wipe out all the abuses which put the market in the state that it is in. Borrowers would no longer be able to get a loan on a dime and dream if the mortgage broker would be held accountable for a loan that was unsuitable for their needs. Brokers would be forced to perform actual due diligence instead of covering their eyes and claiming ignorance when stated income loans defaulted. I support a Federal plan which would require that each mortgage professional registered in their respective state be forced to carry an Errors and Omissions malpractice policy in the amount of 2 million dollars, which, if the professional defaulted on the premium, would not be discharged in bankruptcy, much like a student loan. I would also extend the statute of limitations on fraud in real estate transactions to the life of the loan. Failure to register or maintain insurance would result in criminal and civil penalties which would not be discharged in bankruptcy. Much as the writer of the article separated the scam artist from the average homeowner, this would separate the scam artist from the true professional. Having worked in the field, and having the good fortune and foresight to diversify my practice out of the real estate field, I can assure you that the ratio of scam artist to average homeowner is inverted compared to the ratio of scam artist to true mortgage professional.

My solution would cost almost nothing, with the exception of regulatory oversight. The Mortgage Bankers Association would kill this bill and anything that would tie its fortune to the homeowners whom they claim to advocate for.

It is symbolic that the MBA owns a building in downtown Washington DC for 100 million dollars, with borrowed money, and they cannot attract tenants, so it sits vacant. Enormous edifice, utterly hollow at its core. Meanwhile, life on the farm continues, photosynthesis goes on, the sun rises, and the grass grows in the vacant parking spots where the Mercedes once parked.

www.washingtonpost.com...

2008 Sep 05 07:53 AM

[I should know:]

Jimmy,

EXCELLENT and 100% correct.

2008 Sep 05 08:45 AM

[I should know:]

My personal disclosure: I spent 40 years in mortgage lending and real estate. Over this time, I held a variety of positions, licenses and been granted a variety of authorities in lending and real estate. As an Area Manager, I personally originated and or oversaw more than $20 BILLION in retail mortgage fundings. Over the past 6 years prior to my retirement, my area was funding in excess of $100 million per month in retail originated mortgages. I did my first conventional loan in 1965. I speak from my various experiences.

FHA section 245(a) loans were very, very rare indeed; almost never used. There are several plans under this section with most involving some degree of "negative amortization" i.e., the payments are not sufficient to pay the interest due or pay off the loan within the required period of years. When given the option, borrowers almost always choose the lowest payment and, therefore, incurred negative amortization, not at all unlike the current toxic Option ARMs.

Unlike the writer of the above article who stated “ I cannot recall the last time I had a borrower who actually met the published guidelines”, by far the vast majority of our borrowers either met or slightly exceeded normal and customary guidelines.

The writers statement that “ . . in reality, in mid-2007, 60/65 was good enough, with other relevant factors, to get F/F’s highest level loan approvals” is absolutely ridiculous. Sure, EXCEPTIONS were made to normal underwriting guidelines for ratios, but they were few and far between. If the LTV was 70% or below, greater exceptions to the ratios would be made. If the bowers had significantly large cash reserves, an exception might be made.

Yes, F/F both had relatively similar automated underwriting systems that most brokers and mom & pop mortgage lenders would use (<25% of all loan originations), but most loans were underwritten through big lenders’ proprietary automated underwriting systems. Some lenders such as Countrywide and Great Western stretched their guidelines to meet F/F guidelines, but most lenders such as Chase and Wells Fargo & Co used guidelines more in-line with normal and customary ratios of 28/36 or 30/38 or 40. The statement “In December, 2007 a 605 mid credit score was also good enough for the best that F/F had, at 100% LTV” may or may not be true; I very seldom had a loan approved with a credit score below 620, and if we did, we required at least a 10% down payment, usually more. Yea, we certainly missed out on a lot of business because we were more conservative and didn’t push the envelope on every loan whenever possible, but like most large respectable lenders, we tried to do the right thing for our customers, stockholders, and stakeholders. The vast majority of outstanding mortgages are NOT liar loans or subprime loans. They’re just not.

And just as an FYI in reference to the thought that all these past due loans should be refinance at a lower rate and better turns at the taxpayers’ expense, on July 16, Moody’s Investors Service noted that 42 percent of subprime adjustable-rate mortgages modified during the first half of 2007 had become 90 or more days delinquent by the end of March 2008. That number was well north of 50 percent when looking at previously-modified loans 60 or more days delinquent.

2008 Sep 05 09:49 AM

[wsigler:]

MR. Lathrop: FINALLY, I see an analysis that is accurate, to the point, pulls no punches - placing the blame squarely where it belongs - and proposing a solution that is fair and workable. What a travesty that the MBA, as you indicate, would never allow such a solution to be implemented. Like the author, however, I would encourage you to make this proposal to as many in positions of influence as you can find time and energy...

Wayne

2008 Sep 05 11:17 AM

[rm:]

[Borrowers would no longer be able to get a loan on a dime and dream if the mortgage broker would be held accountable for a loan that was unsuitable for their needs.]



We can argue about who's footing the bill, but the fact is, the broker's fees are coming out of the proceeds, so let's clearly delineate who's working for home by requiring borrowers pay their mortgage broker *out of their own pockets.*

[I would also extend the statute of limitations on fraud in real estate transactions to the life of the loan. ]

Losses due to fraud are a drop in the bucket when compared to losses caused by absurd underwriting standards and "pie in the sky" lending programs.

Everyone wants to dream up a single solution to a problem that had numerous causes... most of which are no longer a factor.

2008 Sep 05 11:38 AM

[8-Alpha-Zulu:]

What a great piece and following string. Agreed, mortgage professionals "including appraisers" should be required to operate under a fiduciary with the mortgagee (especially in the CMBS issues). The loosy-goosy relationship between all of the participants in the process is ridiculous, especially with "appraisers" and the mortgage issuer(s). In the commercial side of things (office, retail, industrial assets) this is a huge and much overlooked area of back-room dealing, nod-nod, wink-wink, etc. I have witnessed this for all of my 28 years in the business and it sickens me to see the lenders stressed to the brink (again, ref. RTC) because of the game played between valuation (appraisal) and the total capitalization of the debt side of deals done over the last decade or so. The entire process of moving money from raw capital/debt to the marketplace (in the form of mortgages( is ridden with impropriety and bias and there are there are billionaires (many) that made their fortunes by exploiting and successfully manipulating this inefficiency in the mortgaging system/process.

2008 Sep 05 12:14 PM

[kebu77:]

Amend the bankruptcy code to allow principal homeowners to get the same treatment that owners of second homes and investment properties can get. The shock to the system will get the servicers to get with the program on effective loan mods like they should have been doing for the past year or more. Servicers are cheating lenders by stonewalling borrowers in default who could make it with loan mods. Hundreds of thousands of borrowers walked away who could have kept their homes with respectable loan mods.

For the future, the regs should require not only a fudiciary responsibility by lenders/brokers to borrowers but also a fudiciary responsibility by BROKERS and SERVICERS to lenders. How many borrowers got under water because brokers closed deals in a hurry on the hoods of cars and sold crappy paper? How many borrowers already under water walked away because servicers made more money from foreclosures than loan mods?

2008 Sep 05 02:32 PM

[John Preston:]

Hey, Wakeup.... perhaps you should....sorry, I couldn't resist, so I apologize immediately.

My reason for touting my PLAN is that no one else has really offered a real solution to the directed at current problem. I have not found a plan directed at the problems on Main Street.

I read lots of posts on a variety of blogsites... and all I sense is a growing angst....criticisms of lenders...of buyers...of borrowers....a rah rah rah for the beat down on housing values. But, no suggestions with practical, real work, workable solutions. Just angst and poorly formed criticisms.
The impact of the "wealth effect" housing has as it relates to the general economy is not something I made up. As a matter of fact, Robert Shiller was profiled today on some news sites discussing his new book and his “wealth effect” study which I cited in my article.

I am hoping that others, if not liking my plan, will put forth their own plan...one that really addresses the issues on main street. You should perhaps try to write a program that addresses the number of issues that mine actually does.

The economy needs serious help, and there is none coming from the top...for whatever reasons....I thought I might find some serious solutions here.

As for the accountability of the mortgage broker, as written above, again, this is not on-topic as it relates to any solution to the current problem...It seems easier to ignore the current crisis and write about the future...

As for mortgage brokers and the process...the true mortgage broker process is the most transparent aspect of the mortgage marketplace. Every piece of paper is displayed to the actual lender prior to any final decisions are made....As for transparency with the borrower, 85% or so of all loans written are simple, one dimensional 30 yr fixed rate loans...not real complex stuff. And, for the other loans, last time I checked, the borrowers were adults...

However, like much of the posting I read on the internet...no one really wants to address the negative effect the current situation is having on the general economy. Everyone wants to criticized the past process, and jump ahead with impractical solutions for the future, basically ignoring the current crisis….meanwhile the ship is sinking...needlessly.....
I challenge who disagree with my article all to post a better, more workable solution. Head-in-the-sand is not a solution.

2008 Sep 05 05:56 PM

[Jimmy Lathrop:]

Mr. Preston

Your final paragraph addresses the fundamental differences in our opinion. You are of the opinion that the deflation of the housing market is having a negative effect on the economy. I am of the opinion that a hangover is not a big issue outside of the liquor peddlers and alcoholics. No more hair-of-the-dog-that-b... remedies, thank you.

Time cures hangovers. That seems to be the plan working right now for our nation of mortgage binge drinkers. But fret not, the pendulum will swing back to 2002 in ten years or so. The golden punchbowl will be spiked again. I will put the word out on the street to the mortgage bartenders so that you are assured a spot in the front of the line when the party hats are being passed out. There will be loud raucous laughter and toasting to Messrs Paulson and Bernanke for serving the Bloody Marys that kept the spirits high during the dry years. The regret will be forgotten. The collection calls a distant memory. The foreclosure notices a speck in the distance as the phantom equity drains from the taps as the registers of the barkeeps swell with the transfer of wealth from the rubes to the wolves.

On the farm, photosynthesis will continue, the crops will muffle the sounds of cursing and Mercedes fenders bending as the farmers family sleep through the night.

2008 Sep 05 08:36 PM

[John Preston:]

To Mr. Lathrop

Yours was a long post and I respect the time you took and the consideration you my article. Let me further clarify my plan.
You wrote: The most obvious problems with the program suggested is the price tag, which would run into the trillions of dollars. Next, even assuming the government would bail out overleveraged homeowners, the attitudes which caused the problem would remain, and these borrowers would go to another lender and get into the same problem again.
The first part, the cost...lenders are not charging for this process, they already have more staff than they need to process the paperwork…and the home owners who want the benefit are paying the title and closing cost….the mortgages in question would revert back to the owners of those mortgages. The attitudes, as you phrase it, would not matter as my reform proposal would actually codify the range of limits between with the future lenders could work…I would actually define the playing field boundaries, and end for ever what I refer to as the “accordion effect.”
You wrote: Home prices are inflated beyond their historic measures and still beyond affordability for the average first time homeowner. If credit and lending continues to tighten, it will spur saving which, due to the freewheeling credit cycle, has been at historic lows. Savings spur the rebuild of capital for financial institutions and allows for a readjustment, albeit violent, of the inflated housing market.
Under the reform part of my plan, with a rigidly define lending field, past abuses cannot occur. The near-to-mid term effect would be to smooth the home value curve and provide for an orderly market correction. The savings rate you refer to will probably not occur, as, with the severe decline in consumer spending, jobs will become a problem and therefore disposable income will fall. There will be no increase in savings rates unless we cut up credit cards, stop purchasing new vehicles and other mid and big ticket consumer items…this will not lead to a very pretty economy. If every American established a 10% savings rate, it would drain the economy of consumption, in my opinion.
You wrote: There is only one plan which would solve the real estate crisis in this country. This would be legislation that would mandate that mortgage professionals have the same fiduciary relationship with a borrower as a stock broker.
First, in many states, licensing is in place and it did not help. I concur that the current standards, even as a broker, are somewhat low. I had to meet a 5 year experience requirement, take a course and pass a test. Of all of the professional tests I have taken, the easiest was the various Real Estate tests…the hardest (and it still is, BTW) was the California Appraisal license exam. However, you see this as a point of sale problem…and I see it as a top-of-the-heap problem. Let me explain it this way. A few years ago, Montana, I believe, posted speed limits at 100 MPH. First, I am sure most drivers, going through Montana, drove faster rather than slower. Why? Because they could drive faster legally. Now, was the “excess speed” the fault the workman who put up the signs…the fault of the Highway Patrol officer who watched the drivers zip by, or was it the fault of those in the legislature who passed the law? Who had real oversight?
The housing problem, and its related impact on the economy, is really the result of poor management at the top of the financial and regulatory food chain. The abuses can only be corrected by permanently defining lending, from the top-down.
And, as I have stated, the only way to get into a position to reform real estate lending is to first repair the damage that has been done and stabilized the situation.
Personal Disclosure: I do not comment on stocks or the various financial markets. My focus is on real estate and mortgage lending. My background is 30+ years in mortgage lending and real estate. Variously, during this time, I have been a mortgage originator, a licensed Realtor, a licensed Appraiser, a licensed Mortgage Broker and held underwriting authority. I have been self-employed, as well as employed by small mortgage firms, and large banking institutions during my career. I estimate that I have personally assisted with around 6,000 escrows.

2008 Sep 05 08:44 PM

[John Preston:]

Mr. Lathrop

I do feel there is a direct link...and Robert Shill told me so...

Please follow this link ... finance.yahoo.com/tech...=^GSPC,fnm,fre

This is an interview...today no less, with Robert Shiller...in it, he references his 2004 paper I have been citing....

2008 Sep 05 09:13 PM