John Preston

The Reality of Real Estate and the Economy

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.