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Economic Diffusion Works

The more things change, the more they stay the same- Alphonse Karr

I’ve been writing and/or speaking about the need for major mortgage reform and the industry’s pending demise for well over 3 years.   There’s really little left for me to say or bitch about.  Most of all that was wrong with the industry has been eradicated.  Really?  Really.

Jay Thompson wrote a post awhile back about some of President Elect Barack (Barry) Obama’s proposed policy changes for, about and around the real estate and mortgage industries.  Apart from writing a resourceful article, Jay made the insightful statement:

There are some fundamental laws of economics that will lead to a correction of the mess we’re in.

I couldn’t agree more…Case in point.

Mortgage Industry (c)1998:

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  • FHA underwritten loans were the primary mortgage source for first time home buyers and borrowers who had less than perfect or limited credit.
  • Fannie Mae and Freddie Mac maintained the bulk of the rest of the mortgage market.
  • A borrower needed good credit and at least a 3%-5% down payment (or equity) to secure a mortgage.  Better credit and/or more money down (or real equity) yielded better terms.
  • Borrowers had to prove they had a job and income sufficient enough to ::wait for it:: MAKE THE PAYMENTS.

The overall industry was manageable enough in size to effectively counter against greed and other grievous practices.

(c)2000 – 2007

  • Wall Street begins mass commoditization of Mortgage Backed Securities, literally creating a new market that overtakes Fannie, Freddie and FHA as the largest loan class sectors of the mortgage industry.
  • No Income, No Asset, No Job mortgage programs…Free Money!…becomes the rage of the housing industry’s.
  • There is next to NO regulation and a once stable industry is lit with the fire of open market volitility.

2008 going forward…see: Mortgage Industry (c)1998.

As I commented on Jay’s post:

The irony of it all is that the crap that’s hitting the fan right now (’toxic’ mortgage backed securities) is what kept the economy rolling a few years ago…we’re blessed and cursed with short term memories.

Many people danced with the devil and now he’s hung them out to dry…

I think President Elect Obama’s plans are admirable and should soften the blow for many homeowners but the market will eventually, innately shake itself out…100% NINJA loans and the lenders who provided the pitchforks that everyone stuck themselves with are already gone…now its time to clean up the mess from one epic party with one epic hangover.

For what it’s worth, I’m of the opinion that blame ought to be shared pretty evenly for the ‘mortgage mess’ between bank, broker and consumer.

Everyone from the top down was proliferating the ‘American Dream of Home Ownership’ and using your home like an ATM machine was almost as common as using an ATM machine. Most consumers simply wanted to know one thing…how much home they could afford or cash could they take out right there, right then…all other rhyme or reason be damned.

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During the housing boom the rest of the economy was sucking sh*t through a straw much like it is today.  Without Wall Street creating these now ‘toxic mortgage assets’ we were likely headed into a similar economic situation that we are faced with today.

If consumers didn’t have access to all the new debt (or wealth as it used to be referred to) that the housing boom provided, would we have already gone through what we’re facing today?  Maybe things wouldn’t be this bad as the housing bubble *pop* has exacerbated the situation..?  In any case, the mortgage industry moved back from ‘crazy’ to sensible.

As an aside, the recent ramblings regarding the Fed possibly buying down mortgage rates into the 4.5% range makes for nice press, yet the underwriting requirements to qualify for such rates and programs are such that a relatively small % of homeowners, prospective and/or existing, will actually qualify.

The 720 credit score, 80% LTV, full income documentable borrower isn’t the demographic in economic peril, on the verge of losing their home.

Give them cake, watch them eat, then vomit…

Many Americans are ‘anti-government’, we like to claim we’re a country of Capitalist’s preferring to keep Big Brother and his Socialist agendas separated from our daily lives as much as possible, until the sh*t hits the fan.  Then, hypocritically enough, we blame our government for not protecting or helping us out enough.

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Let me rhetorically ask: ‘What if ‘Government’ stepped into the middle of the housing boom and proposed to start regulating lending like they are now retroactively implementing?  Its plausible to believe that this could have helped millions of homeowners avert the pains of foreclosure and resulting economic stress.  However, the money consumers were borrowing and spending during the housing boom fueled our economy to historic highs.  So let me fare to answer stated question: Effing Anarchy.

Can you imagine the Administration and the policy makers of that time standing up and telling Wall Street as well as the American public that they were going to implement new legislation that effectively didn’t allow many ‘qualified’ borrowers to qualify anymore?  Heh.

Now that were in the midst of an economic ‘crisis’ and the welfare line is growing with entire industries changing their cries from ‘Stay out!’ to ‘Bailout!’.

The solution resides in letting our economic woes naturally diffuse toward equilibrium instead of throwing good money after bad and catalyzing a cataclysm.  There is no quick and fast solution and knee jerk reactions end up kicking someone in the crotch.  Let our collective minds work through problems instead of trying for the quick fix. There are no magic bullets.  We’re transitioning from fast and loose to slower and tighter, from historic economic highs into a historic economic correction.

We need sound thoughtful guidance from progressive, ethical and transparent leaders from government, public and private sectors to steer us out of this current state of uber-volatility.  80% of the people in this country cannot handle marginal volatility much less the category 5 economic hurricane that’s come ashore.

Here’s hoping the government and private sectors don’t create more temporary paper-remedies that have had disastrous effects like the toxic MBS free money giveaway party of 2002-2007.  Not capitulating to the bloated auto industry’s request for a hand-out without a thoughtful, practical plan in place…possibly even forcing them into a Chapter 11 reorganization…is a positive sign-IMO

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These are going to be relatively painful times compared to recent history but we will pull through it.  America remains the most innovative country in the world, second to no one, we can think and work our way through these challenging times…we just can’t continue to get high on our own ether or we will pass out.

Written By

Jeff started in August of 2006 to express his industry knowledge and provocative opinion. He’s been an adversary of traditional real estate and mortgage business since running his own brokerages. Formally educated in the biological sciences at Syracuse University and Barton College, once Jeff discovered how little entry level research science paid, he started his post collegiate career working for Branch Banking and Trust in The Triad area of North Carolina. He learned about the worlds of finance and real estate and began to personally purchase property at the courthouse steps. Today, Jeff is VP Operations and Business Development of ActiveRain Corp and still The XBroker



  1. BawldGuy

    December 14, 2008 at 8:29 pm

    You’re too kind Jeff.

    We’re readin’ from he songbook, but I’m singing a slightly different version of the same tune.

    1. The ‘evil’ neg am loans, though never designed for universal application, worked just fine for nearly 20 years. How was that possible? Because #2 hadn’t happened yet.

    2. Wall Street’s BS was NOT under the radar, but openly and notoriously flaunted, even though the SEC Chairman knew. His spineless lack of response was critical — maybe the understatement of this year.

    3. Fannie/Freddie went off the reservation in the arrogantly deadly march to appease the political correctness of the Left. That’s empirical, not surmise or opinion.

    4. When offered a chance to reverse course back to sane underwriting, Congress, as testosterone-free as ever, smilingly declared ‘There is no problem.’ They then proceeded to their ‘go to’ tactic, which was to demagogue the subject.

    5. My guys, the ones with ‘R’s’ in front of their names acted like sorority girls at the height of a well planned panty raid. In other words, they jumped up and down screaming, hoping they looked good while allowing the status quo to continue.

    6. The Bailout? A bad joke perpetuated by some of the same folks who screwed the pooch in the first place.

    Again, a whole bunch of stoppin’ to think is exactly what the doctor ordered, Jeff. Listening to a bunch of pols who’ve, for the most part, never produced anything of value in their lives? How would any thinking person not be scared silly at the possibility they’ll be the ones writing the prescription for what ails us?

  2. JeffX

    December 14, 2008 at 9:38 pm

    Categorically agree, fellow Bawld Jeff 🙂

    I harbor no resentment toward Option-Arms either Jeff, they’re a tragic casualty of the great mortgage choke-out. The root of the problem was allowing people to qualify at either high debt ratios or throwing debt ratios out of the approval equation all together.

    I hope the powers that be realize one can’t cure cancers with a boxes of band-aids…

  3. Ken Brand

    December 15, 2008 at 7:59 am

    Thoughtful post and comments.

    Not sure what Uncle Sam’s ultimate prescription will be? I’m sure no one on earth knows the totality of the consequences and repercussions of their medicine, positive or negative. Sadly, the thought that comes to mind sounds like the arm long disclaimers that drug companies staple to the end of the their TV commercials. The side effects sound more horrid than the original problem.

    The core to confidence and eventual normalcy, IMHO, is fair and responsible qualifying guidelines.

    We’ll all stay tuned and look forward to hearing from the Mortgage Pros.


  4. teresa boardman

    December 15, 2008 at 8:37 am

    I hate to say nice post. Maybe I should say great post. It never ceases to amaze me how quickly people forget. Our economy has been propped up by the housing market for years. Our current situation is a delayed recession. It would have hit worse after 9/11 if not for the housing market. Now the party is over as consumers discover that they can’t borrow any life style they want because eventually they have to pay it back. You make so many good points in this post I could go on and on. Thanks for writing it.

  5. Benn Rosales

    December 15, 2008 at 8:47 am

    Credit freezing globally would have completely collapsed the economy, so I’m not sure something wasn’t called for. The confidence issues that currently plague the markets, including bank managers, as well as consumers is a real problem so I think that the initial wad of O cash was the mental element that was needed to knock the scale back in an upward direction. I agree however, that it’s tempoary and those same bankers and consumers can see it ever so clearly that a real bailout, or some sort of saving idea isn’t forth coming.

    I’m still praying for real incentives that help those below the 720 mark with realistic requirements get the homes they want.

    Stop worrying about bailing people out, and fire up the economy already- turn consumers into sharks and let’s move some inventories.

  6. BawldGuy

    December 15, 2008 at 11:44 am

    Jeff — RE: ARMs.

    Before Wall St ruined them, the margins ranged .75-2% max. In the early ’00’s there literally were times when borrowers INDEXED rates were less than conforming fixed rates.

    What killed them was the expansion of the spread between start rate and indexed rate as margins increased. For nearly 20 years, an investor needed an average of only 2-4% annual appreciation to be ahead a buck. Once lenders learned what could be done with the Ponzi-like scheme of securitization etc., they showed up palms up wanting their share of the booty.

    The rest is history.

  7. JeffX

    December 15, 2008 at 2:48 pm

    @Bawldguy: Therein lies the reason why we will be in a housing mess until most of these loans are flushed from the system.
    As you alluded too, Alt-A and Sub-Prime (high margin) ARM’s are adjusting into payments that are too high for borrowers to afford and refinancing is not an option because there is no more Alt-A or Sub-Prime market left.

    This situation will unfortunately perpetuate (like, well into 2010) due to:

    A. The last of these 3-5 yr MBS market fueled ARM’s were sold into the market as late as early 2007…putting adjustments out to as late as 2012.

    B. The increasing fire sales of distressed property (foreclosures & short sales) place continued downward pressure on home values, as appraisers are forced to consider these discounted numbers in their comparable analysis for future values on future sales…continuing the ‘my home is worth less than what I owe’ phenomenon…not to mention the ‘walk away’ mentality that’s becoming en vogue.

    With all the ad-hoc, mash-up solutions being thrown out there (loan mods, periods of reprieve etc), it would seem to make sense to enact some sort of provision that allowed appraisers to not include distressed property sales in their market analysis to alleviate some downward pressure on home values…

    If values can be stabilized lenders may be willing to open up underwriting standards a tad more, though, the Regulators are quickly finding out that the #1 reason for borrower default is high debt to income ratios.

    So, while the: ‘You turned down this loan because of what??’ situations may eventually decline, potentially even lowering credit score thresholds (and other risk based qualifying criteria), borrowers who cannot unequivocally prove their income and assets against tighter DTI ratios (dare I suggest 31% – 39%) simply will not qualify.
    Higher unemployment levels are only going to exacerbate this situation.

    Thinking back, during the refi/housing boom heyday, I’d feel secure in saying that half of all borrowers required some sort of DTI concession (in the form of higher margins) from the lender or had to ‘go stated’ even with qualifying ratios north of 50%…

    This comment is turning into a post…I’ll stop now 🙂

  8. BawldGuy

    December 15, 2008 at 4:26 pm

    JeffX — Pretty much. I do think, however, that before 2012, there will be sufficient potential for either sales, or refi’s for resets that late.

    Have a good one.

  9. linsey

    December 18, 2008 at 2:33 pm

    For all the talk about this Bailout and help on ‘Mainstreet’ I’m amazed at how little is seen at ground zero of this fiasco. I agree that this thing needs to run its course and throwing good money after bad only creates an artificial recovery. Ignoring the inflationary implications sets up another debilitating crisis.

    There are things that could be done that would have a significant impact on values, consumers, and the strength of our market – resolve the extreme inefficiencies in the processing of the short sales and foreclosures. Shorten the time frame that it takes to approve a short sale, be proactive, and you expedite our recovery. No real progress can be made until the distress inventory is absorbed and right now the turnaround time from banks like Countrywide is shameful.

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