Gordon Gekko, in the movie Wall Street, opines that "Greed captures the essence of the evolutionary spirit." If word coming out of the banking industry these days is any indication, we've been evolving like rabbits lately. At meeting after meeting around the country, bankers and mortgage lenders are gathering to determine what caused the recent miasmal meltdown of the sub-prime loan market. At meeting after meeting they come to the same conclusion - ‘there was just sooo much money to be made.'
As the market for risky mortgages collapses, dragging home values and stock prices in a downward, swirling motion, one of the saddest things is how easily avoidable, how totally unnecessary, this meltdown is. Hell, I was writing articles about avoiding interest only loans and 125% loans and all those ‘exotic' things three years ago - and I ain't the sharpest hammer in the bag. Then the Federal Government joined my crusade 15 months ago, another organization not known for it's nimbleness and prescience, when the Federal Reserve, the Treasury Department and other agencies urged lenders to:
•· Refrain from giving loans to people who can't repay them.
•· Educate borrowers on the risks involved with these sub-prime mortgages.
•· Increase their cash reserves to prepare for the possibility of widespread defaults.
REFRAIN FROM GIVING LOANS TO PEOPLE WHO CAN'T REPAY THEM!?
Wouldn't you learn something like THAT in Banker 101? Do you really require the Federal Government to remind you of THAT? Does anybody remember back to the ‘good old days' when you got your liar loan from your friendly neighborhood ‘Savings and Loan?' It hasn't been that long, has it? What's a Savings and Loan, Daddy?
Even continuing into the past year, when the housing market was already slowing, banks looked for ever more creative ways to increase their largesse. Nationwide these sub-prime loans accounted for about 20% of loans in 2005 and 2006, about 15% of the total loan market. Of these loans, at least 20% are said to be either in foreclosure or in the process. 2 million homeowners are delinquent on their loans including many defaults on loans funded as recently as 12 - 24 months ago. In California, exotic loans have made up as much as 50% of the market the past couple years. Our foreclosures are up 166%.
And why were these increasingly risky loans increasingly marketed to the exact people who needed them least? Because oftentimes, the people who needed them least also needed them most. These are the folks who might not otherwise have become homeowners - and most will remain homeowners, and that's a good thing. First time homebuyers in droves saw the California Dream slipping further and further away. These are our kids, our teachers & soldiers. Upwards of 40% of these loans were made to Hispanics. The impact will be far reaching as people find themselves buried in debt, an interest rate that has gone from 2% to 6+% overnight, credit cards maxed and gas prices skyrocketing.
It's a time when bad things will be happening to good people, where the bottom line isn't just a ding on your credit but the loss of your home. That's the downside, and it's a riptide if you're caught in it. BT, DT, got the shirt.
There will be some restructuring of the market. Maybe banks will finally realize they don't belong in the real estate business until they can take care of their own. Maybe consumers will realize they have some responsibility for the decisions they make about their own financial future. Maybe we'll realize - if the deal sounds too good to be true maybe we should look twice.
But until that happens, there will some terrific opportunities out there for qualified buyers to obtain their dream home, for those of you with equity to expand your market position and to take advantage of one of the best Buyers markets we've seen in years. After all, greed, for lack of a better word, is good. All depends on your perspective.