There's a story that I've wanted to tell for some time.   I've avoided it only because family members are involved.  The recent commentary thread to Lenn's post California Subprime Borrowers May Get Relief? - More Questions Than Answers  convinced me that it was time to share and delve even deeper into the mess that's now referred to as a national credit crunch.  While a credit crunch most certainly exists, it's a mere symptom of a complex series of broad and interacting issues.  It's not the problem.  Unlike a coin that has only two sides, our industry faces a problem with a root cause that seemingly spreads in an infinite number of directions.

My sister, Liz, and her husband, Rob, have two adult daughters and lived, until two years ago, in a sprawling tangle of communities known as Bel Air, Md.  The city located just north of Baltimore is properly described as a prosperous place comprised mostly of commuters.  Liz and Rob were homesteaders of sorts when they built a new home 25 years ago when Bel Air's cow population far exceeded its count of taxpaying denizens.  Like other families, they wanted a pool, a huge deck, a finished basement.  Then, there were the traditional cash outlays for college tuitions, weddings, vacations, etc. that confront us all.

In no time, the homes in Liz's community were selling for $125,000 (her and her husband paid $90,000 for theirs) and then $180,000, and then $250,000 ... etc. etc. etc.  You know the story!  By the summer of 2005, identical homes were readily fetching $500,000 or more.   Like I said, there were bills to pay and my sister refinanced any number of times and took out equity loans.  While not mortgaged to the hilt, a fair share of the equity in the home was encumbered.

Back to the summer of 2005.  Rob received the promotion he had dreamed of during the tenure of his career.  All of a sudden there were more cars than could fit in the garage and a need for a house that would lend itself to cocktail parties and entertaining.  As fate would have it, there was a new community nearby with one particular colonial, all brick, of course, selling for $950,000.  You know where I'm going so why bother mincing words.  My sister and her husband sold their comfortable residence to acquire the true measure of American success that is the million dollar home. Saving accounts were tapped and stocks sold to come up with a suitable down payment.  After all was said and done, a $700,000 mortgage was originated.

Maryland, in my humble opinion, first felt the effects of the housing downturn in October of 2005.  That's the time that my abstracting business lost traction overnight.  My sister has no fear of losing her home to foreclosure.  That's not even a concern.  She's still content where she is, but my sister is nearly 60 years old.  There's talk of retirement and a smaller home someplace warm before too long.  The problem is the price that her house would sell for in today's market.  Like everyone else, Liz and Rob assumed that their investment in real estate would be safe.  They assumed their house would appreciate or not-depreciate - at the very least.  My sister didn't game the system or cheat in any way.   She wouldn't know how.  I know she'd have to take money to closing if she decided to sell today and could somehow find a buyer. 

The questions abound and are perfectly valid:

• How much is the house really worth? 
• How could a house lose so much value so quickly? 
• What happened to the sizable down payment that seeming disappeared overnight?  
• How long will it take for the market to turn around? 
  
• Why hasn't the assessed value of the property been adjusted to lower property taxes?  (my personal favorite)
  

A perfectly lovely house in the suburbs has become a nightmare of horrific proportion that will determine, to some degree, the financial future of a couple that worked a lifetime and made the right decisions. 

What happened? 

It's easy for consumers to blame real estate agents and loan originators when real estate markets become patently dysfunctional.  As an industry, we find it convenient to blame borrowers for their guile, and Wall Street for its chicanery.  I don't blame the real estate agent that sold the albatross to my sister, nor do I blame the builder nor the loan originator. They did nothing wrong.  The issues we're confronting run exceedingly deep; the system we embrace so dear has collided with destiny.  Like the credit crunch that's blamed for every woe, the unethical, often criminal, behavior demonstrated by some industry insiders is systemic of a still deeper problem.

Regrettably, we shun the inevitable conclusion that the crises in real estate markets is far from over.  As a primary causation factor, we need to consider the paradigm of politics that is the federal reserve.  In his book The Age of Turbulence, Alan Greenspan audaciously exculpates himself from any responsibility for the pending debacle in domestic housing markets and related financial appendages.  He conveniently places blame on global factors while ignoring the devastating economic effects caused by restrained market forces.  Yes, Greenspan is guilty of holding interest rates much lower than they should have been for nearly a decade.  It was a political ploy by an appointee to a post that is ostensibly non-political.  Markets should determine interest rates, not a politico that caters to the aspirations of the oval office and a thirst for public approval.

The artificially created perception of prosperity had become a reality for a nation that believes that bigger is better and every debt can be settled tomorrow.  We felt so good for so long that we ignored the reality that all drunken stupors must end.  We are now paying the price and suffering the consequences of a reckless monetary policy born of the glitz of the mid 1990's.  The laws of physics dictate that every force is accompanied by an equal opposing force.  Why would we assume a quick, painless correction for a problem that took a decade to create? The feds aren't going to allow untold numbers of homes to go to foreclosure.  Consider the implications as a matter of public policy. Where would the countless families displaced by foreclosure live?  As a society, will we tolerate the appearance of boarded-up properties in polite middle class communities?  The stakes are high on this one.  The world is watching.  Foreign investors are already questioning the integrity of mortgage backed securities.

The problem was caused by the feds and its solution will require federal intervention.  Yes, you can expect governmental intrusion in your business affairs before long.   Regardless of the powerful lobbies that exist, public officials will side with consumers at the expense of an industry with fees and commissions that are chronically characterized as excessive.

The real problem: How do we get the feds to leave once they've entered the house?

 

Related posts:

What's The Solution To The Stagnant Market ... The Pent House Sweet - Fran "The Title Man" Gaspari reveals his 3 point plan to rid the real estate world of its current woes.

California Foreclosures ... Stupidity or Greed - Kaye Thomas aptly and honestly confronts the realities of markets in California.

Here's A Concept: Let's Just Do Nothing About the Mortgage Crises - Janet Guilbault pro-actively espouses a philosophy of passiveness towards the looming crises that's clamping down on our industry.

ActiveRain Mortgage/Housing Crises Resource - Bryant has generously compiled an anthology of all related posts.

 
The Typical Metro Detroit Foreclosure Family - Chris Wales explores the "human factor" that's so often ignored when discussing foreclosures.  She offers a glimpse of reality with an important message at the close of this holiday weekend.

Massive Foreclosures Coming? The Market Is Speaking Loud And Clear - A painful dose of honesty and realism from Lenn Harley.

Update 11/25/07 

There are so many related posts being written that I'll simply defer to Bryant's compilation as the definitive referral source.

Lola Audo summarized the matter nicely:

"There must have been something about that Thanksgiving Turkey...The past 48 hours have spawned one of the most far reaching discussions that I've ever read on Activerain about the foreclosure crisis in different parts of the country.  The value of this discussion is enormous...both from an educational perspective and the ability for a professional forum to hash out some much needed analysis."

All are a must read!