You said in your blog "Entirely too many people borrowed too much money to purchase homes that were way over-priced, and now they can't sell them for what they owe on them."

I didn't loan them the money force them to borrow or even over price the homes as they all appraised. So I think you are wrong. This kind of statement and wrong thinking will be the crack in the door that lets Uncle Sugar  who currently is in the hands of Big Business and banks regulate us (Realtors) out of business 

Bill, thanks for sharing your thoughts. Speaking only for myself, I sell in a secondary market. Back in the boom, I had almost no say in setting prices. All one had to do is add 5 to 10 % on a comp and buyers would stampede. As a seller's agent I at least had that obligation to my client. So, I'm not sure brokers and real estates agents can share in the blame. Further, I didn't see mention of buyers creating the problem, but atleast in my market, they had to have it, damn the price.

Charlie, I'm sorry you think I'm wrong, and I know I'm not going to be able to change your mind.  Nevertheless, let's play with your idea.

The easiest way may be to reduce this to the absurd.

Let's say I build a subdivision of 10 houses, and a lender says he'll finance each of them 100% for anyone who wants to buy them.  All they really have to do is sign the loan documents. 

Nearby is a bridge and homeless people live under it, and they're cold and wet and want to come inside.  They hear about my deal and they figure if they can get out of the cold for one day, it'll be worth "buying" one of my houses.

I've got my houses priced at "the market" when I start out, but then on Day 1 there are 50 homeless people from under the bridge wanting to buy a home for nothing down, stated income.  They're lined up out front.  That's a huge demand.  So I decide I can make a lot more if I double the prices of my homes.  The homeless people don't care what the price is...they have no reason to. so they buy them at the double price.

I get 10 contracts from them, and the appraiser comes out and lo and behold his methodology shows that there is demand, so they appraise.  How does he do that?  Simple, he decides it must be location, so he makes up his shortage in comparable value to homes in other nearby neighborhoods by increasing the value of the lots.

But the homeless people never make a payment, and they get to live there for three months before they are thrown out.  Now the lender has 10 houses on his books, and he has to write them down to their real value.  That means he books a big loss.

Nothing about this example was anything but artificial.  There was no qualified demand for the homes, there were no financially qualified borrowers, and the prices made no sense. 

The facts are, I'm not one bit wrong.  But you can get comfort by knowing that there are a zillion others who agree with you.

 Billycherry

Bill

In reality it was one giant flim-flam that everyone participated in.

The problem is the Flim Flam Society not only screwed up the market, but they also devalued other people's homes...people who had actually had to prove-up that they could afford the house when they bought it, and had to have a cash down payment and closing costs.

And you'll recall that down payment couldn't be borrowed, not even from a relative, and for a long time, lenders wouldn't even consider gifts of cash to the borrower as being eligible for use as a down payment.

I had a nice young man call me a few weeks back.  He had bought in a new neighborhood and had put $40,000 cash down. He now had to sell.  Because so many in the neighborhood had bought their homes with sub-prime deals, and were now unable to make the payments, a bunch had been foreclosed.

On top of that, the builder was stuck with inventory, so he was dramatically discounting his stock...all below what the young man had paid.

So, the bottom line is this:  He had played by the conventional wisdom/rules and was losing his $40,000 equity plus another $20,000 or so that he didn't have.

That's not how this is supposed to work.

Billycherry

Bill . Suppose you are correct.

What should Realtors have done different all along? Should we have suggested to our sellers to not accept high offers? Should we have suggested to our buyers who in good faith assumed that their loan officer was getting them a fair and equitable loan, that they not take the loan? Should we have challenged the appraisers who appraised the property and supported the value that made the loan work, that made the deal close, that  put the buyer in a home, that made a fee for agents, and fees for surveyors, inspectors and repairmen, and insurance and title companies? What in the world could Realtors have done different?

Trey-

Thanks for asking the question. 

What each Realtor should have done is follow his conscience, and most probably felt they did.  The common rational that is used by real estate people to placate a question that is challenging the conscious is this, "If I don't sell him the home, someone else will."  Somehow that seems to make it alright.

I don't think anyone who can't qualify for a conventional loan has any business buying a home.  They aren't buying a home, they're renting a home from the lender.

So I've never, to my knowledge, had a client who lost his home to foreclosure.  No one should have been sold a house whose only avenue for financing it was a sub-prime loan.  That's what I thought when the things first came out, and that's what I think today.

Now the credit market seems to agree.

Billycherry

OK Bill, I was waiting for this and I really don't know how I missed it. Must have been that New Year's Eve and New Year's Day thing. Anyway, thanks for letting me know it was up.

I think Paulson's actions are correct. In five years these people should be better off enough to re-fi. If they live in the house and they want to keep it then five years may actually give them some equity through the action of inflation if nothing else. And the less houses that get foreclosed the better for all of us.

I whole-heartedly support our public policy that everybody should be able to own their own home. Sub-prime loans are good for the country because they extend homeownership to a class of otherwise disenfranchised people.

The real issue was not with people who wanted to buy a home for themselves, but rather the speculators (flippers) who took advantage of very low rates, quickly escallating prices, and lax underwriting standards for non-owner-occupied houses. When rates went up these guys had to abandon ship quickly.

Price increases were the result of buyers paying what they could afford on a monthly basis, not how much the house cost. "Starter" rates should never have been used for qualifying purposes.

Price decreases were the result of the flippers jumping overboard.

The poor people that just wanted their own home were caught in the stampede (both directions).

I still lay the blame at Greenspan's feet. Nothing I've read since has changed my mind.

Bill Roberts

Bill Roberts,

 Each day i find myself thinking more and more as you.  Personally I don't blame the sub-prime lenders. As you stated they offered home ownership to lower income people. More importantly I blame credit cards for the bulk of the problems.  Most big,bad credit card debt was created after the home purchase.  They had to buy that big screen , that new bedroom suit, etc.   In the past it was easier to walk away from those card debts... not so easy today. It has simply been too easy to run up credit cards and obtain auto loans.  And if the home owner decides the new car, big screen, and furniture is more important than the home he can leave the home and always rent something.  In that sense Mr, Cherry is right about renting from the lender. 

Bill R and Trey

You both advance interesting thoughts, and I think you're right.

Bill R and I have had this discussion about Mr. Greenspan before.  My favorite line (and I heard him say it with his own voice) was that it never ocurred to him that anything bad would come out of sub-prime loans.

Billycherry

P.S.  If I hear the word "flip" one more time, I swear I'm going to barf.