The Wall Street Journal for 6/7/11 contains a fascinating article about second mortgages putting homeowners under water. You can read the article here: http://tinyurl.com/secondunderwater. Robbie Whelan does a nice job of identifying second mortgages as a huge part of the on going mortgage mess, including so many homeowners being under water.
In the run up to the early 2000's, in fact throughout the 1990's and up to about 2005, real estate appraisers, like me, all knew we were headed for a world of trouble. In the continuing education classes I teach to appraisers, the discussion of how this would end very badly began at least in the mid 1990s. What the appraisers saw starting then was the troubling pattern of home owners treating their homes like giant ATM machines-let's just do another "cash out refi". Many of us appraised, re-appraised, and re-appraised again the same property. When I was a kid, my Dad used to say: "If you go to the well too many times, one day the well will be dry." Well, we all know-that well did indeed dry up.
Other than an apparently insatiable need for cars, bigger houses, additions, new kitchens and paying off of debt, what drove this? In a phrase: tax policy. In 1988, credit card interest and car loan interest, previously deductible, became non-deductible. But the mortgage interest deduction (MID) remained sacrosanct (at least up to the first $1 of debt on your house and one other property), so homeowners started the First National Bank of Mom and Pop's house. In some markets, those house values kept rising, so it seemed like a great plan. But, this unintended consequence of a tax law change had an awful bite, as we all know. Couple it with lending policies that were insane ("Can you fog the mirror? Good! We'll give you a loan; Do you want to borrow 125% of the value of your house? No problem!; Look, if you don't really make $225,000 a year, I'm just going to look the other way here while you do a "statement of income"), not to mention widespread fraud, mortgage backed securities, and well, we've been there, we're still here and it still hurts.
But unintended consequences have been piquing my curiosity for the better part of the last year. One of the books I read was Last Call: The Rise and Fall of Prohibition by Daniel Okrent. It's a fascinating read, and Okrent points out two of the unintended consequences of prohibition: NASCAR and the Mafia. When I teach agents and appraisers economics as it applies to real estate, I usually have about one good history major in the class who knows what caused those two unintended consequences.
What's on my mind today is the vast boiling sea of unintended consequences we are going to be facing from: Obamacare; Dodd-Frank; QRMs (Qualified Residential Mortgages, where borrowers will have to put down at least 20%) and the revamping/doing away with/leaving alone (pick one) of the Government Sponsored Entities of Fannie Mae and Freddie Mac. The implementation of Obamacare and Dodd-Frank are in the hands of the bureaucrats, which reminds me so much of Reagan's famous quote that the ten most terrifying words in the English language are: "I'm from the government and I'm here to help you!"
I'm terrified because:
- Congress keeps passing legislation no one has read, and therefore no one understands
- Few, if any, in Congress appear to be able to learn from history (or even understand it)
- The constant focus in Washington is getting re-elected so as to secure one's pension, salary, place in history, power, etc.
- Many of those in power will be genuinely surprised when there are unintended consequences, and what they are.
Hold on. The ride isn't over yet.
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