Let's preface my feeling that I'm a strong Republican, and conservative in values.. but also an environmentalist.. so I'm probably a "Paulson Republican". Hank Paulson spends a lot of time on environmental causes... so not all of us like the SUV's and smoke stacks.
I also believe in free markets, and the ability for the market to make sound judgements. If you look at the former Soviet Union, it was a very good indicator of what a "managed economy" looks like. If you have a government weenie sitting in an office somewhere, debating between coffee break and a walk to get a soda down the street, or which to do first, do you really want that person making decisions about what products are offered in the market place, or whether a car dealership should stock 100 Toyota Priuses and nothing else, or let the dealership determine what it needs? Keep in mind, the govie gets paid either way, and whether they go home at 1 or 10 pm, probably doesn't matter.
Profit incentive, referral customers (fair dealings), and survival of the fittest determine the market place.
Where we got off track was deciding that somehow banks and mortgage brokers are consumer advocates to get the absolute best deal for the clients. It's an incorrect assumption. We (the financial industry) have a fiduciary duty to the client and fair dealings with them, but we also make a living too (which is always a concept that people that don't work on a commission fail to understand). And we are not so much "obtaining" money for a borrower, as we are providing an investment opportunity for the final mortgage investor. While the borrowers come and go, the investment community -must- be there and be interested for any financing to happen.
That is what has currently happened now in the market... the real estate market is really only weak because there is very little financing availabe. We have more buyers than we know what to do with... but only about 1 out of 7 or so qualify currently, and no one that is self employed, a farmer, etc., can obtain any financing.
How did we get here? Well, let's see... we had a general deflating of the real estate boom.. followed by people that can -afford- their home, but simply choose not to and walked away from it in droves. At some point, it almost became fashionable to do so. Many of them started a thing called "Buy and Bail"... hurry up and buy a foreclosure down the street, say you are going to rent out the old house, and then dump it... thus turning a single foreclosure on the block into 2. This was so common that the industry changed underwriting standards to require an appraisal on the previous property, proof of rent received -before- closing on the new home, and at least 30% equity in the old house.
We also have the flat out demonizing of the mortgage industry by the media... demonizing of banks... and general suspicion. Thanks for the Option ARMS Countrywide... They will probably burn in hell and none of us in the industry will shed a tear. They invented that thing and pushed ENORMOUS commissions to loan officers to produce them. A typical loan pays about a 1% commission from the bank to the loan officer... those things paid at least 3.5%, and up to about 5% with a 3 Year -HARD- Prepayment Penalty. The penalties were about what the commission paid on the deal was. On a $300,000 loan, a typical loan officer, literally made almost $20,000, compared to about $3500 on a typical transaction. It was no mistake how quickly the option ARM became "One size fits all". Once they hit critical mass, it was like crack on the streets. Pretty soon homeowners were calling in droves wanting the $400 payment deal their neighbors had, and it was soon self-perpetuating.
At the same time, we (mortgage professionals) could hardly make a living on the Fannie Mae fixed-rate stuff. They paid very little, nothing at all, or even charged a fee to the homeowner for one (and we would also have to charge fees to stay in business). The market "demanded" alternative products, and would only pay for those.. so that is what was produced. If you make automobiles, and gas is $5.00 a gallon, even if you make a lot of money on an SUV, you are probably not going to sell many, and the market determines what you produce (by creating a demand).
Those of us that continued to produce basic home loans, and having suffered for a while, are suddenly getting a little busy again.
The issue is... we definitely got us ourselves here, but we (as a nation) have to get past it and move on. Consumers spent way too much money by borrowing against their homes, getting addicted to spending, and kept going on credit cards when the home equity ran out.
Now we are paying the price... the country is extremely over-leveraged, and the market is fixing itself again. Consumers have cut back, restaurants are starting to struggle, stores are starting to struggle, and gas prices have trimmed back travel.
We need a big mover though, without shareholder responsibility, to fix this.. the government is really the only one that can do that. They can buy the slow-performing mortgages for maybe half price, offer a refinance to the homeowners with that discount in there as well to something they can afford... but no cash out... and if done in droves, the government will actually make some money on this... how?
- Buy a 300,000 mortgage for say.. 60%... or about $180k.
- Offer a refinance to about $200,000 to the home owner that is struggling and write off the other 100k. The government only paid $180,000 and is now collecting a new $200,000 note. Buyer is now making the payments.
- Government borrows money on t-bills at about 2% to do this, and will charge closer to 7% on FHA loans that it will get... plus mortgage insurance paid to the FHA, etc. Realistically, they will earn about 5% on the $750B annually, while also making the profit in the notes themselves.
- They later (3 years or so) sell the new $200,000 note (performing) for about $205,000 on the market to a new mortgage investor, and in the 3 years, make about $75,000 on the original $170,000 investment (profit on interest versus money borrowed, plus the increased value of the note over the original $180k investment.
On distressed notes, they would make even more... paying about 25 cents on the dollar for them.
With the homeowner population less financially stressed, with cheap loans they can afford, and won't want to give up... you suddenly will see a return to steady, predictable financial growth, and the taxpayers also benefit from new taxes coming in. Keep in mind, that with foreclosures, less driving (gas tax), lost jobs, no capital gains, etc., the government gets much, much less in tax receipts than they anticipate... so instead of $3 Trillion or whatever, they are only taking in maybe half-that during a recession.
Does that mean that the retail and restaurants come back? Sadly.. no ... they are over built just like the housing sector was. Many of them will die. But.. the stronger ones will thrive when some disposable income comes back to consumers.
Do I think we should bail out the student loans, credit cards, etc., ? Hell NO. Banks charge 30% interest for that stuff for a reason, and the quality student loans are already backed by the government. Let the banks sort out their mess there. It might teach them not to send credit card offers to 5 year olds and non-humans (canines & such). I have never understood the need for a college kid to have a $5000 citi bank card... that is just irresponsible (for the bank) they can suck the wind on those.
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