So, my family moved to northern California about three months ago. You know how California’s housing market is supposed to be really, I mean REALLY down in the dumps? Well, it is. So, logic would dictate that there would be tons of houses on the market (whether regular active listings, short sales, or foreclosures) at incredible prices just begging to change hands, right? Right? Well, not so much. Not only is active inventory surprisingly scarce (more on this later), but it seems like the banks, who are obviously losing tons of money on this real estate, don’t seem to mind at all that they have unpaid, overdue loans out on properties that are sitting there, unoccupied, and that aren’t being sold. Here’s an example: during our real estate search, we came across a very nice home that we wanted to buy. It was a short sale that has been on the market for over a year. For those of you not well-versed in real estate lingo, a short sale is a home that is for sale for less than what the owner owes on his mortgage. It’s like a last ditch attempt to get rid of the property to avoid foreclosure. The owner bought the home in 2007 and was asking less than half of what he paid for it. He claims he can’t afford the house and no longer is making any payments on his mortgage. The bank is losing money and the house, though very nice, is worth nowhere near what they loaned him when it was purchased during the “housing bubble.” We offered full asking price, are more than qualified to purchase the house, and can make a large down payment. Three months later the seller’s bank still has not approved the sale, apparently because they want more money back. Here’s the catch, though: the longer the house sits there vacant, the less it’s going to be worth. The yard is overgrown, the wood is going to rot from water damage, and lack of maintenance in general is going to make the property even less attractive to potential buyers. Why on earth wouldn’t the bank jump at the chance to get this property and associated losses off their books, knowing that under current market conditions, the price just will only keep dropping (and dropping, and…you know)?
Well, what’s going on?? One word: TARP. That irresponsible (and possibly predatory) loan the bank made to the guy who couldn’t afford it? Well, it turns out they DID get paid! By YOUR tax dollars, thanks (again) to the parting gift left to us by George W. Bush and Congress at the end of 2008! The mortgage bank is in no hurry for the house to sell until they get an offer for full loan amount because (since Federal funds already bailed them out) there’s no incentive for them to move it. So, it’s sitting there rotting instead of generating income or providing housing for someone, and they don’t care. Why? Because they’re not in financial trouble. They don’t need the real estate to sell right away in order to recover their losses. As a result, the housing market remains stagnant, and home values continue to plummet. This, ladies and gentlemen, was supposed to stimulate the market. Do you feel stimulated?
Now, for my readers who are delighted that I’ve harped on Bush for three posts in a row, let me rain on your parade by reminding you that TARP was issued by a Democrat-controlled Congress. Dubya, unfortunately, never met a bill he didn’t like. Correct me if I’m wrong, but I don’t remember him using the power of the veto even once during his presidency. Did any other president ever make it through a full term without even just one little veto? But fiscal policy and funding are primarily the responsibility of the House of Representatives. Thank you too, Ben Bernanke, for all your “excellent” work at the Fed in the monetary policy arena. (It’s worthwhile to Google the differences between fiscal and monetary policy, if you’re curious).
Now for some more evidence that our current mess goes way back across several administrations. Let’s go back in time so I can explain how this all started in the first place. Remember when I discussed the 16th Amendment in my post here? That was back in 1913, and at the time, the reason given for allowing Congress to tax the citizens was to provide enough funds to the Treasury for national defense, which, as you may recall, is the primary role of the Federal Government. It must have seemed like a good idea at the time (that Kaiser guy is EVIL!), but as you also may recall, I think it’s one of the dumbest things our State governments ever talked themselves into, precisely because (DUH…) the money OBVIOUSLY isn’t being used for its intended purpose!
Fast forward to Bernie, um, Franklin Delano Roosevelt’s New Scam, um, Deal (did I type that out loud again?) I told you I was going to tie all this history together, didn’t I? As part of the New Deal (see my riveting discussion here) the Federal National Mortgage Association, or Fannie Mae, was founded in 1938. I don’t want to make your eyes glaze over with all the details, but basically, Fannie Mae was initially founded as a bank backed and insured by Federal funds, designed so that lenders could originate more loans to people who otherwise couldn’t get credit. Seems benign on the surface, but in a minute you’ll see why it’s not. In 1968 it got split up into several different entities, and Fannie Mae was privatized but still heavily influenced and backed by the Federal government. In 1970 Freddie Mac, another government mortgage corporation, was created to compete with Fannie Mae. The government also allowed these corporations to purchase private mortgages – with Federal funds. Ummm.
Anyway, in 1977 the Carter administration created the Community Reinvestment Act (CRA) which basically told banks that if they were allowing people in low income neighborhoods to have savings accounts with them, then they also had to lend to them, too. In the interest of “fairness.” Again, ummm. Let’s see. Just because I have a little savings I’d like to sock away in a bank does NOT mean I’m qualified to borrow from said bank. See where this is going?
In 1999, during the Clinton administration, Fannie Mae started to get lots of pressure from the government to relax its lending standards in order to allow more people to get housing loans, to “stimulate” the housing market. So, Fannie Mae started issuing loans to people with less than ideal credit, at higher interest rates than conventional loans. Feeling the pressure to keep up the resulting fantastic profits, the corporation continued making these loans in the subprime market. Not to be left behind, the private banks thought, hey, why can’t we get in on some of that action? After all, if the government is doing it…
You know those credit card offers you get in the mail that say 0% APR! Free balance transfer! No credit limit! You’re preapproved! If you’re smart, you’ll read the fine print and realize that in 6 months the interest rate is going to go to 25% and if you put anything on that card and make a payment one day late, it will go up to 35% and they will charge you a $350 late fee. So if you are smart you don’t even take a second look at that offer before you tear it up and toss it. Well, those new mortgages banks were making to subprime borrowers? Pretty much the same. One such scam, the ARM (Adjustable Rate Mortgage) is one where you start off with a seemingly attractive rate, so your payment seems decent, but if you read the fine print, you find out the bank has the right to change the rate to something ridiculous sometime 2-5 years down the road. So a $500 payment can go to an $1800 payment overnight. Nice, huh? Private banks were luring people in with these attractive offers, much more attractive than the higher Fannie Mae rates. Who wants a Fannie Mae loan when you can get a much better rate at Countrywide or Citimortgage?
Let’s apply a little supply and demand economics: now lots of people were able to get loans! So, lots of people could “afford” houses: demand for houses soared, so real estate prices soared as well! Yay! Money was being made! The economy was stimulated! Except…this was not a real free market effect. This was ARTIFICIAL, hence the name “housing bubble,” created by the Federal government encouraging loans to people who couldn’t really afford them! Uh oh…
Again, fast forward. What is forced up…must crash down. People started getting their mortgage bills, which were now 3 or 4 times higher than when they started. What the…? I guess they didn’t read the fine print, huh? On top of that, there were other factors leading to an economic downturn. People got laid off, couldn’t pay their outrageous mortgages, and tried to sell their homes but couldn’t. (Hey! I thought my home was supposed to be an investment!!)
So, instead of learning from our past mistakes and realizing that government intervention in the free market perhaps isn’t the best idea (after all, using Federal funds to back subprime loans in the first place is what got us into this mess) the solution became to throw more Federal funds at the problem. Funds we don’t even have. The result? Irresponsible banks rewarded for predatory lending practices. The housing market? Stagnant. The American public? Punished and forced to pay for the irresponsibility of others, both creditors and debtors.
One more thing. You know all that inventory that’s been foreclosed on that should be on the market for sale? Want to know a dirty little secret? The mortgage banks are holding on to it. Withholding it from the market. To control how many homes are for sale at a time. Controlling supply. Artificially. Want to know another dirty secret? Remember how Fannie Mae and Freddie Mac were authorized to purchase private mortgages? Well, they did. So now the Federal Government owns almost 60% of all mortgages in the United States. In other words, real estate is now more government-owned than private. Chew on that, and think about whether it was intentional…now think about the 16th Amendment again, and we’ll talk next time. Until then, remember that if you can’t trust your government, who can you trust?