The easiest way to get out of our current and pending economic problems is to get the real estate industry back on its feet. Why would I say this, other than the fact that I am a card-carrying member of this industry? Or maybe because I’m worried for my livelihood as a mortgage professional and for my real estate investments? It certainly would be better than worse for me.
But I am not out in the public carrying my banner. I am genuinely trying to point out what the obvious to the vast majority of politicians, business leaders and the public who haven’t a clue. I say that because as I have said before, Washington likes to point fingers and not fix problems. The pendulum is swinging and it whizzed passed “the midpoint” months ago. It now could fly off so far in the wrong direction that it may never return to a realistic centrist position.
We as a country need to fix the problems quickly before they really start mounting. Foreclosures can create more foreclosures by artificially bringing down areas where the only sales are foreclosures. When an appraiser does a new appraisal in such an area, he has no choice but to use the foreclosed sales as comps for all of the other houses. When someone needs to refinance, they are stuck with an artificially lower value—which in normal times would be disregarded or given a lesser weight in the report—and finds out that he can’t refinance. Now this homeowner is facing problems because his mortgage is going up $600 a month and he may be next in line to lose his house.
Is this what we want? Many will say that water is only seeking its level and it is what it is. What they don’t take into account is that 92% of the homeowners are making their payments but are painted with the same brush as the 8% who are not. If a large amount of the 92% had sold their houses, and the foreclosures were at normal level of 1% or 2%, home prices wouldn’t have fallen as far and more people would be able to refinance if needed.
Why is this happening? Because banks are both the problem and the victim in this scenario. Banks and other lenders made loans, as they always had, to home buyers in this country. As the real estate market heated up, the demand for loans became stronger, the profits to the banks and lenders greater, and the ability to sell these loans on Wall Street easier. It is not hard to see how this scenario was a disaster waiting to happen. Once the fervor began, the public jumped in with both feet. A few years back, I had a call from an acquaintance who wanted to refinance. He was listening to everyone talking about refinancing and he didn’t want to be left out. Unfortunately he didn’t own a house. This man wasn’t joking or stupid. He simply thought such loans were available to all people for debt consolidation. Once you get a call like that you can readily see how easy it is for people to get caught up in any hysteria. Now that some loans have turned bad, the banks and lenders have to start preparing for more of the same by writing off billions of dollars of loans. They actually haven’t all lost anywhere near that amount of money but are preparing to do so. If real estate turns around, the losses they have taken become gains. This produces more profits, more jobs, more income and eventually more tax revenue.
The turnaround isn’t happening because of both problems I have talked about above: foreclosures and bank/lender losses. Foreclosures are preventing good borrowers from refinancing and are forcing some of them to become bad borrowers because of increases in their interest rates that make their loans unaffordable. If the bank or other lenders have to work something out for the borrowers, then the bank increases their losses. On the other hand, banks aren’t willing to lend except under the best circumstances as they see every loan now as a potential loss instead of a potential gain. I witness every day how they have changed their underwriting standards making it harder for borrowers. Most lenders will not touch “make sense” loans because they do not fit into “the box.” (See “I Guess They’ll Never Learn Part II.”) Now, people who wish to purchase and can’t fit into the box are finding it very hard to find a lender who wants their business, especially at loan amounts above the new conforming jumbo loan limit of $729,750.
Mortgage insurance is an answer to some of these problems. Up to now, borrowers who have loans exceeding 80% loan-to-value (LTV) had to have mortgage insurance that would insure the lenders for the portion over 80% if the borrower defaults. The insurance would be paid by the borrower and the lender would be paid the proceeds if they lose money because the borrower ends up defaulting on his loan. (Writer’s note: adding to the mess, some of the mortgage insurance companies are now in financial trouble.)
My proposal is to charge mortgage insurance on loans over 60% LTV so that the lenders would feel a bit more comfortable that they are covered if the borrower defaults. Once again the borrower would pay the premium and the lender would be the recipient of the proceeds. This, by the way, is done on every FHA loan regardless of the loan-to-value.
If we can get the lending industry moving, real estate will be next, followed by all of the collateral industries that are dependent on real estate: furniture, building materials, plumbing, electrical, architecture and engineering, utility companies, government, etc. This is the lasting shot in the arm the economy needs, not stimulus checks that have come and gone. Once people start making money and perceive that their net worth has stopped falling, the optimism that has created this great country will return. We do not need a wildfire of epic proportions to burn up our equity, access to capital, and hopes; we need a tidal wave of success to wash over America and get everyone back on track.
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