by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I’m going to say something very unpopular… again:
We gotta get the Government out of the mortgage business.
That’s not going to happen anytime soon but we, as responsible free market advocates of our respective industries, must never stop saying “I told you so” when the whole thing implodes again. After repeated admonitions, they’ll start listening. When they start listening, we’ll experience a brutal but swift decline followed by a healthy and sustainable restoration of private mortgage banking.
Everyone is worried about Wall Street securitizing the paper. The prevailing thought is that without a government guarantee, no clear-thinking investment banker will ever take a risk on the American homeowner again. I know how to solve that problem;
Make ’em an offer they can’t refuse.
If a housing capital drought reduces housing prices to a stoopid low level, those investment bankers will be back. Investment bankers have the memory of a four-year old. We have to remove the current arbitrage game they’re playing so that they can get back into the business of doing what they should be doing; analyzing and pricing risk.
Right now, your mouth is probably shaped like an “O”. You’re most likely thinking “mortgage rates will skyrocket to 10% and NOBODY will buy a house! ” Your conclusion would be wrong and I’ll prove it to you:
Today, a $300,000 30-year, fixed-rate loan, at 5% requires a monthly principal and interest payment of $1610. If mortgage rates skyrocketed to 10%, the loan amount, for the same payment, would drop to $183,500.
That’s an offer Wall Street can’t refuse.
PS: If I’m sounding like a broken record, it’s because I’m going to keep saying” I told you”, as my battle cry, until they start listening. For those of you who believe in “spreading the wealth around”, believe me when I tell you that price deflation redistributes wealth to its proper stewards.
Doug Quance says:
If they don’t start doing a better job of analyzing risk – the market will never improve.
Case in point:
I know a recent retiree who has roughly 50% current equity in her home. She has enough liquid assets to pay off her house – and enough left over to buy the one next door for cash. She lives off her SS Disability as well as her savings. Her credit score is 800+ and has been an A+ borrower for more than 40 years.
She does not meet current income and debt ratio requirements to do a refi. Now if she had NO money in reserve… but worked as an employee earning enough money – she could get bought… but absent that, she could not.
Isn’t that silly? She has more than three times reserves… and can’t get bought on a 50% LTV loan.
Now that rates have crept up, she’ll probably just pay off her mortgage.
April 9, 2010 — 1:03 pm
Patsy Snyder says:
No aspect of the mortgage business will ever be good until we get the government out of it.
April 9, 2010 — 2:56 pm
Matthew Ferrara says:
There are lots of banks lending to homeowners, many of whom did not get into the SIV/derivatives debacle because they stuck to strict underwriting guidelines. Most of the local community banks are doing brisk lending; we’ll still sell 4M plus homes in America this year; so somebody is lending.
Not every market is a disaster; which is the “rest” of the lending story. Recently I was in Syracuse, NY which is experiencing 9% APPRECIATION y/y. Lots of lending happening there; even with dicey employment numbers in the rest of the state.
What we don’t need is more FHA backed lending. Apparently nobody has learned the lessons of “creditworthiness” and budgeting; and politicians act as if renting is somehow a bad thing to do. It’s not, tax-deductions aside. Even Gen X/Y’ers are outsmarting the system, by living longer at home or with friends, because they understand that credit isn’t something you “get” from a bank, but something you “have” by being solvent; against which the bank will advance you funds… but economics lessons are hard.
As for distressed/declining markets, lending won’t be needed; there’s trillions of investment dollars both in and outside of America waiting for some good deals (ie., price). Most upper end in many places is all cash, too. And foreign investment even in “distressed” markets like FL and NV is up.
In the meantime, lending requires repayment; which requires employment. Getting the government out of the business of mortgages is a terrific idea; but it would be much better to get the government out of the business of employment (or anti-employment as in taxes, wage minimums and regulations). Wealth creation is required before credit-extension can be improved.
Just my two cents (recently devalued to 1.24-cents U.S.)
April 9, 2010 — 9:16 pm
Don Reedy says:
Doug,
For your gal, honest, a reverse mortgage is just the cup of tea she needs. She’s the perfect round peg in the round hole for this type of financing.
Turn her on to that type of financing, and you’ll be a hero.
April 9, 2010 — 10:00 pm
Joe Dallorso says:
Brian
I bought my first house in around 1980 at about 15% interest. It was a pig pen of a handyman’s special & I spent the next 5 years doing nothing but fixing it up. I sold it for $100,000- more than I paid for it minus about $20,000- in materials and a huge amount of sweat equity. One of the best things I ever did. Opportunity exists in the worst of times.
April 10, 2010 — 4:56 am
Brian Brady says:
Don, that’s a perfect diagnosis and prescription.
April 10, 2010 — 7:57 am