What is the right solution for housing?
Losing your home to foreclosure must be devastating. I am fortunate enough not to have bought in recent years, still have my job, and not have any major medical costs. I also do not live in an area of heavy foreclosures, although there are certainly more homes on the market and we have seen some decline in prices.
I have long wondered how people could afford the bigger homes and huge mortgages. I understand how an ARM reset can put people in a hole and you can add on higher property/school taxes. But, loan modifications and foreclosure freezes should really be focused on those who can afford the mortgage at a fixed rate. I suspect this a small percentage of those at risk. The majority will only end up dumping more money into a house they cannot afford and will eventually lose.
The problem is affordability, so the answer is not to prop up home prices. Doing so, may seem like it would save retirees dependent on their equity for retirement. But, it only helps those retiring right now and hurts those retiring later. As much as I hate to lose equity in my home, prices have to fall further. They will stabilize when they become affordable again and inventory goes down.
We should focus on further regulation of the industry, going after predatory lenders, and to ease refinancing into fixed mortgages. But, I want our politicians to stop saying the goal is to prop up housing prices or acting like we can save most home owners by holding off foreclosure.
Hopefully this provokes some replies from those more informed. Maybe I am way off base here...
I'm not sure there is a fix to the housing crisis, except for people to stop beleiving there is a houseing crisis. The only thing that can solve this problem is for more people to buy homes. To do that, they have to beleive that thier money won't be blown by making a bad investment.
So, how do we get people to buy? As a Realtor, that's the question we ask every day. The basic solution would be to do what it can to make credit more available, but the recent overtures towards Fannie Mae and the changes in FHA loans have tried, but if lenders don't want to lend, they won't lend.
Foreclosures happen, fundementally, because no one buys the home first. Unless we come up with buyers, we're not going to find a way out of this thing. And I don't think we start seeing too many buyers until the market hits the bottom and bounces a little. Hopefully, that's soon.
What we DON'T need is the Senate bill designed to help builders. Builders won't start building again until the market has turned -- all the bill does is give them free money. And, despite all the talk of sub-prime lending and predatory lenders, what started this crisis was builders flooding the market and then dumping homes to keep their velocity.
So, if you want to try to solve this crisis, tell all your freinds to buy a home. (want my card? :)
Nice post and good questions
April 9, 2008 1:23 PM | Reply | Permalink
a couple things, the term predetory lender gets thrown around all the time, I would like to know what that really means, in my mind payday lenders are predatory, with mortgage lending it is always in the brokers best interest to find the best program available, a prime rate that wholesales at 6% that you give to a client at 6.75% will pay more than a subprime loan that wholesales at 8% and you give to a client at 9%. Also, just think how much easier it is to have a client agree to a 6.75% rate over a 9% rate.
The worst programs out there where the pay option arms. These programs allow for a borrower to pay less than the interest on the loan allowing for negative equity, this means you owe more after a year than when you started, it is sometimes called a pick a pay or neg-am loan. These loans are advertised with the start rate, usually 1-3%. The way it works, that 1-3% is the payment rate and only lasts a few months, the actual accrual rate changed month to month and is closer to 8% right now. Brokers did not think this program up, it was created and pushed by Countrywide, Chase, Wamu, IndyMac and others.
So far as a solution to the problem, I do not think there is one. I think the strategy is to stimulate inflation to cover the price differences, the problem will be how fast wages rise with inflation to cover. This is taking huge amounts of money from anyone with savings or a 401k by devaluation, the numbers in your account will not change, but losing 20-30% of buying power with the dollar is just as devastating as if the federal government seized 20 to 30% of all liquid assets. Inflation is more palatble to the public because it is like the old story about a frog in boiling water, if you throw the frog in water that is already boiling, he will jump out, but if you raise the heat slowly, he will not.
They will pass some regulation, but in reality it will be 29 pages to sign when you get a loan instead of 25, it will not matter much. The big banks will be protected, homeowners and small business will lose out. They are trying to get govt backed lenders like fannie mae, freddie mac, and FHA to take up the slack, but really it is just shuffling bad paper from investor backed entities to govt. backed entities reducing the risk for hedgefunds while placing it on taxpayers. Nice system.
April 9, 2008 1:41 PM | Reply | Permalink