What Caused the Housing Crisis?
When I get this question, I often hear many answers that are just a little off base. I hear "the banks gave out loans they shouldn't have." This is true but what many people don't know is, we have been doing low down payment loans or unverifiable income loans for more than 20 years without a problem. Obviously, these loans entail more risk to the lender. What many people fail to realize is that the lenders/investors were recieving significantly higher return on these loans over what an A loan would return. I am not saying their were no abuses and that no one received a loan that shouldn't have. If a lender is recieving a 5% return on their investment instead of 4% and they borrowed the money from the Federal Reserve at 1%, many people see that as an additional 1% of return but it's not. If their net return is 4% (5%-!%=4%) versus 3% (4%-1%=3%) that is a 25% difference in the lenders return. A closely guarded secret about these loans that does not recieve much publicity is the foreclosure rate was never higher on these loans than the rate of return. The investors did violate a basic tenant of investing. If you have higher risk, you have to have higher reserves to be able to tolerate this risk. If they had taken the excess return on their investment and reserved it, I doubt there would have been much of a housing crisis. Of course, NO ONE modeled the market going down 65% but it probably would not have if the lenders would have been able to cure their own problems with this reserve.
The second thing I hear routinely, is that is was all the appraisers fault. This is absolutely false. The appraiser basically takes a snap shot of the current market and reflects what value is today not what it will be in the future. Now I see appraisers that are so conservative that even when we get a property in escrow that would improve the neighborhood pricing of a area, they are reluctant to allow for any signficant appreciation. The reason for this is many, many appraiser are out of a job even some with over 20 years experience. The over-reactve cure to this has become disallowing direct contact between the lenders and the appraiser. Sounds like a great idea, except now this appraisal management company, now receives 50% or more of the fee you pay for an appraisal. The net result, many of the really good appraisers who have trained their entire career in this field are either unemployed or working 3 times as hard for the same money.
The third thing you hear about is the lack of available funds or credit. Again, this scenario is mostly false now. There is plenty of credit available but over-reaction to the crisis is now causing huge problems with the ability of a borrower to get a loan. Most of this is due to the fact that the powers that be (government guarantors and agencies mostly) will now place regulations in place to stop the fraud and abuse in the mortgage industry. But is it really necessary to spend 10 million dollars to prevent $100,000 worth of fraud. We see things like verifying downpayments back for years and questioning its source even when its from a 401k. Is the fact that a borrower, sold a vehicle and recieved cash for it really going to effect their ability to pay. Underwriters are so worried about writing a bad loan that they turn down otherwise good loans at a rate of about 5 to 1.
Finally, the things done under consumer protection guises are really bogging down the system. FHA came out with a rule last year that a person couldnt make more than 20% on a flip without adding 2 appraisals and receipts for all the work or wait 90 days. This goes against the American way. If a buyer buys a property at a bargain price, why should FHA tell him how much profit they can make as long as the property appraises. Another similar issue, is lenders no longer allowing any credit for rent received on a property unless it shows on the borrowers tax returns. This in effect makes the borrower qualify for the entire amount of both payments. This is done to prevent the "buy and bail" scenario. In actuallity, it prmotes more foreclosures because a homeowner who would otherwise purchase a home a today's prime prices to offset the loss on their current home, feels they are better off to simply "bail" and wait the three years to buy another home at discounted prices.
Most of what you hear/read in the media is not an accurate reflection of todays market conditions. If you want straight answers about our local market and not opinions painted with a broad stroke by national media, call or email us to specifically discuss your situation.