The current real estate crisis was precipitated by problems in the mortgage industry closely related to reckless Wall Street players. In other words, the tail has been wagging the dog and that is never a good sign. But as lenders adopt smarter policies to distance themselves from mavericks and unnecessary risk, it will be good for real estate and for American homebuyers.
The lending industry — in cahoots with Wall Street — failed what was otherwise a relatively stable and robust real estate sector and the initial impetus for the dramatic economic crisis came from the wholesale marketing or “securitization” of subprimes and other low-quality mortgages. Such loans always yield higher rates of foreclosure because they are made for borrowers who have a proven track record of terrible credit. They should never have become widespread — and such an integral part of investors’ core portfolios — that they threatened to infect the entire real estate market and bring the whole nation’s economy to its knees.
The reason these securitized loans started wagging the dog is that Wall Street — in partnership with global financial interests including China’s gigantic emerging economy — developed a raging appetite for mortgage investments. As Americans poured money into China, for instance, much of that money returned to the U.S. in the form of investment capital spent to buy mortgage-backed securities. These new investment products were innovative, because they bundled mortgages together into multi-million dollar pools — not unlike stocks or junk bonds — that could be sold to investors who ultimately profited from the mortgage interest payments.
But as with most get-rich-quick schemes, a few things about the mortgage backed securities game were potentially hazardous:
• An artificially high demand for mortgages was created, because instead of the demand coming from people wanting to buy homes, it came from powerful investors wanting to buy mortgages. The market was essentially turned on its head and that is a gravity-defying act.
• To make the products profitable, higher interest rates were necessary. But to meet the huge demand for them, it was important to sell them to as many homeowners as possible. So teaser rates — which enticed more people to take out more mortgages – were used to lure borrowers. Then adjustable rates — with payments that sometimes double when they reset — were added to ensure higher interest payments to investors.
• The mortgage industry treated investors on Wall Street like preferred VIP customers, but their customer service orientation should have been focused instead on regular customers trying to borrow money with safe mortgages in order to buy homes for their families.
• To churn out enough loans to keep up with Wall Street’s insatiable hunger, lenders encouraged consumers to borrow when they could not afford to and pushed refinances and home equity loans like real estate ATM machines. Some resorted to illegal tactics, and a lack of government oversight made it easier to get away with such crimes.
• Scores of borrowers who qualified for low-cost, low-risk prime loans, for example, were sold expensive subprimes instead — because those carried higher rates of return for Wall Street.
• Eventually, as we now know, loose lending practices and exotic mortgages led to disaster. Major investment portfolios were populated with bad loans that infected them like a virus. Mortgage activity slowed, putting the brakes on the housing market. That put the squeeze on homeowners who relied upon home equity as a huge part of their net worth.
The good news is that as strategies are implemented to remedy the financial mess, the real estate business will not only turn around, but it will also become better and more reliable than ever before. The evidence is already emerging. Tighter oversight of the mortgage industry to prevent predatory lending was recently enacted at the federal level. Support for the nation’s two biggest mortgage agencies — Fannie Mae and Freddie Mac — was also provided. The FHA was given more power to make affordable loans — especially to homeowners with good credit who do not want to make hefty down payments — and Fannie Mae was authorized to make jumbo loans, which used to be only provided by private lenders.
All of these factors help to ensure that home ownership will remain possible — and more affordable — over the long haul. Meanwhile the artificial and dangerous excesses created by an ill-conceived partnership between Wall Street hedge fund managers and the lending industry are being wrung out of home prices. As soon as those artificial and greed-induced influences are gone, real estate will regain traction, sales will pick up, and real estate equity will rise with solid integrity and longevity.
Had the credit crisis not happened when it did, problems would have continued to fester and worsen. But history will most likely show that this year — although challenging — is a healthy turning point for real estate ownership and investment in the USA. Many buying during this rare opportunity for bargain hunting can already attest to that fact.
— Jeff Hammerberg is the president of GayRealEstate.com, an online real estate company dedicated to the LGBT community.