Business advice

I was checking on the latest oped additions to the New York Times and ran across the oddest article. Well, at least I thought it was odd. The rest of the country’s liberals will probably cry a few tears over it. The author predicted the expectation of over two million foreclosures next year. He inferred the whole problem was tied to the sub-prime loans, but I have my doubts.

He had a discussion with an elderly woman facing the loss of her home because of a refinancing mortgage she couldn’t keep up with. She lamented that she was going to ‘lose her home.’ Apparently, no one ever informed he the home still belonged to the bank.

I am not going to argue that the explosion of the sub-prime mortgages has not created a mess that the world is scrambling to clean up. But, there is more to this. There wouldn’t be a problem this big if there common sense was being used in the realm of buying and selling real property.

The real estate bubble has been in the process of bursting for quite awhile. The world chose to stay in denial. Prices weren’t increasing as fast and homes were staying on the market. Along came sub-prime loans. And, that’s not all. I recently learned that a young woman I knew had gotten a loan a couple of years back requiring no down because she had a good credit rating at the time. She and her husband are now behind in their payments.

Nonsense has prevailed. Loans made with higher rates; loans with no money down, loans with variable rates, those with balloon payments are all ticking bombs. The goal seemed to be to put folks in homes no matter what. They had bad credit. There was a hope they would stay in the home, make payments and increase their credit rating. Well, folks with bad credit have a tendency to be poor at managing their finances. Bad habits die hard. Shock oh shock when a few years into the loan, the payments are either late or missed.

Easy-to-get-loans for those with questionable credit along with the decrease in prices are two sticks of dynamite rubbing together. Then, there are the loans that were made for those with good credit that didn’t demand down payments. This put people into homes without being able to achieve any equity for many years. That provides a situation where owners are going to be just that quicker to walk away from the dwelling they once imagined to be their home. Without any equity, you are also left without any leverage when it comes to any chance to refinance. The only thing you are left for years is a mortgage and a roof over your head which could disappear if there is a blip in your cash flow.

Deals without equity are not new. This began in this generation about the time I started covering real estate in the early 80s. Prices have inflated so high along with interest rates, owners were sitting on properties that couldn’t be moved for love nor money. Owners and brokers came up with a way to get that title transferred. It was known then as wrap-around-mortgages. In many instances the sellers held the paper until a second could be paid off. The seller in those instances was choosing a monthly payment in lieu of being stuck in a property they no longer wanted. Variations of this craziness have been going on ever since.

Increased pressure/regulation is needed on every person involved in real estate deals. This includes agents, brokers, escrow trustees, mortgage brokers/bankers all the way down to the appraisers. Each of these individuals makes money every time a deal closes. They have a vested interest to go along with the flow. It is obvious by now that no one has the guts to stand up and shout: “…this is a risky deal.” If someone opened his/her mouth then they would not only lose out on that deal, but future deals would go elsewhere. The whole industry needs to be called into question.

Congress is arguing over what they are going to do to bailout this mess. The California Governor is also putting his two cents into the mix. It is going to take awhile to unravel. Those involved in the real estate industry can certainly feel the pressure to wise up and put together less risky deals. They will eventually get tired of reading about themselves in the paper.

There are also the consumers willingly sign anything put in front of them if it means getting what they want. Want to take that route? Then, don’t whine when the foreclosure notices come in the mail.

For more examples of my work: www.bellbusinessreport.com

Laura Bell
writer@well.com

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