In It For The Investment
It’s Friday desk clearing time for this blogger. “Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.”
“‘This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,’ the researchers noted.”
“The researchers said their findings focused on an ‘undocumented’ dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.”
March 2005. “Real-estate investment is what has allowed the Ackermans to move from a modest $165,000 home, purchased in 1999, to the six-bedroom stunner they live in today. The Ackermans bought three of their houses the same way: They financed 80 percent of the purchase price with an interest-only loan. To avoid paying private mortgage insurance, they put 20 percent down on each home, but only 5 percent of that was out of pocket. The remaining 15 percent came from simultaneous second mortgages, called ‘piggyback’ loans.”
“The double loans have left them carrying eight mortgages. If interest rates go up, ‘we could be in trouble,’ admitted Gregg. ‘If that happens, our exit strategy is to start liquidating homes. Right now, I’m just playing the game,’ said Janey. ‘But we have an out. We can always sell.”‘
April 2005. “As prices continue, the Ahillens say they are forced to look at smaller homes and act more quickly. The Ahillens said they want to keep the home they now own in Tempe as an investment for their 3 1/2-month-old son’s college education, which means they need to finance 100 percent of the purchase price in Gilbert. ‘You find if you don’t act now, you’re going to get priced out of the market.’”
April 2005. “Three years ago Greg and Jessica Furr paid $230,000 for a single-family home. They recently sold it for $445,000, pocketing a $215,000 profit. The Furrs and their two young children moved into a new, four-bedroom, brick-and-vinyl-sided home. The couple bought the place for the pre-construction price of $380,000. ‘We plan on selling this in two or three years. They say we’ll get $750,000. It’s hard to believe. To make 80 or 100 grand on a house is one thing. To double the value is kind of absolutely mind-boggling.’”
“The couple also has a place on the Northern Neck, where they spend most weekends.”
May 2005. “Darryl Wortham says he’s not speculating. Wortham, a tech project manager in California, has bought three houses this year in Georgia. ‘So I bought all the properties really sight unseen. You see they have all the pictures up here, so it makes it real easy to make the buy,’ he says. ‘You come down and see the ‘purchase’ button. That’s all you have to do.’”
May 2005. “It’s clear that something big and basic in the way Americans think about housing has changed. For many of us a house has become a way to pay for retirement or the kids’ education, or simply a way to get rich. With no savings, and a college loan to repay, Kelly Pearson took out a mortgage for 100 percent of the price of the house. Closing costs were paid for by a $10,000 gift from her parents. Her plan: to borrow more soon and invest in a condo.”
“Jerry and Laura Satran’s Sunday open house is empty. (They) are asking $1.3 million. But here they are, the second week the house has been on the market, drumming their fingers. The previous Sunday, Jerry says, 40 visitors stopped by. No offers. Two weeks later the Satrans receive an offer: $1.2 million. Not the full asking price. No one seems more disappointed than the neighbors. One woman suggests the Satrans would be hurting the entire block if they settled for less than $1.25 million.”
“‘She says she was only going to be here for two years, so don’t screw up the comps,’ says Laura. ‘She’s not being cruel, everybody who lives here is in it for the investment.’”
“Dear Debt Adviser: I am emailing you in hopes of getting some honest advice. I recently owned a condo in Atlanta, and I financed it with two mortgages. I used a first mortgage and a home equity loan/line of credit. This was not my primary residence. I’m one of the many people who tried to rent out my condo because I couldn’t sell and break even. Long story short: The bank foreclosed three weeks ago. I continue to get threatening calls from the bank concerning my equity loan. So my question is: What should I do about the loan balance?”
“Dear Adam: If this wasn’t your primary residence, then I’ll assume you bought this condo as an investment hoping to make money. When an investor plunks down money on an asset, it is often said they are making a bet. In your case, you bet and lost. As a result, the rules that govern unpaid mortgage debts in your situation are different from those of a homeowner who buys and loses a home he or she bought as a primary residence.”
“Expect your lender to come after you for the deficiency balance after the property is sold.”
“It takes a leap of faith, not to mention a little investment in time and money, but the idea of renting your home to strangers is catching on. ‘We have had many great experiences renting our home for the summer months,’ said Michelle, a real estate agent who rents out her primary residence, located in Maine, every summer and lives with family and friends while her place is rented. ‘Believe me, it was not an easy decision to allow strangers to come in our home a week at a time. However, financially we had no other options. The (rental) money allowed us to pay the mortgage.’”
“Activists fought back against the foreclosure process in Martinez on Thursday. ‘For over 20 years, I made my payments on time,’ said Tony Amador of Oakley, who allowed demonstrators to use his home as a backdrop for their protest. ‘I’ve been double-crossed,’ Amador said. ‘Between the mortgage companies that I’ve been paying to all my life — between that, and the government letting them do it, they stabbed the knife into my heart and I’m bleeding.’”
“The U.S. Financial Crisis Inquiry Commission found in its report issued in January that the Federal Reserve – among other agencies – had failed to deal with irresponsible lending during the economic boom despite warnings that it wasn’t sustainable. ‘There were warning signs,’ the panel concluded in its report last year. ‘The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.’”
“Alan Greenspan, in a speech on Dec. 5, 1996, phrased it as a question: ‘How do we know when irrational exuberance has unduly escalated asset values?’ But he meant it as a signal that stock prices may have soared a bit too high.”
“The Fed chief cautioned that asset-price booms could be followed by a bust with harsh consequences even for people with no money in stocks. ‘We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy,’ he said. Greenspan’s words didn’t imply that the Fed would take any action designed to prevent or deflate a stock bubble. A hallmark of the Greenspan Fed, in fact, came to be the view that the central bank’s best role would be to do economic damage control if an asset-price bust occurred.”
“Stocks kept rising for three years, and the Fed found itself providing emergency support after a 2000 stock-market plunge, and again after a 2007 real estate bust.”
“President Barack Obama has argued, as recently as last Sunday on ‘60 Minutes,’ that what happened on Wall Street wasn’t criminal. ‘Some of the most damaging behavior on Wall Street,’ the president told Steve Kroft, ‘in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.’”
“Obama is wrong. Fraud was illegal before the crisis; it’s illegal now. The Servicemember Civil Relief Act was signed in 2003. So it was already on the books. During the savings and loan crisis, the George H.W. Bush administration sent about 3,000 white-collar criminals to jail. This administration has yet to send one.”
“And it is for lack of trying. Attorney General Eric Holder and his network of U.S. attorneys haven’t brought one criminal suit on illegal military foreclosures or foreclosure fraud. There have been enough books and investigations revealing rampant criminality in the housing bubble and now in foreclosure crisis. Yet Holder’s DOJ is still settling with banks to let them off the hook for illegal foreclosures on active duty troops.”
“The housing bubble was not just due to tragic herding behavior. It also involved the financial sector’s aggressive responses to democratic attempts to rein in creditor abuses. Turning our markets into playpens for predatory behavior didn’t happen overnight, and it will not be fixed overnight. But until we have public servants strongly focused on justice for all, we can expect the crime spree to go on.”
