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Does Anyone Win in a Housing Market Crash?

I thought I might write something scentilating regarding lead based paint but that would be the easy way out of what has become a very contentious topic: Portland’s housing market. Nationally and locally the economic outlook isn’t good. There is a lot of uncertainty. Sure, Portland’s market has fared better than most of the nation to date but it is not impossible that prices will fall. I’m more optimistic than those that think there will be a 20%+ correction but going into a real estate transaction now without acknowledging the possibility is folly. Somebody is going to be right on this one but calling it now is tough.

I’ve been thinking about who the “winners” are in a housing market crash/bubble burst.

The losers:

1) Homeowners- that lose their house or equity. Equity is only realized at the sale.

2) Properties- less money to spend means less investment into properties. This can be remodel upgrades or simple maintenance. Deferred maintenance is the single largest category of repair items in inspection addendums. Less work on houses equates to fewer housing related jobs and therefore see #4 below.

3) Renters (at least some (I’m thinking single family home renters as the economics of apartments is outside the scope) – I am not a renter so correct me if my assertion is wrong- Increase demand for rentals drives up rents. Homeowners, tight on cash, have less desirable properties (for reasons above) but they rent because of the increased demand. This equates to renters paying more for less property (this may be negated by a large number of once-condo-now-apartments in the Pearl etc.. Some renters receive eviction notices- I have never seen a bank owned property with tenant. I’ve never evicted or been evicted but I don’t imagine that a bankrupt landlord has deposits at the ready to return (tenant/landlord law notwithstanding). Maybe someone has experience being a renter where the home went into foreclosure. I’d expect the cost of moving assuming a rental truck, deposits, time, etc. to be about $2000. A landlord requiring first last and a deposit could be looking for upwards for $4000 cash.

4) Banks and the economy. Not sure why I put these together in retrospect.

5) First time buyers (this one could go either way)- Prices drop so the market becomes more affordable and a larger segment of the population can enter the market if they desire. Because of the crash, they now “need” 20% down in order to purchase (I’m willing to bet that there are loans requiring less than 10% down still exist). A $200,000 house in 2005 could be bought for basically any amount of money down (not discussing here whether that is a good or bad thing, just fact). Now a $150,000 house doesn’t necessarily require it on paper but 20% down is $30,000. Did the buyer pool expand or contract?

6) Neighborhoods (ignoring the gentrification debate which is a topic unto itself)- Flippers and true remodelers are less able to invest in neighborhoods so houses that might have reborn aren’t. My point here isn’t whether whether flippers/remodelers are building appropriately, quality or respectfully but that they are not investing into the community.

The winners may be those who stuck to fundamentals: put 20% down, used conventional loans and invested equity they may have pulled out back into the property. They should be able to whether the bumps in the road. Though they have fewer options. Investors like SRS seem to be doing well. Investors with cash to invest in real estate (not stocks about real estate) will do well. Anybody that finds the bottom of the market as a buyer should do well. Do renters win? I don’t feel qualified to answer for them.

I’ve read through the above a couple of times and don’t see anything incendiary about it but knowing from past history, I’m sure it will be taken issue with. The goal is respectful debate and I hope we can go down that path.

Discuss. Email addresses are not required to comment.

48 Comments on “Does Anyone Win in a Housing Market Crash?

  1. How could I forget Realtors? Winners or losers? I’d say both. Many (possibly us) will get forced out of the business which will leave the survivors (possibly us) to continuing do their jobs. Which will reduce further, the client pool or the Realtor pool remains unclear.

    That might ultimately make the real estate industry a winner as barriers to entry increase and commission and agency models change.

  2. When an average person sees the value of their biggest asset decrease substantially (say 10%+), it opens a huge can of problems that affects everyone:

    – Less spending on new purchases from electronics to automobiles; which results in severe unemployment for people in those industries; reduces US innovation
    – Less spending on travel; hurts airline and our tourism industry
    – Less spending on services
    – Fondness for lower priced imported goods
    – Higher rents due to demand for rental properties
    – Reduced state income from realestate taxes which would limit many programs for the poor

    etc etc.

    Bottomline: Hate to rain on the parade but no free lunch for renters either.

  3. Add’l loser is of course gov’t, with lower property taxes.

    I’m currently a renter, having recently relocated here after selling before the crash, and am waiting for the market to stabilize.

    That said, I follow 4BR/2BA rentals on Craigslist (that take cats!) as one measure of the economy. Prices have now dropped below $1300/mo; had been around $1500/mo back in Dec. Therefore, I think renters are benefiting at the moment. Were rentals to go back up, then I think that would be a sign of stabilization, as it would then be economically feasible to purchase rental properties.

    I also believe 1st time homebuyers benefit, as prices will be essentially dropping, and mortgage guidelines returning to historical norms (assuming 10% required, not 20%).

    I also believe the economy benefits, as irrational prices and accompanying distortions go away and people return to the stock markets for their speculative purchases!

  4. A new issue popped into my little brain this weekend. While speaking to my brother in Greeley, CO, we, of coursed, discussed the housing market. He put 20% down 3 years ago and said that if he had to sell today he would be lucky to break even, toe 20% down is gone, essentially. Is there anyway possible that banks can re-evaluate mortgages and start requiring PMI if the 20% equity rule is no long met due to decreasing values?

  5. All interesting comments!

    bearlee’s comment is thought provoking. Really it’s unprecedented territory as far as I know. A mortgagee had to go to the bank with proof that the home exceeded a 20% equity position. Most often through an appraisal which the mortgagee paid for.

    Once the PMI (private mortgage insurance) could be cancelled at the bank’s discretion.

    Would a bank say, “we’re going to appraise your house so we can prove that you need PMI?” There would have to be something in the contract to allow a bank to unilaterly apply PMI coverage I would think. Banks mutually agreed to cancel PMI, I doubt they can change terms but I don’t know. Nor do I know what percentage of homes that were bought with less than 20% down actually have PMI. There were lots of ways around it.

    Going one step further: could a homeowner that considered themselves at risk of default purchase insurance (PMI or otherwise) to cover them? Proactive PMI? It would be expensive I’m sure. There’s a whole new can of worms.

  6. Good list. I am a little unclear on how people with conventional loans who put 20% down are winners in this housing market. As that is my situation, I am seeing I am in a good position because my mortgage is stable, but I don’t see how putting 20% on a house with a value that may drop is a good thing. Unless you are saying that 20% down guarantees a good mortgage situation.

    I agree on the part about the neighborhood being the loser here — in my case my next door neighbor wanted to move last summer and decided to rent instead of sell. He was not so picky about the tenants because he just wanted to move on to the house he already bought. The tenants have trashed the outside of the house, barking dogs, loud parties, fights, etc. I’ve talked to the landlord and I can tell he just wants that rent check, neighborhood problems are not his problem. Now, in a better economy, I imagine he would just have sold the house. Of course, not all renters would be like this, but I think the landlord was desperate enough to not be paying two mortgages that he made a bad tenant decision. So, I did pay 20% down on my house, but in this economy neighborhood depreciation is more likely, so my situation is not as stable as it could be.

  7. I am a little unclear on how people with conventional loans who put 20% down are winners in this housing market. As that is my situation, I am seeing I am in a good position because my mortgage is stable, but I don’t see how putting 20% on a house with a value that may drop is a good thing.

    True, maybe not a winner but better able to survive a down market. My line of thinking (flawed or not) was that if A has 20% equity before the market drops and B has none and then the market drops at least A can probably get out without writing a check at closing or bankruptcy. Granted the equity is gone either way but I personally would feel better about situation A than B.

  8. if A has 20% equity before the market drops and B has none and then the market drops at least A can probably get out without writing a check at closing or bankruptcy

    That makes sense. I think I have a harder time accepting that I may lose money already invested, as see as the benefit not owing money later. For some reason, losing money seems worse than having to pay later. But then looking at inflation, the money I am losing now costs less than the money I would have to pay later (in theory, at least).

  9. I am sure you have all heard the term “jingle mail”. Seller A bought house for 300K and 20% down, seller B bought house for 300K and zero down. Seller B walks when house loses 20% in value and hurts his credit. Seller A has to sell and breaks even. Who is better off, the guy that put 20% and lost it or the guy w/ zero down who walks and just gets bad credit for a few years? I would say the guy who sent the jingle mail is better off financially. Aint fair, is it?

  10. Previewing your Comment
    In my neighborhood I am witnessing rental properties of two duplexes and one 4 plex selling recently. The people living in all the units were evicted and the places are being renovated. (Two of the places had renters selling drugs). I have talked with the new landlords and they say they will be raising rents after the renovations. All these places were dumps and needed the remodel, but I am surprised that these were purchased, as they were so run down. This has happened within the last couple of months.

    I am worried if there is a downturn. I have witnessed Portland’s change (for the better) first hand over the last 30 years. A lot of the neighborhoods were crime ridden and trashed 30 years ago. Unemployment was outrageous. Now most of the neighborhoods have been re-burnished and crime is way down. It is a fact when unemployment is high, crime goes up. I remember you could not even keep a flower pot on your front porch 30 years ago because someone would steal it. Housing is so tied to the rest of the economy, that if it goes down, so will the rest of the economy and that includes people losing their jobs. From restaurant workers to carpenters. No one is immune from this. Building of houses and office buildings is about the only thing still manufactured locally in the US anymore. (I’m exaggerating, but this is getting more true as time goes along). I remember applying for a office job in 1984 and being told that 500 other people had applied for the same job. In another part of Oregon I lived in, a new chain restaurant opened up in 1978 and the line of job applicants was two blocks long applying for jobs from waitress to busboys.

    Most of the renovation of housing was because people saw housing stock that was way underpriced (houses for 20K to 60K in the early 90″s and saw the opportunity to move here and live a good lifestyle. The houses they picked were in undesirable neighborhoods and people pitched in and cleaned up the neighborhood both physically and crime-wise. When a neighborhood that was previously undesirable was cleaned up and became too expensive people just picked the next “down and out crime infested” neighborhood next to it and purchased their house for a fair price and then cleaned up that neighborhood. Trendy NW Portland was a down and out neighborhood in it’s day also. I was told in the early 70’s people were shooting their guns off there too, and everything was trashed. (This was before I moved to Portland). My neighborhood was crime infested and not desirable a few years ago and through neighborhood involvement has been turned around. This was the only neighborhood I could afford when I was looking for a house. There are still other neighborhoods that need help too, I hope Portland continues it’s positive renovation of housing stock and continues with the positive trend of crime prevention in these previously crime ridden neighborhoods.

    Posted by: Dot and Dash | March 17, 2008 at 02:10 PM

    Post a comment

  11. Bring on the crash. Sure, RE people and homedebtors want to blackmail us into thinking we’ll all lose when houses become more affordable. Oh yeah, and we renters will suffer too.

    Nonsense. And most of you know it.

    Charles, you admonished me in the past for wishing ill on arrogant home buyers who look down on those who didn’t participate in the madness. But what I see here (in a less abvious way) is the threat to renters of not bailing out the home buyers and the industry. And you also can’t tell me home buyers don’t get a rush of smug satisfaction when they hear that rents went up. It validates their decision to buy a house. So they’re doing the exact same thing as we renter do when we relish the declining market.

    That’s what this thread is doing. It’s threatening renters to get behind a bailout.

    Forget it. Let them eat their granite countertops. Let them get foreclosed and rent until they can afford their purchases. Too freakin’ bad.

  12. That’s what this thread is doing. It’s threatening renters to get behind a bailout.

    It is? I don’t read it that way or see my mention of bailout in this or other posts but I can’t see the majority of us, either renters or owners, as winners in this scenario. I may be wrong but your comment doesn’t illustrate how.

    Naysayer, how do you win if the market crashes? That’s the question. Is it all upside for you?

    ChrisM sees some upside as a renter. That is insightful.

  13. Thought about another way. The Titanic (housing market) sinks. The passengers are made up of renters (women and children) and owners (the men). The women and children and a few men survive. Most of the men die. The losers are clear (they’re dead) but were the surviors winners?

  14. Two words:

    Affordability and Sustainability

    We will all lose a little, some more than others. But if that is what it takes to get us back to ground, so be it.

  15. In the “big picture” view, everybody loses in a bubble because bubbles distort asset prices. So, in the “big picture” view, everybody wins when the bubble pops and asset prices are once again set rationally. And the sooner the bubble pops, the better.

    One of the problems with speculative bubbles is that speculation doesn’t actually produce anything. True, some level of speculation helps to provide liquidity to the market, but beyond that, it doesn’t produce anything of value. And during bubble times, a large amount of money gets “wasted” on such non-productive uses.

    There will be job losses and spending slowdowns galore when this thing really starts rolling. But those jobs and that spending money were created by the bubble, so it isn’t as if they were sustainable to begin with. The money that fueled the housing boom didn’t come from nowhere, and now that you begin to see companies like Bear-Sterns collapsing, you begin to see where it actually came from.

  16. I believe that those that own housing will be winning in the long run. I’m not aware of many individuals that are in a financially successful position at retirement that have not owned real estate.

    Short term, I guess it’s a timing issue of buying and selling, just like investing in the stock market.

  17. The comment by kevbo illustrates the attitude that makes we renters want to see this market crash. There is no connection between owning and a happy, successful retirement. For one thing, no one’s life is so placid that we buy young, live happily ever after then sell for a fat profit and go golfing every day after that. Oh, and pass on a fortune in equity to the perfect children who all went to Harvard. Yech.

    When houses drop back to affordability rents will also stabilize.

    Bubbles are bad. Assets, particularly necessary ones like housing, increasing at 6-7 times the rate of inflation are BAD. Bad for society, bad for future generations and as we have seen and will see even more starkly, bad for the economy. Or maybe you housing bubble cheerleaders haven’t read the papers?

    Your little equity party, patting yourselves on the back for your wise, savvy investment, has sunk the credit markets. Maybe you all can brag about how much your house was worth when we’re all living in tents!

    How can people be so self-absorbed and short-sighted? Look at all the money wasted building condo towers for the rich! Have you walked by the Wyatt lately? It’s like a ghost town.

    Using the logic displayed here, we should have done everything in our power to support the internet stock prices. We could have devoted the treasury to making sure Pets.com stayed afloat because, well, if we didn’t, we’d all suffer. Did we? NO. And we won’t this time either unless too many wannabe land barons walk away from their no money down palaces after they’ve already extracted the paper equity from them.

    We need to bring back debtors prison for that.

  18. The CNN article is interesting? I’d call it scary.

    The amazing thing is that we bubblesitters were predicting this only a couple of years ago. While everyone was high-fiving each other over their paper gains and others were scrambling to buy something, ANYTHING in order to “get in the game” we were shaking our heads and warning of how things would eventually end up.

    And what did we get for that? I was told I had “sour grapes”. That I was a loser renter. That I missed the boat. Co-workers asked me if I wasn’t afraid of getting old and having “nothing to show for all the rent I paid”. Now these same people think I should feel sorry for them, perhaps get out my wallet and chip in so they won’t lose money on their foolish purchase.

    Um, no. It’s bad enough the Fed is funneling cash to Wall Street. It’s not bad it’s criminal.

  19. I got into a discussion with a fella that said he will be flipping houses next year and that he had recently bought 3 homes in the Portland area.
    He mentioned he will make money because he is the guy going out there and buying houses before they go into foreclosure- he doesn’t need to go to the bank- he pays cash for them.
    He said that he buys them at well below the market value making it possible to sell the home and make a profit.
    I told him he was a fool- and the more I think about it, the worst kind of businessman- one who tries to gain off the misfourtune of others.

  20. First time buyers will benefit from lower prices. The fact that larger downpayments are being required is actually helping to keep them from getting into a falling market.

    Renters can also benefit if more properties that were originally destined for sale, now go on the rental market.

    Owners can benefit if they lower property taxes based on lower prices – but somehow I doubt the counties are going to be in a hurry to do that.

  21. I think the real winners in this equation are two groups of people –

    Everyone who got out at the peak and went to renting to wait out the bust.

    Everyone who sat on the sidelines, saved cash and waited on a return to a regular market with sensible lending standards. They are sitting with good credit, cash and competing with a pack of buyers that’s shrinking daily with tightening credit for an expanding pool of properties as the bust cranks up.

    I don’t honestly think the bust will hurt renters at all to be honest – for every homedebtor throw
    out of the house he rented from the bank – another will put a property on the rental market hoping to ease the sing of that monthly payment.

    Don’t forget something like 30% of mortgages in the past 3 years have been “Investment properties” that don’t flow cash.

    Rents may rise a little – but the cost of buying at these ridiculous prices is still way way higher – even at historic low interest rates.

    Biggest losers are those who drank the cool aid and bought overinflated assets, the banks and their investors who bought the CDO’s riddled with toxic mortgages – that’s your 401k in case you are wondering.

    It’s been a ponzi scheme – everyone who played will get burned – even those who were not aware they were playing through their 401k funds.

    Realtors will have a lean few years until sales volume increases again and the pack thins a bit – the smart ones who saved their bonanza earnings over the last few years will be just fine.

  22. “Rents may rise a little – but the cost of buying at these ridiculous prices is still way way higher”

    Absolutely true. Also, rents were stagnant or falling for 2000-2005, so adjusted for inflation, even a small increase in rent may just make it equal to Y2k rent.

    I know that Charles explicitly excluded apartment rentals from his own assessment, but let me throw mine out there. Two years ago, there were really only two rental buildings I was seriously considering: The Louisa and The Burlington. This year, there is also The Wyatt. In a few months, there will be Ladd Tower. The supply for this particular segment of the rental market is more than doubling over the next few months. I can’t see much of a rent increase when the supply doubles.

  23. Naysayer, I’m sorry that you read my statement to mean that double digit appreciation in real estate prices was acceptable to me. Yes, I did profit some from it. I have no one to apologize to for that. But I would have much rather seen a far more sane appreciation rate.

    And I would agree with you that money alone does make for a good retirement. I believe it helps put them in a better financial position to have a good retirement.

  24. Drop in housing prices can be beneficial to 1st time home buyers. Anything to bring housing prices back to some semblance of affordability can’t hurt.

    For the life of me I can’t figure out how is it that I make an above average salary yet can’t afford the mortgage on a median priced house while still putting any money into retirement. Just doesn’t add up, and until it does I’m staying on the sidelines.

  25. For the life of me I can’t figure out how is it that I make an above average salary yet can’t afford the mortgage on a median priced house while still putting any money into retirement. Just doesn’t add up, and until it does I’m staying on the sidelines.

    This is a perfect summary of my current situation and mindset, well-said.

    Question for you guys… I have a friend who bought a new condo for about $360K last year. He mentioned to me the other day that he put zero down, but still had a fixed-rate loan. I was incredulous; not only was this a bad idea, but I didn’t even think it was possible… I thought you had to do some sort of creative financing to get a fixed with zero-down, but I guess this isn’t the case. Anyone heard of a situation like this?

  26. Thank you for the link to the article, Naysayer. The times they are a changin. America’s personal savings rate is down over the years too. (Sorry, I don’t have a link to an article)

  27. He mentioned to me the other day that he put zero down, but still had a fixed-rate loan. I was incredulous; not only was this a bad idea, but I didn’t even think it was possible… I thought you had to do some sort of creative financing to get a fixed with zero-down, but I guess this isn’t the case. Anyone heard of a situation like this?

    loadimmed: You mention that he bought a year ago. Yes, this was quite common until about a year ago. The scam went like this: you got a first mortgage for 80% of the value and at the same time you got a 2nd mortgage for the other 20%. And guess what? You didn’t have to pay PMI then. It was FRAUD but it was so widespread that it became the norm.

  28. I’m sure the RE industry discouraged such blatant disregard for the law. Aren’t you?

  29. You missed one other big loser. Local banks Washington Mutual, Wells Fargo and all the local guys offering HELOC’s to the masses. Those security interests are toast.

    Charles, I agree that bank owned homes are not rented and that, only that, is what is keeping Rents stabilized. One major elephant in the room during the last stage of the bubble is how many homes are unoccupied. Is it truly economic efficiency to have that much empty space. Once the banks start unwinding, aka doing th Bear Stearns swoon. The RE market will return to economically viable levels. Unlike some, I’m beginning to think that there will be a spike down, not the normal slow deflate of most housing downturns.

    It’s true there are few “winners” in the near future (in my opinion first time homebuyers will be where they should have been all along, purchasing at economically reasonable prices)however, all we need to do is look back a few years and we can find where all the winners are hiding.

    Bear Stearns paid $2.6 billion in BONUSES to its employees in 2006. That’s 10X what you and I (through the FED) and JP Morgoan paid on Monday. Think about all the commissions paid to mortgage brokers and RE agents along the way. There are the so called winners. Also sellers at the peak… who downsized or became renters This one is going to turn out to be less than a zero sum game in retrospect.

  30. “The scam went like this: you got a first mortgage for 80% of the value and at the same time you got a 2nd mortgage for the other 20%. And guess what? You didn’t have to pay PMI then. It was FRAUD but it was so widespread that it became the norm.”

    I don’t understand how this was fraud? I did an 80/20 loan when I bought my house and I didn’t cheat anybody or do anything fraudulent. The banks looked at my income and my credit and assessed whether I was a good risk or not, which I was. It’s been four years and I was never late on a payment and now I’ve consolidated them into one loan.

    Please don’t lump everyone who did this financing into one big category of “fraudelent schemers out to screw the system” – this method of lending allowed a lot of people to purchase homes who otherwise wouldn’t have been able to and who were worth the risk, and who did it within their means.

  31. The criminal activity involved in the creation of this credit/solvency issue is ASTOUNDING; requiring the largest confederation of dunces in the history of mankind.

    This is off-topic to this discussion, but I would like to apologize to Charles if I posted any comments at The Portland Housing Blog that could be construed as mean. I have been caustic and sarcastic in my commentary, but I don’t think I ever made it personal. If I did, again I’m sorry.

    I am adult enough to admit my insecurities and frustrations surrounding the housing issue are mine alone and no one is *making* me feel that way…there is nothing *being done to me*.

  32. A down payment is supposed to be your part, your skin in the game, to keep you from walking like so many are doing. Sure, it worked for Tamar. I can also go 85 on I5 and not have a problem. Others may get a ticket.

    But now we’ve made it even easier for people to screw the system by removing the tax penalty for walking away. And like readyandable said, now we get to provide Bear Stearns with a rescue so they can rectify the huge bonuses they paid people to f*ck us over.

    Gee, I love America!

  33. PDX Renter,

    Plenty is being done TO you. You’re being forced to rescue rich guys and foolish home buyers. You’re being punished in effect for being responsible. To add insult to injury, the Congress is trying to figure a way of circumventing normal market forces by artificially keeping house values UP, further restricting your ability to purchase a house for a reasonable, market-set price. Meanwhile, the Fed is making your tax money available to hedge fund managers and Wall Street greedbags and lowering interest rates to the point that your $$$ are worthless. Oil is way up due to the falling dollar and so is inflation which affects what you’re paying for even the most mundane intems like food and energy.

    We’ve entered an era of corporate fascism which most certainly is hurting the commoner.

  34. Naysayer…

    I agree with everything you say and I realize I need to clarify my earlier statement.

    There is no face I can put to these happenings — not Charles Turner, not President Bush, not Chuck Prince (Citigroup) nor any of the other big-time money shufflers.

    Rather it is the “confederacy of dunces” doing these things; leaving me with a system to be angry at rather than a person. So when I say that nothing is being done to me…I mean by specific individuals that can be brought to account for their insults and injuries.

    Hope that helps to clarify.

  35. “I mean by specific individuals that can be brought to account for their insults and injuries. Hope that helps to clarify.”

    Untrue. The specific individuals have names: Bush, Paulson, Bernanke, et al.

  36. The number one name and the person who should be dragged from his Georgetown home and hanged from a very high tree:

    Alan Greenspan.

  37. Looking at the financial stock crash and tech stock crash; i am happy that I invested in PDX realstate.

    The latest $170 -> $2 stock crash at Bear tells me again that my realestate investment was really smart.

    I would rather be a “foolish home buyer” and have a heck of a time in my own house than be a renter for life who saves for retirement and sees his/her mutual funds and stock portfolio go down the drain.

    As your primary residence, realestate is the still the safest and happiest investment.

    ok, now let the flood gates open.

  38. I don’t understand how this was fraud? I did an 80/20 loan when I bought my house and I didn’t cheat anybody or do anything fraudulent.

    Tamar: Did the lender who loaned you the 80% know you were borrowing the 20%? Or did it just look to them like you had 20% down?

    Please don’t lump everyone who did this financing into one big category

    Tamar: I understand that it was common practice in the mortgage lending industry until about 12 months ago, and I fully understand that when the scheme was explained to you by your mortgage broker that you probably just thought it must be OK because who would doubt this mortgage professional? And most people just went along with it.

    However, about 18 months ago when I talked to a mortgage broker and he pitched this as a way to avoid PMI the first words out of my mouth were “Wait, isn’t that FRAUD?” But what do I know, the last time I bought was the early 90’s before all this “financial innovation”… I wasn’t up on all the cool hip new ways to borrow money (that was pretty much how the broker responded – nicely, of course, but he did imply that I just didn’t now how things were done nowadays). It had become such common practice that nobody seemed to be questioning the practice.

  39. You probably already know this, but other than the last 7-10 years, real estate has been far outpaced by stocks. And we’re about to see real estate gains erased.

    I do agree, though, that houses are great fun and used to be a smart purchase. That’s before hysteria made them much more expensive than renting. You’ll never really own your house even assuming your lifestyle allows you to stay there for the whole term of your loan. There’s always some parasitic entity laying claim to it whether than be a taxing authority, a repairman or an angry spouse.

  40. Greenspan was a world-class *pretender* who convinced a great many people he knew what he was doing.

    I am of course aware of the larger players and their individual names, but again I have no connection to these people, they are but faces on tv and the internet; I can never personally hold them accountable.

    Angst like this makes it convenient to lash out locally.

  41. There was no crash today. The stock market is up 420 points, the biggest gain in years:

    Goldman Sachs (GS) is up 15%
    Merrill Lynch (MER) is up 12%
    Lehman (LEH) is up a whopping 42%
    Bear Stearns (BSC) is up 36%

    I have an amount of money invested in Oil and Wheat futures, the former may likely top $200/barrel by the end of the year.

    Should I then say to everyone: “Please by all means if you want to keep driving and eating, go right ahead…you are funding my retirement!!!”

    Sounds asinine doesn’t it? To attempt to make people feel wrong about basic needs.

  42. Not to say fraud or not because I have never signed closing documents with a second loan package (like TiP) and I am not an attorney but I can’t imagine a bank with the ability to make numerous 80% loans didn’t know that some of their clients might be borrowing the other 20% if it was common practice. If they were concerned they could have done any number of things about it and enforced PMI. Isn’t that what underwriters are for?

    Is it off base to say the Realtor and the mortgage broker worked for the client and the bank worked for the bank? Did the mortgage broker work for both the bank and the client? The client wanted to buy a home and all three represented what was asked for truthfully (anybody who didn’t most likely committed fraud). The question is did the bank explicitly ask, “are you borrowing funds from another institution or party to complete this transaction from a source other than this lender?” Banks have NO PROBLEM using caps and bold and repeating the same thing on multiple copies if they feel the need to get something across.

    I’m not in any way implying that some Realtors, mortgage brokers and buyer’s committed didn’t commit fraud in some transactions but I am not sure that avoiding PMI was a part of it. Maybe it was.

  43. No PDX Renter, you’re supposed to encourage people to do whatever it is that enriches YOUR life and fills YOUR pockets. If they balk at $8 a gallon gasoline while you’re making money hand over fist off of oil futures, just accuse them of having “sour grapes” or chide them for “missing the boat”. Ignore them when they point out that governmental policy in the form of currency devaluation is what helped raise the price of oil to $200 a barrel. Instead, claim it was your savvy investment style due to your superior planning skills.

  44. Is it off base to say the Realtor and the mortgage broker worked for the client and the bank worked for the bank? Did the mortgage broker work for both the bank and the client?

    All parties were working for themselves. You should never enter any kind of financial transaction thinking that those on the other side(s) of the transaction from you are out for anything other than their own interests.

    I can’t imagine a bank with the ability to make numerous 80% loans didn’t know that some of their clients might be borrowing the other 20% if it was common practice. If they were concerned they could have done any number of things about it and enforced PMI. Isn’t that what underwriters are for?

    Oh, I suspect that banks were aware this was going on. In some cases they may have looked the other way (afterall, they also wanted to be in that 20% business). Still, if you go to a lender and tell them you’re putting less than 20% down they’re going to make you get PMI. That PMI is for the lender, not you. If you borrow that 20% down from a different lender (as was the fairly common practice) so that the first lender thinks you’re putting 20% down then the 80% lender doesn’t require PMI. But the 80% lender is in the same position they would have been if you had put nothing down since the buyer has no skin in the game… this is, I think, one of the big reasons we’re seeing so much people walking away from their mortgages now.

  45. But was it fraud or all parties being complicit (or with or without excuse, unknowing)?

    In my never ending goal to replace real estate with a different part of life (this one is a bit of a stretch (change genders and locations to suit your needs)):

    Woman (buyer) walks up to a nightclub (the bank) in heels and jeans. Sign on the wall says no denim, no heels (there is a deck with large gaps out back so no heels and jeans because this is a classy joint). The bouncer (the underwriter) looks her up and down and waves her in. It’s no big deal because the club owner (banker) just this afternoon told him what a great job he is doing and to keep it up and he’s seen her “type” before. Everyone has a good time and the story ends…

    Actually it doesn’t. She’s 19, she gets drunk and wraps her car around a telephone pole and is DOA. She’s 23 and breaks her ankle when her heel gets stuck in the deck. She and the server bump into each other. The server is carrying eight shots of Louis VIII for the table in the VIP room (retail value $1000+). She’s legal drinking age, gets loaded, gets home via taxi and gets fired in the morning because she can’t get her hungover body to work.

    In each situation something negative occurred. Almost all of them require more questions to be asked before assigning blame to one or more of the parties.

    So it was a stretch. You’re probably thinking about now that it is a good thing he is a Realtor and not a novelist. Have a great night.

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