What Happened to the Open Market?

In the Mercury News on Sunday 12/10, there was a letter to the editor that commented on the bailing out of borrowers.  Why should the government bail out borrowers?  Why not let these borrowers suffer through the school of “hard knocks”?

In reality, many of the borrowers got there based on promises given by lenders and real estate agents.  “The market never goes down in California.”  “You’ll be able to sell for a profit in two years.”  “When the interest rate adjusts, you can refinance your loan at a lower rate.”

In fact, I overheard a conversation at a restaurant last night where a gentleman was telling his table partner that “the real estate market in California is resilient.”  Resilient!  Hell, I don’t think the market’s even realized all of the losses that are out there yet.  He continued that the high end homes are not affected by the reduction in values that the lower priced homes are dealing with.  Wake up!  It’s all interconnected!  If you can’t afford to move up, you can’t afford to buy the next level home.  And, this continues throughout the housing market.  Even though the problem hasn’t hit certain areas and the higher priced homes, they will not survive unscathed.  The real estate correction is in process.  Watch out!

We’ve got a real estate market that’s in chaos.  Values are dropping and lenders are requiring more and more documentation and higher and higher qualifications for loans.  As more documentation is required and higher qualifications are put into place, fewer people qualify for loans.  Fewer qualified borrowers mean fewer buyers.

Right now when more buyers are what we need to pull the market out of it’s slide, fewer buyers qualify.  Refinancing isn’t possible for many because of the reduced value of the home.  And, even if the home’s value still covers the mortgage, the borrowers credit score probably won’t qualify.

When we need aggressive lending, aggressive lending is stopped.  I’m not naive.  I don’t believe that aggressive lending is going to solve the problem.  However, if the pull back to more conservative methods had happened over time, the market might have been able to adjust instead of flounder.

The bottom line is who was in control?  Who kept lending money?  Who kept making it easier?  Who kept selling the homes?  Who kept pushing values?  The answer, lenders loaned the money.  As the money became easier to get, the values continued to climb.  More borrowers, because of easy money pushed up values.  Real estate agents continued to believe that prices would never fall.  And then the sub-prime market problems started.

Borrowers are the naive ones in this process.  Most people only buy several homes over the years.  And, even if we refinance periodically, it’s not something that happens every day.  And for whatever reason, many of us trust our lenders or mortgage brokers.  Why not?  These people are our friends, neighbors, community members.  And if not, they certainly seem like nice people.  We believe what they tell us about the process, and we believe what they tell us about what the loan documents say.

As numbers of mortgage brokers and real estate agents grew, competition for the deals grew.  Bigger promises and less concern for our individual clients seems to have been the results.  Unfortunately, the people who benefitted from the deals have spent their paychecks.   Borrowers can’t recoup what they’ve lost from the people who overcharge them for the loans.  Borrowers can’t change the past.  They can’t become knowledgeable now and fix what has happened to them.

Ultimately, we will all pay the price of these bad loans.  Those who charged extra fees and points may never be punished.  But the rest of us will or are being punished by the potential of a recession.  If not ultimately the real thing.

Inventory in the Santa Clara County is almost 200% of normal.  Most real estate agents are not looking forward to a Merry Christmas.  And some of us have already left the business.  Others will follow.  Lenders are laying off employees.  Mortgage brokers are suffering as well.

And what has happened to those who took advantage of the naive buyer?  They’ve probably already moved on to other scams and get rich schemes.

I wonder what the next big thing will be.  I’d just like to get in at the beginning this time.  Like the realtor saying “Please God, let there be one more real estate boom.  And this time, I promise not to piss it all away.”  I’d like to amend it to: “Please God, let me know where the next financial boom will be.  And this time, I promise not to let it pass me by.”

© 2007 by Judy Kane