Before beginning I want to make to disclosures:
- I am a fiscal conservative, social moderate Republican
- I am a licensed real estate agent
The economic meltdown that we find ourselves in began with the housing crisis and will end when we come out of the housing crisis. The housing crisis was not created due to the variety of exotic loan products but by the abuse of them. Let me explain by illustrating a couple of the "exotic" loans that were available.
- The most popular was the no doc or "liar loan" This loan was a GREAT product for the right buyer. If you are an independent contractor or own your own business you find yourself in a catch 22. You don’t want to show too much income on your taxes, but it is your taxable income that the bank uses to determine what you qualify for. SOLUTION is the no income verification/no doc loan. This allows people to get loans that they can afford but not qualify for. The problems came when buyers used this loan to circumvent ratio’s. Buyers would say they make 100k a year when they really only made 60k. For those buyers that used these loans honestly they are still in their home making their mortgage payment
- The other loan which has caught a lot of flak was the option ARM. You had a choice of 4 different payments:
a. Interest and Principal
b. Interest only
c. Interest and Principal at a reduced teaser rate
d. Special agreed upon payment
These loans were designed for people who have seasonal income. For example a real estate agent makes most of their commission during the Spring and Summer. An Option Arm allows them to manage cash flow during the winter. So in the Winter I would pay the reduced payment understanding I may be adding to the mortgage balance, then in the summer I would pay extra. The abuse on these loans came when people were enticed by the lowest payment. Again a good product that was abused.
These two loan products single handedly drove up the price of real estate. In 2000 people were buying houses at a strong pace and it was causing the house prices to rise (supply/demand). Eventually the price of these homes outstripped the income levels of the buyers. Normally what happens then is the housing market stabilizes.
The problem was that as the real estate market heated up every one and their mother became a real estate agent or a loan officer. It was these individuals within the industry that did everything they could for a quick buck. They would encourage buyers to lie on mortgage applications, talk them into homes they knew they could not afford. Basically the worst of the worst traits for sales people. This caused home prices to grow even faster at unsustainable rates. This of course led to trillions of dollars in equity lines/loans that were used to artificially pump up the economy.
The sad truth is the "fundamentals of our economy" have been crap since 2001 and it was phantom equity money that kept it afloat
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Because the industry is so complex and training in both real estate and mortgage brokerages is non-existent you had greed coupled with incompetence which is a deadly combination.
All the discussions on how to fix the foreclosure mess do not resolve the core issue and
to quote Battlestar Galactica "this has all happened before and it will all happen again"
A) We need to triple the pre-licensing education requirements for real estate agents
B) We need to have an apprentice program so agents are not just given a desk, a phone and told to go sell some houses
C) We need more FEES to increase the barrier to entry. This industry cannot be a transient industry where people go from insurance sales to real estate then to the next hot market.
D) Lenders, banks loan officers CAN NOT BE ALLOWED TO CHOSE THE APPRAISER. States should use additional fees to establish an independent middle agency that assigns all appraisals who get paid regardless if the loan closes.
E) All loan officers MUST be licensed and be required to take classes prior to and during the licensing period.
By putting up the barriers to entry we won’t have the same floods of agents and L.O’s when the next market boom occurs. This will ensure the market is getting an experienced professional who is focused on the long term and not trying to make a quick buck. Most of those responsible for this mess have left the industry and we are left to pick up the pieces.
Bottom line is the real estate/lending industry needs a detox or in 10 years it will all happen again.