So Cal Real Estate News

Today the Wall Street Journal reported that Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and his committee’s ranking Republican, Sen. Richard Shelby of Alabama have reached an “agreement in principal” that could lead to senate approval of their own version of Barny Frank’s $300 billion dollar mortgage relief bill.

You may recall our post ten days ago about Ben Bernanke’s seeming support of such a bill.

While we are supportive of some of the many things included in Frank’s bill, there are huge problems which we hope our Senators are wise enough to correct.

1. It makes no sense to bail out loans that never should have been made and that will ultimately fail regardless of temporary bailouts. There’s plenty of blame to go around for the subprime crisis (see “How we got into this mess“), some goes to borrowers who lied about their income, other to lenders willing to make no down home loans to borrowers with Fico scores so low I wouldn’t have accepted them as renters, let along borrowers. In either case, there’s no sense in putting off the inevitable for borrowers who never should have become homeowners.
2. It makes no sense to reward and encourage irresponsibility. It’s really up to the borrower to read and understand the loan documents, not to just “trust our agent,” who probably hasn’t read them either.
3. Let’s not punish tens of millions of responsible homeowners who are also taxpayers by forcing them to shoulder billions of potential losses to bail out less responsible homeowners.

In fairness, many subprime borrowers were duped by mortgage brokers who were often also real estate agents, eager to make a commissions for both the sale and the loan. I’ve heard tales of some agents employing full time “signers” to supply signatures on loan applications and documents. Many others simply trusted agents who spoke their language to correctly explain the various English documents. The documents are indeed overwhelming. I usually scan loan docs that I sign, but rarely do I read every word of every page.

The other day as Barb & I were out for an evening stroll we passed a home which had recently been foreclosed and then sold. The buyers paid about $200,000 less than the former owners had paid almost three years ago. They had moved in, and we noticed new kitchen cabinets stacked in the garage, no doubt waiting installation.

This was not a subprime loan gone bad, just a case of a buyer who bought at the peak and then decided to accept a job transfer as prices were declining. They picked a really friendly Realtor whose child was on the same soccer team as theirs (see”Top 10 ways NOT to pick a real estate agent“).  The agent allowed them to overprice the home, then chase the market down, then take it off the market and rent it until their considerable equity was gone.

Sad for the borrower, sad for the lender, good for the buyer.  Kind of a cleansing and a fresh start, ultimately for everyone.  Not the end of the world.  Nobody died.  The sun’s still coming up.  Lender and  borrower made their choices and lived with the consequences.  And the American taxpayer didn’t have to bail anyone out.

Worse things could happen.  Rep Frank’s bailout bill, unless modified by the Senate, might be one of them.

One of the many unknowns in the current real estate market/meltdown/crisis/challenge (take your pick) is what the government can and will do to get us out of the mess they helped get us into (see “How we got into this mess“).

Monday night  Fed Chairman Ben Bernanke, speaking at Columbi’a Business School, pushed Congress to act for the sake of us all:

High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.

We think he’s right on the money on that one.    (For the APs report on the speech, click here.)

The challenge is how to correct the problem without bankrupting us all.

On the one hand, there are probably well over a million homeowners who now owe significantly more on their mortgage than their home is worth.  On the other hand, as Tevye would say, there are also no doubt tens of millions of Americans who owe significantly more on their car loan than their car is worth.

Do we really want to set a precedent that the government will bail people out of their own stupid decisions?  Nobody held a gun to anyone’s head to buy a home.  Most of them signed disclosure documents detailing out their loan’s ridiculous terms somewhere in the fine print.

But I know a rocket scientist (literally) that signed those documents and ended up over $100,000 upside down with an obscene payment.  Yes, he “trusted” his real estate agent/lender (bad sign!), who promised she’d get them a refi out of the loan (oops, guess she forgot to mention the prepayment penalty let alone the potential for decline in value).

I also have heard of lenders who had full time “signers” who supplied signatures on behalf of their borrowers for those subprime loans, whether their borrowers knew it or not.  (Now that I think of it, I don’t recall signing loan docs on some refi loans my wife & I did a while back.  Hmmm.)  Oh, did I mention that those disclosure documents were written in a language many of the borrowers didn’t speak (English)?

Bernanke’s taking a different approach.  Something like “we’re all in this boat together, and if we don’t start bailing these people out, we’ll all sink together.”  And he may be right.

Most commentators take this as a direct push from Bernanke for something akin to Rep. Barney Frank’s proposal for broad based foreclosure relief, which would include write-downs of the principal balance for some upside-down homeowners.  (For interesting details on Frank’s bill & the Bernanke connection, check out this post from TheHill.com).

How this all works could get messy, or it could help us all move on.  Or it could sink us all.  Action-reaction.  Unintended consequences.  Like the Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up.  That just happened.

Or, as my friend in Tennessee, Vince Thrasher, would say, “Hey, ‘The Fed dropping short term rates so low the dollar drops and inflation picks up & long-term rates (including fixed mortgages) go up’ just happened!”

Kind of like the fed dropping interest rates to save the economy after 9/11 and creating a housing bubble.  Yeah, that just happened, too, although Ben wasn’t driving the bus into the ditch back then.

Maybe it’s just time to let things just run their course.  It’s beginning to look like the longer the government tries to put off or minimize a downturn, the worse it becomes.

I’m still hoping an orderly debate may produce a moderate middle course that will at least partially mitigate some of the damage as we move forward.

We’re also advising our sellers to take advantage of the current spring mini-surge if they want to take the most conservative course of action.  And we’re advising our buyers to be patient, negotiate aggressively, and be sure to lock in a 30 year fixed loan they can live with on a home they won’t have to sell any time soon.

Just more evidence that what we said last November is still true:  We’re in uncharted territory, and nobody knows what’s ahead (see “How low will prices go?“)

Or, as Bernanke said last night, in our favorite quote, “A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.”

Actually, they should have developed those new strategies a year or two ago.  Instead of the new and flexible subprime lending strategies they were working on.

As my mom would say, “Better late than never.”  If Bernanke’s concerned, maybe we should be too.