Out of the pile of articles to read this morning is one entitles ‘Investors at Fault in Housing Collapse’. A catchy title and everyone wants to blame us capitalistic money making real estate investors for the current state of the real estate market. The truth is that there were dozens of factors that played into the current state of the market.
Investors alone could not have crashed the market!
While it is true that builders went insane with how many units they were producing, and that flippers were everywhere, there are two other places that need to be looked at. These are the loans that were out and out fraudulent and the loan programs lenders were strong armed into making for the subprime market.
Powered by Jimmy Carter’s 1977 Community Reinvestment Act (CRA) ‘community groups like the now deceased and fully discredited ACORN worked for years pushing banks to make loans available to low income families. Using its ties to the government and the Federal Reserve they forced banks do loans they otherwise wouldn’t have.
The Federal Reserve Board has been ACORN’s “partner” in this endeavor ever since 1977, when the Fed was given responsibility (along with the Comptroller of the Currency) for enforcing the CRA. For those who are not yet familiar with the CRA, which was significantly strengthened during the Clinton administration, it works like this: The ostensible purpose of the Act is to get banks to make more mortgage loans in “minority and low-income” neighborhoods. These loans have been defined by the government as “sub-prime” loans, implying that the borrowers have credit ratings just a tiny, tiny smidgen below the “prime” or highest-credit-rating borrowers. This of course is a farce, as nearly everyone now knows. The Fed keeps track of such loans, and gives each lender a CRA ranking. A poor ranking can destroy a bank’s plans for branch expansions, mergers, and other activities.
The Federal Reserve ACORN Racket
So banks were pushed into making loans to high risk individuals. Not a great business plan, but banks are a business and if they have to play ball with ACORN and the Fed to stay in the game, they will do what they have to do. Faced with big portfolios of questionable loans, the banks found ways to repackage them and sell them off to investors. Shady, yes but not surprising.
Fraud on the street had a hand to play as well!
With low income loans available as well as low-doc and no-doc loans, you know fraud was going to show up. Not nearly enough light has been put on the number of buyers that were put in homes using totally falsified information. Sometimes these were actually people wanting to buy a home. I would be willing to bet though that in the areas with the highest home loan default rate, you will find the highest levels of flat out bogus loans.
Mortgage Loan Fraud
Written way back in 2007 this article touches on a lot of what has happened with the fraudulent loans and scams people pulled |
The number of different scams people played with the banks is amazing and bounded only by human ingenuity. The lowest of our society will always look for ways to scam and defraud those of us that are actually working legitimately to make a profit.
What is the solution to this whole mess? It will be a while before the scars of this crash heal up, but primarily what we need right now is the government to get out of the business of playing with the markets and for banks to start lending again. If those two things happen, supply and demand will even things out and we will start moving some of these short sale homes off the market and that is what we need to do before things will fully start to turn around.
As for banks doing short sales, as the esteemed cooking show how Alton Brown would put it, “that is another show.” Right now they seem to be totally insane in musings as to why they are doing what they are would take hours.
Where else and who else do you see at fault for the current state of the real estate market. Do you have a prediction for when it will turn around and what it will take to make that happen?
