Today, the Chronicle reported that the home sales fell even more then expected, and that the percentage drop is the biggest since 1968. (The story). People in the industry are calling for Congress to subsidize more mortgages stating it would lead to over 500,000 home sales. However pockets of areas are showing great sales figures, such as places like Nevada or California, where sales are up like 40%.
If the sales figures are so high, then this to me indicates that money is in the industry being hoarded by investors till they see the right price. The subsidized mortgages assume easy lending standards of the past. People will still have to go through underwriting, and with weak economic indicators; this is not a slam dunk. People will have to show stable job history, good credit, etc. In this economy, credit scores are plummeting as people cannot afford the places that they have, lost their jobs, or simply are over leveraged. Who will be getting all these subsidized mortgages if most people who want their own piece of dirt have red flag that will not pass the muster, then who will be getting all these homes? Investors will be the primary beneficiaries. At that point, it is an illogical proposition. The purpose of bailing out failed mortgages is to preserver the American dream that every American can buy a home.
Investors are just sitting back to find homes at bargain rates, as everyone tries to predict the bottom. Obviously investor money is fueling the sales in Nevada and California as well credit worthy home owners (the minority group that they are). The system is just cleaning out the fat from the over inflated prices that existed in many areas. It is just a natural correction, however painful it is.
I am not saying that some liquidity in the market would not be good for everyone. However, I want the public to be honest with who will benefit during those periods. It will not be the father and mother working three jobs to support their three kids. Those individual just are not good candidates for banks to take a chance on.
Any bailout will have to provide liquidity or guarantees to provide a market to buy mortgages, which allows banks to divest risks. If the Government bought these mortgages and got private firms to assist with renegotiations and collections, then the predictions made by some pundits of potentially discounted portfolios growing in value could come to fruition. Banks will also have to build stronger controls for underwriting, and as foreclosures epidemic bottoms out venture to take smart risk.
Why would you ever do a “stated” income loan? Why would you do a “no doc” loan? Why did they do “zero down” loans for so many people? Why did mortgage brokers not have some kind of charge back or cost for every failed mortgage that they did? There should have been some incentive for mortgage brokers to not get greedy and make every loan for fear of consequences.
There are good hardworking people who deserve to get mortgages even in these tough times. The banks will have to once again take calculated risk on those people other wise they will simply not make the return on their velocity of money to justify their business model. Banks must make more money then the cost of their capital (interest paid out on savings, cd, etc). This means that there must be some risk to help them gain the better margins. Banks will also have to embrace methods to encourage drive by banking or online banking, so they can reduce cost and overhead. Bank of America has great new drive through ATM, where they make the person put each check in one by one, and this makes the person assist in the scanning and sorting of checks. Customers now get on their receipts scans of each item deposited, which is great. Banks will have to continue to make efforts like this that helps cut out overhead and also provides customers benefits as well.
Banks are no different then the Big 3 automakers in that they got full on the success they had. Automakers in the US over loaded their portfolios with SUV’s and Trucks. They were totally unprepared for the shift in customer preference to gas efficient cars. Their visit to Congress was blasted for their pompous manner that they traveled to Washington. However, banks were no different. They cut back on doing due diligence and created complicated products that average consumers had no business using. Complicated ARM’s, Balloon Payments, and other exotic products had no business being offered to non institutional or “sophisticated” investors (based on standard used by the SEC for securities). Average working class people did not fully appreciate the risk that was inherent in those complicated schemes. This is why going to back to some more traditional fundamental and due diligence will help restore sanity to the system. After logic presides, banks will realize that they will not survive hoarding there money for people who have 750 and up credit scores.
Investors can still act in this market, but they might have to put more of their money in the pot. The days of 5% down payment is over. It may stifle some deal flow, but it hopefully will provide enough skin in the game for them to be prudent with their investors. Also, investors during due dilligence will have to determine their worst case scenario planning to see if a deal makes sense. Investors with a better head on their shoulders will help keep the market in check as we recover.
Investors should know there are deals to be had and investments to be made. The key is to not avoid doing their homework on deals. Out of state investors must build trusted network in the markets that they choose to do business in, but they should actually visit their property if at all possible. Additionally, they should do more homework on rental rates and not try to analogize with their home market. Different real estate markets have different rental rates and dynamics. I have seen too many investors tell me they bought homes or property based on a agents reports and with no real independent due diligence. The agent is paid on commission so any analysis has a tilt towards closing the deal in some cases. It would be good to have do your own homework. You want to make sure that the data you review is kept with a skeptical eye and it is not spiked with over inflated assumptions. These over inflated assumptions will will haunt you later like the ghost of past real estate deals gone bad.
Enjoy your holiday, and Happy Thanksgiving!
Posted by ashokalion 
