Monday, September 29, 2008

Not so sure Paulson is correct

The premise that Paulson is using to justify the government's purchase of these Mortgage Securities is that home values will go up because money is being made available. I am assuming then that he believes that it will raise the value of the securities being purchased by the government.

The problem I see with that argument is that the housing prices we saw from 2003-2007 was a combination of a couple of things.

1) It was so easy for buyers to be approved for loans so people were offering more for homes than list price. For example, a home might be listed for $250K and a consumer might then offer $300k for the house. Why? Because the seller would then give the buyer $50k at the closing table. It was a round about way of allowing buyers to borrow more money at mortgage rate interest rates. Often times it was meant to help investors pay their mortgage while they waited for a tenant to occupy their property. In order for that to work, the appraisers had to be willing to appraise the property higher than "market" value which was already inflated. The lender gets their 1 - 2% commission, the realtors get their commission, and the appraiser gets his pocket padded.

2) There were so many people being qualified for loans that the housing inventory was not meeting the demand. With so many people chasing houses, we were faced with a seller's market. Sellers could expect higher prices for their homes because buyers were being qualified for them. Sellers did very well during these years.

These lax policies for lending money is why we are seeing the foreclosures we see. The strict policies that lenders traditionally required when offering loans were there for a reason.

So, I don't believe this bailout is going to change home prices as much as he is predicting because so much of the housing prices were fundamentally influenced by one thing: The ease by which a person with a pulse could get a loan.

It is my opinion that in order for home prices to go up from here, creditors would have to continue to look the other way when borrowers don't have what it takes to qualify for loans. And that will continue to deteriorate the mess we are already in.

If we go back to the rules that banks have followed before this mess, then it will be more difficult for fraud to take place, which results in fewer qualified buyers. Such a scenario creates a buyer's market. A buyer's market brings down home prices.


SunWolf said...

I think that homes are over priced anyway. People should buy the homes they really can afford and not what the banks tell them they can afford. On the other hand, the banks need to prevent these forclosures by renegotiating the mortgages...take a lower interest rate rather than having them balloon up so high. Give up a little of that obscene profit. Even if it means unscrambling the egg (the mortgage securities), they should do so. They act as if they cannot undo the bundling. I disagree. I know what my original mortgage is and what my monthly payment is, and at tax time every year, they send me a form showing my balance and annual interest payment. If they can do that, they can figure out who has what mortgage and renegotiate to something more reasonable. Think of the foreclosures that could be prevented.

I hate this unbelievable greed.

A Girl From Texas said...

The problem is that they don't know which of the loans are "A" paper loans and which ones are "B" paper.

In 2006 I tried to find out how many loans were subprime loans and what was A paper loans. That data isn't available.

When the bad loans were sold up the line, they were bundled with the good ones. They don't know which of the loans they are assuming are good ones and which ones are bad.

SunWolf said...

They don't have to assume anything. "Good" and "Bad" loans are easy to determine: who is paying and who is not? The data has to be available. That's how they tell us what our annual interest is. I think it's all a bunch of hooey.

Cathy said...

I have to think that sunwolf is right. Simply looking at the books will tell them who is paying and who isn't.

My mortgage payment is due between the 1st and the 10th of the month. If they don't get it on the 1st I start getting phone calls about it.

If they can tag me late, even when I'm not late and start calling surely they can come up with a list of who is truly late and who is on time.

A Girl From Texas said...

Some of them are ARMs and they haven't kicked in yet. Once the new rates kick in, they'll discover the toxicity of those particular loans.

Some of those loans allowed cash back at the closing table to allow the buyer to have money to pay the mortgage for a year or two. Once that money runs out, they'll start defaulting on their loans.

Freddie Mac & Fannie Mae started to get wind of these practices late 2006 and started making it more difficult for appraisers to over appraise house values. But it wasn't early enough. We have many loans that look good right now but actually are toxic.