The Great Real Estate Lie - From Boom To Bust - How The Real Estate Industry Screwed You

The sweeping failures of "sub-prime" mortgages (which is a fancy way of basically saying every home owner with a adjustable rate mortgage) and higher interest fixed rate loans, could have an economic impact on you greater than what you are hearing in the news.

As I mentioned in my December 2006 Ezine article "Everything A Real Estate Agent Doesn't Want You To Know, A Year In Review 2006" the real estate market was at the end of the bubble and the boom was going to go bust... and it has only just begun. There are multi-dimensional repercussions to the mortgage failures being touted on the news today. Let's consider a few things:

  1. The mortgages were made to home buyers by greedy lenders, catering to the real estate industry, at very low interest rates (especially compared to the 10% fixed rate loans of the early 90's).
  2. Many of the people who were given mortgages were not qualified to do a conventional deal and were steered into fancy rate gimmick loans to complete the purchase process.
  3. Nobody (and I mean real estate agents AND lenders) was looking out for the home buyer's long term legal and financial interest... no, they were only interested in earning money on commissions and lenders fees.
  4. Many people were "over sold" on houses they didn't need and couldn't afford under the guise of a "hot real estate market". The truth be told, when you hear about any "hot market" at the retail level, you can bet your bottom dollar that "market" has already begun to "cool" or, you wouldn't be "hearing about it"...
One thing is for sure; the real estate agents made their money, but did the lenders? Maybe not... You have to understand how the real estate and financial industry is set up to understand the impact this could have on the economy. So here's a real simple crash course:

  1. Home loans that are written up at the lenders office are sold on what is known as the "secondary market" which is basically composed of very large mortgage warehousing companies that buy blocks of mortgages say, in 10 million dollar blocks at a time. Basically, warehouse organizations are buying mortgages from banks and mortgage brokers, bundling them up and;
  2. Selling blocks of mortgages to Fannie Mae who utilize investment bankers and stock brokers to sell "mortgage backed securities" to the investing public. The securities are more or less guaranteed by statistical fact that people pay their mortgage over everything else. So, as people pay on the loans, the warehousing companies collect the fees, forward the balance to Fannie Mae (for example) who disburse dividend payments through the investment network to support the mortgage backed securities game. While this is a simple explanation, it drives home the point, which is this: Your home loan probably serves as collateral for mortgage backed securities someone else owns.
Why does this matter? For a number of reason:

  1. As borrowers default on home loans, lenders have to repossess those properties.
  2. As properties are repossessed, they go on the market and increase the supply of housing, which lowers selling prices.
  3. Rates are a function of risk, and, as investors who buy mortgage backed securities get nervous, they will have to be paid a higher interest rate to entice them to invest (or stay invested) in mortgage backed securities.
  4. This creates a ripple "down effect" most probably ending up in rising interests rates to home buyers who are skeptical about buying homes anyway. And,
  5. This also forces lenders to create stricter lending pollicies, preventing potential buyers from buying.
  6. Which means there is glut of housing hitting the market (failed mortgages) which nobody can buy (higher rates and stricter lending policies) which means the prices of homes is going to be driven down possibly, very sharply. Which means,
  7. People will lose equity in their homes with a diminishing capacity to refinance or sell them. Which means,
  8. Real estate investing loses it's allure and the market begins to stagnate which puts pressure on the economy and inflation, which in turn;
  9. Keeps interest rates moving higher which causes business to slow and that,
  10. Causes layoffs and job losses, which causes more failures in mortgages and repeats the whole dirty mess again.
  11. And what about those lenders who are holding on to all those repossessed "low interest" homes? If the rates go higher lenders will be holding on to vacant homes, with low interets rates and no buyers. Their money wrapped up in low interest failure in a high interest market- a double whammy.
I am not an "economist "but I am a "commonsensesist" and I fear we are just beginning to see the beginnings of a very bad economy on the horizon, a recession or maybe even a depression. Think about it: We are losing our industrial base to China, the real estate markets are going in the tank, durable goods (like auto manufacturers) are reorganizing and laying off to avoid bankruptcy, the war, illegal immigration invasions, low paying jobs, an economy specially tuned for the rich... Put it all together....

The rich get richer, the poor get poorer and the middle class is disappearing.

Do you want my professional opinion? I would hold off on buying a house for awhile. I think you are going to see some real deals in the months ahead.

Copyright © 2006

James W. Hart, IV

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