Mortgage Market Mayhem Continues in the Economic Downturn
Flip ’em on the way up…
Flop ’em on the way down…
Subsidize ’em on the way up…
Subsidize the subsidizer on the way down…
Banks Face Short-Sale Fraud as Home ‘Flopping’ Rises
June 10 (Bloomberg) – Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.
Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed – known as a short sale – without disclosing that there were better offers. They then flipped the houses for a profit.
There is always a way to make money. When prices were rising, unscrupulous speculators made money by pretending houses were worth more than they really were. Now they make money by pretending they’re worth less than they really are.
Trouble is, no one knows exactly what things are worth. They know even less what they’ll be worth tomorrow or the next day.
The theories about economics and markets developed in the last 100 years are almost all nonsense. Markets are not perfect. They do not reflect the actual value of things. There’s no way of knowing what the actual value is. Instead, markets are always discovering value – in fits and starts – imperfectly. They reflect reality and fantasy…the future and the past…math and muddle.
When the feds pushed down interest rates following the ’01 mini recession, homeowners realized that they could own more home with the same monthly payments. Houses suddenly became more valuable. This pushed up prices and led homeowners to conclude that houses were a good investment as well as a good place to hang your hat. And because the value of their collateral had increased, it enticed the mortgage industry to lend more aggressively…and ultimately, recklessly.
Prices moved up even more. Happy days were here.
And then, the market discovered that houses weren’t really worth so much after all. Because the mortgage industry had canoodled with Wall Street and Washington to inflate house prices far beyond what people could afford to pay. The average homeowner could no longer come close to buying the average house. Fannie and Freddie, for example, backed every crackerjack mortgage scheme that came along. And then, wouldn’t you know it, people had mortgage payments they couldn’t meet.
Prices fell. Bummer.
And now comes news that Fannie and Freddie need a bigger bailout:
“Fannie Freddie Fix at $160 billion, $1 trillion worst case…”
Up, down…down, up. Flip ’em…flop ’em. Subsidize them…then rescue the subsidizer.
Even when markets are allowed to operate freely, they can never make up their minds. But at least it’s an honest confusion. Imagine what happens when the feds deliberately distort prices by raising the money supply, holding down interest rates, and subsidizing borrowers.
This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the US government was instrumental in causing the blow up in the housing market. The New York Times:
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers – a speech that got surprisingly little attention – Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers – and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
We had no doubt about it. Anyone can make a mistake. But if you want to make a real mess of things, you need taxpayer support.