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Don't Be Fooled by the Housing Market's False Bottom

Existing home sales surprised the markets by rising 7.4% to an annual rate of 6.54 million units in November, the highest since February 2007, according to the National Association of Realtors (NAR). That's only 10% below the all-time peak in 2005.

What's more is that house prices, as measured by the S&P/Case-Shiller 20-city Home Price Index, rose for the fourth consecutive month in September before stabilizing in October when prices were flat.

The NAR is inevitably convinced that the worst is over and that housing is due for a rapid recovery, and that home prices will take out 2006's peaks some time in 2011 or 2012.

Not so fast, guys!

The recovery in housing has been boosted by just about every artificial means you can imagine:

Of course it looks like the housing market has recovered! The question is what happens when some of these subsidies are taken away?

Even if we wanted to provide gigantic subsidies to housing finance in every form for evermore, we couldn't afford to. The U.S. government is running trillion dollar deficits, and something has to change. So at some point the feather cushions that have surrounded every aspect of the housing market will be taken away.

To see how far housing might fall, look at the Case-Shiller index's bottom after the last housing bust in 1989-90 (as the 20-city index did not exist back then, we used the 10-city index). The index bottomed in September 1993 – more than two years after the U.S. economy had begun to recover – at a value of 75.81. Nominal gross domestic product (GDP) rose by 109% between the third quarter of 1993 and the third quarter of 2009.

However, the population rose by about 20%, so nominal GDP per capita rose by 74%. (Real GDP per capita rose by 27%, a pretty mangy performance over 16 years.) House prices can be expected to inflate about as fast as nominal GDP per capita, in a large country like the United States where space is not yet at a premium.

Thus the Case-Shiller Index this time around might be expected to bottom at 132 (75.81 x 174%). Its current value is 157, so we can expect a further 16% drop, even if you assume the bottom is no lower than after the milder housing downturn of 1989-90. That bottom will probably be reached around the end of 2011 if the 1990-93 post-recession pattern plays out.


To give you an idea of what that might mean, the Case-Shiller 10-city index passed 132 in June 2002. That means, on average, everybody who has bought a house since June 2002 can be expected to be underwater on the deal when the bottom is reached.

Every mortgage with a 10% down payment made since about April 2003 (when the Case-Shiller index was 147 – 90% of which is 132) would be underwater. Every prime mortgage with a 20% down payment – not that many of these were being made in those years – made after February 2004 would be underwater.

Of course, that's an average. In Dallas, there would probably be few foreclosures beyond those we already have seen, because prices didn't go up so much. On the other hand, in Las Vegas, pretty well every mortgage made since Bugsy Siegel started developing the Flamingo in 1946 would be kaput.

The housing market is unlikely to turn around while there's so much cheap money about, or while the feds are subsidizing home purchases to such an extent. However, at some point next year, reality will hit the U.S. economy and the federal budget – maybe simultaneously.

The house purchase subsidies are likely to be extended for one more six-month period, through December 2010, over the midterm elections, but not beyond that. At some point, the losses on the FHA mortgage portfolio will become large enough that some of them will have to be taken "on budget." And at some point, either resurgent inflation or soaring commodity prices will force Ben Bernanke to raise interest rates – or crash the Treasury bond market because he won't do so.

At that point, reality will return to the housing market too.

Meanwhile my advice is: Don't get sucked in!

[Editor's Note : There's a reason Martin Hutchinson is building a reputation as one of the sharpest prognosticators in the investment world today: He can see things that "the system" is trying to hide from individual investors. Today's analysis of the new U.S. healthcare bill is a case in point: Hutchinson sees the costly pitfalls.

But that same vision allows him to spot the top profit opportunities available to individual investors. And Hutchinson scours the globe in search of the "hyper-profitable" investment plays that he recommends for his Permanent Wealth Investor trading service.

Hutchinson's experience as an international investment banker has taken him to major markets such as Great Britain and the United States – and to smaller ones such as Macedonia. Wherever he traveled, Hutchinson found one fact to be the same: No matter the market's size, he was always able to uncover the most profitable investment opportunities.

In a new report, in fact, Hutchinson not only uncovers the very best profit opportunities available today, he guarantees triple-digit gains. To check out this report – and these new investment picks – please click here.]

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  1. Deon Moore | December 31, 2009

    I agree wholeheartedly with this article. It confirmed what I have been tossing and turning over for the last few months. I am a recent college grad, fortunate enough to have gainful employment and have managed to save a sizable down payment for a home. I currently live with my parents, but everyone is screaming for me to purchase a home, as if it's the end of the world. I'm waiting for the bottom.

    • Brandon | December 31, 2009

      You should never buy a home. You're obviously are a moron.

    • Gimmesomecoffee | January 1, 2010

      Deon, don't let those screams divert your attention from running the numbers and making your own decision.

      For me – I have been "able" to buy a house since 2003, and even back then the numbers didn't add up (SF Bay Area peninsula). Everybody around me was screaming for me to buy – they were even frustrated about it. All the while, I kept my nest egg and I paid half per month than they were because I was renting. In fact, I was renting places much better than they were buying.

      Turns out, I was right. Now, people are giving me credit for renting through these times. I have more money in the bank, smaller monthly payments, and I have flexibility to quickly move to a different location in this difficult employment environment.

      I underestimated the govt. support to maintain the unsustainable house prices (which has obviously gone to ridiculous levels). Currently, I see the bailouts as a delay to the inevitable – lower house prices. Right now, buying a house is speculating on the depth and longevity of the govt artificial support of high house prices – something that is very difficult to forsee to the extent of buying in by purchasing a house.

      Keep renting. Be patient. Run the numbers.

    • Mark | January 1, 2010

      No one is going to ring a bell when we hit bottom.

      Buy when it is cheaper than renting which is the case in many markets right now. Renting sucks anyhow.


  2. BEM | December 31, 2009

    Once again, another agenda driven report trying to desuade investors from buying real estate.

    • jim | January 1, 2010

      LOL you are kidding right ! Ive been ivesting for over 30 yrs successfully ! You're a pin head !I guarantee we have an additional 25-40% drop in housing prices !YES THERE MAY BE A FEW EXCEPTIONS . Thats not to say one can't make money investing in this market now ! Im doing it ! YOUR COMMENT ( Once again, another agenda driven report trying to desuade investors from buying real estate ) ONLY SHOWS YOUR IGNORANCE ! YOU MUST BE A REAL ESTATE AGENT AND OR BROKER CAUGHT UP IN THE ( NAR ) PROPAGANDA ! GET A LIFE ….FOOL !


  3. Rick | December 31, 2009

    Wake up BEM !!! What happens when interest rates rise ??? I don't have the time to tell you all the pitfalls, but I will enlighten you on the housing market…Less people will be able to get a mortgage & the ones that do, will be given less to borrow; following so far ???? Plus there is this little secrete happening that not many people know about…It's called the shadow inventory by the banks….The banks are holding back close to 7 million foreclosed homes if not more on their toxic books that will have to be released in the next 1 to 2 years to the market….This will flood the market even more & wait for the real good news.In the 2nd half of 2010 & 2011, 25 million more mortgages are going to re-set to higher rates who were screwed by mortgage brokers who got 3 to 4 times their normal commission when they had couples sign these ARM's documents. Plus the commercial re sector will blow up in 2010 & 2011 as well because their mortgages are going to re-set as well………DID YOU KNOW ANY OF THIS BEM BEFORE YOU MADE YOUR STUPID COMMENT ?????? DEON MOORE IS VERY SMART & WAITING 2 TO 3 YEARS WILL BE CORRECT.AS THEY SAY ON WALL ST. (crooks), NEVER TRY TO CATCH A FALLING KNIFE WHEN REFERRING TO A STOCK THAT'S BOMBING.THE SAME THING CAN BE SAID ABOUT BUYING A HOUSE OR A COMMERCIAL RE PROPERTY.Dropping prices are a much steeper curve downward, then when prices someday start to go up……DID YOU LEARN SOMETHING TODAY BEM ??????????

    • American_With_A_Brain | January 1, 2010

      RICK: Very well done. I couldn't have explained it better to "BEM" myself. I can't tell you how many times I rip into unknowing clueless fools about this very topic. Just finished tearing into a real estate "expert" over at Businessweek who wrote an article stating his idea that anyone who doesn't buy a house RIGHT NOW is either stupid or broke since rates are at historical lows. This Businessweek author said rates are more important than price!! Perhaps BEM is really this Businessweek author I just walloped. Anyway, good job there RICK teaching real estate buying/investing 101. Keep 'er up.

    • Rich | January 2, 2010

      OK, so I have been sitting back and not buying for all the reasons stated. But my ques tion is—should I be selling?? I have several properties–single family homes a duplex, condos, & multiple unit properties. Most are still above water and I have cash flow, a couple break even, and a couple I have to feed every year. All are positive aftrer taxes–but back to my question—should I be selling some?

      I remember hearing when evaluating your stocks—would you buy it today? Some of these I would not buy I would look for them to go lower. IDEAS??


  4. Rick | December 31, 2009

    where's my post

  5. Rico | December 31, 2009

    publish my response to REM

  6. Brandon | December 31, 2009

    Why would you want Real Estate to go down? Don't you understand your precious worthless stocks will crash if Real Estate goes down anymore? I know you're a worthless journalist, a mut that does what its master says for fear of being fired from your worthless low paying job a money could do.

    Why not mention how artificial the stock market explosion is. U.S. govt printing money, then lending it to Goldman Sachs and friends for 0.1% interest. They then buy everything from U.S. stocks to emerging market stocks, to commodities such as oil. Our govt funds our own banks to buy oil futures. Yet you're complaining about Real Estate. What a tool.

    • bulfinch | January 1, 2010

      Why would you want Real Estate to go down? First off, so it can at last correct to an inflation adjusted price point and become more affordable in relation to real median wages/salaries, and so that the average American doesn't have to be a debt slave to a money pit.

      By the way, the stock rally would take a hit if workers were to stop getting sh-t canned at the rate they are currently; is that a reason to propound higher unemployment? The stock market is not a sign of wealth for the gross majority of the country, so don't sweat it you tragic wannabe millionaire.

      I guess I understand why you are so bitter, clearly being an easy money type. Likely an agent or a mortgage broker. I suggest you quite trawling websites and spreading your darkness and go renew your beauty school license. Or die.

  7. Ron Glandt | December 31, 2009

    Drive around and look at the average neighborhood that was built since 1972 and notice the poor physical condition of the houses. People are not keeping the mostly frame houses up, in general, and they are absolete regarding energy consumption.

  8. David Krushinsky | December 31, 2009

    Martin – I'm not sure what market you're in but here in Phoenix, our real estate prices are already below 2002 prices. Prices are right around 1992-1997 cost depending on the area. In my opinion, real estate is more local than many other investments, therefore, would highly depend on local conditions.

    I do agree with all the points you make in your article regarding the prices continuing to decline. I think the higher priced homes will begin a massive downward direction due to strategic defaulters. There are few outlets for jumbo financing, which many in that price range are now realizing the true value of their home is signficantly lower than they thought.

  9. rick | December 31, 2009

    Hey Brandon, Real Estate was the story printed & I was only responding to the previous bloggers.You are correct in your comments because I follow Wall St. closely & Goldman is much bigger than most people would ever believe.Goldman already has Obama in their back pocket & Goldman makes over 1 billion dollars a year trading oil future contracts.GOLDMAN SACHS conrrols the price of oil without a doubt; the Saudia's control SH*T !!! I'm shorting the re market with an ETF ticker symbol SRS. This SRS symbol has gone down for the last year plus from about $270 a share to now alittle above $ 7 a share….I got into it too early @ 12 a share, but this ETF (stock) SRS will take off like a coiled spring in 2010 & 2011 when the commercial re sector explodes…Reit companies make up the index (.djusre) which has been inflated since March 9th to 52 week highs.These reits are barely staying afloat & Wall St. is about to sell these stocks of these reits real soon. The SRS ticker will track its way back to $100 a share in 1 to 2 years time.The market is going to crash when the TARP money expires March 31st. & the gov't gets smart & stops handing out money to people to buy homes; printing money is destroying the dollar which will kill our economy..SO THE FED WILL BE FORCED TO RAISE INTEREST RATES WHICH WILL KILL THE STOCK MARKET & HOUSING MARKET BUT THEY HAVE NO CHOICE BECAUSE INFLATION IS SUPPOSSED TO BE THEIR NUMBER ONE GOAL….YET GOLDMAN HAS TOLD UNCLE BEN B. TO HOLD OFF ON RAISING RATES FOR NOW; YET THE DOLLAR IS TANKING.IN THE 100 PLUS YEARS OF THE STOCK MARKET "EVERYTIME" INTEREST WERE RAISED BY THE FEDS, IT DROPS THE STOCK MARKET WHICH WILL HAPPEN IN 2010 & 2011 WHILE RATES RISE THRU THOSES 2 YEARS…………

  10. John | January 1, 2010

    Brandon, the only obvious moron here is you.

    I'd guess you're a realtor or real estate flipper trying to talk up the market. It's amusing that scum like you dares to criticize others.

    BTW your grammar sucks too.

  11. Greg | January 1, 2010

    Very well written. Even if turbulance in the bond market causes yields (and subsequently mtg rates) to rise in the future I do not think the ENTRY LEVEL SEGMENT of real estate will be greatly affected by higher rates. Also if rates on the 30 yr rise to 6% in 2010 (on average) and 7-8% beyond that then BIG DEAL- mtg rates are then still .5%- 1% BELOW the historical average if taking the last 30 yrs into account. So essentially under this "disaster scenario" mtg rates would then stand near it's historic 30 yr average. The gov't has made it dummy proof to cash in on your house (asset) over the last 10 years for long term homeowners (and even shorter term homebuyers if they bought and sold correctly) in most US markets by keeping interest rates low, relaxing lending standards and more recently thru QE, subsidies, etc.. If you didnt TAKE ADVANTAGE OF THAT GOLDEN OPPORTUNITY within that LARGE timeframe dont blame the govt on this one and certainly dont expect them (cough, cough- NAR) to hold rates down indefinetly just to prop up real estate.

    BTW, Brandon, did you happen to buy in 2005 in the Sunbelt ??

  12. Greg | January 1, 2010

    Very well written. Even if turbulance in the bond market causes yields (and subsequently mtg rates) to rise in the future I do not think the ENTRY LEVEL SEGMENT of real estate will be greatly affected by the increase in rates. Also if rates on the 30 yr rise to 6% in 2010 (on average) and 7-8% beyond that then BIG DEAL- mtg rates are then still .5%- 1% BELOW the historical average if taking the last 30 yrs into account. So essentially under this "disaster scenario" mtg rates would then stand near it's historic 30 yr average. The gov't has made it dummy proof to cash in on your house (asset) over the last 10 years for long term homeowners (and even shorter term homebuyers if they bought and sold correctly) in most US markets by keeping interest rates low, relaxing lending standards and more recently thru QE, subsidies, etc.. If you didnt TAKE ADVANTAGE OF THAT GOLDEN OPPORTUNITY within that LARGE timeframe dont blame the govt on this one and certainly dont expect them (cough, cough- NAR) to hold rates down indefinetly just to prop up real estate.

    BTW, Brandon, did you happen to buy in 2005 in the Sunbelt ??

  13. Tiffany | January 1, 2010

    Been tracking home prices for the last few years and it's definitely turning for the worst. We're just in the early stages when you look at the data.

  14. Derek | January 1, 2010


    The FHA/HUD requires 3.5% down not 3% down and the rates that have been kept artificially low are the overnight rates that the Fed charges banks. Mortgages are tied to the long bond, not the overnight rate. The reason the Fed has kept rates low was to help business borrow, do well and put people back to work. In turn they help real estate indirectly because if more people are employed, more people avoid foreclosure and stay in their homes. The overnight rate would help adjustable loans but most borrowers want fixed rates today.

    As for housing, real estate has been going down since September 2006. This past September was a full three years of declining real estate numbers. It's time for the pendulum to swing the other way. Prior cycles were 8 years up, 2 years down with a 2 year post down cleanup of foreclosures. Since this past cycle was 12 years up, you would think we should be down for 3 years and have a 3 year post down cleanup. That is exactly what is happening. The market is turning back the other way but there is still another 2.5 years of foreclosures to clean out. Since foreclosures keep supply up, prices are on still in check and only mildly improving.

    If the government really wanted to help, they might consider allowing cram downs for 30 months where bankruptcy judges could slash mortgage balances, modify loans and keep people in their homes. While I realize this might be very unfair to banks (which is why I proposed a 30 month window after which it expires), it stems the tide of oversupply. Banks shoot themselves in the foot when they foreclose because supply increases hurting their ability to remarket the property for more money. If inventory is kept in check, prices would rise. Say a property is worth $200K and a bank forecloses. Not only is the property going to fetch only $160,000± as a distress sale but it's also one additional unit of inventory driving prices down further. Wouldn't it be better for the bank to just modify the loan to $200K and keep the people in the house? They save $40K that way. The modification could be conditioned by the judge on 5 years of ontime payments or the full balance reverts.

  15. Brendan | January 1, 2010

    Rick, SRS will always go down in the long run. You need to read up on ETF decay. SRS should not be held overnight, much less until 2011 or 2012.

    There's money to be made in SRS, but only on the swings. NEVER hold SRS long term.

  16. Bud | January 1, 2010

    In general, the article is correct, however, in all markets there are a few deals to be found that will not be a "better buy" in two, five, 10 or 20 years. I do expect the overall housing market to have a further, substantial, decline going out five or six more years. If you know a specific R.E. market well and understand value, some properties should be bought when the opportunity arises, including now.

  17. A Maddy | January 1, 2010

    Newsletter request

  18. Tom | January 1, 2010

    could the

  19. Jon King | January 1, 2010

    Brandon. We only want real estate to come down to where people put 20% down and only pay 2.5 times their verified income. We only want real estate to come down to where it pays to buy instead of rent. Once prices return to those levels, they can feel free to stop dropping.

  20. Len | January 1, 2010

    Brandon asked "Why would you want Real Estate to go down? "
    Answer- So I can buy a house without committing financial suicide.
    I clicked on Brandon's name and it took me to his Real Estate site, no wonder he wants real estate to go up, especially where he is located, in Florida, ground zero in the housing bubble.

    Why not admit you have a vested interest in real estate going up Brandon? Afraid it would undermine your credibility as a neutral observer?

    BEM's reply
    "…another agenda driven report trying to desuade investors from buying real estate"

    Where is the agenda? The agenda to save investors from getting wiped out when another wave of housing defaults hit in 2011? If housing were a great investment there would be no need for government intervention. Don't just look at housing in the US, look at housing worldwide. Prices have fallen in most markets all over the planet, banks worldwide are stuck with bad housing loans and shadow inventory, and it was housing/mortgages that led to the global meltdown of 2008. The junk loans are still out there, only now they are owned by the Federal Reserve.
    This real estate mess isn't over, not by a long shot, but if you insist on investing in Real estate, by all means do so BEM, just remember what they say about a fool and his money.

  21. Mark` | January 1, 2010

    To say real estate is comming back anytime soon is suspect at best,Until we get a handle on the unemployment situation,and the banks start lending again ,things will be stagnent for some time
    to come.

  22. Michael | January 1, 2010

    Stocks and housing are going to go south. It will just takes stocks a little longer. I rode the recent uptake, but just switched back to longer term stuff. Common stocks are going to tank. Look a this number and then try to tell anyone that the economy is getting better. Japanese GDP to debt is 237% US GDP to debt is 87% but with Afghan and the healtcare debacle, we will be over 125% by the end fo 2010. Japanaese have salary men working 22 hours a week and they partime at the jobs housewifes and unemployed used to take. The companies we bailed out are making killings with that money while raising our rates, and denying us Credit. (Bank of America and US Bank) have done both to me. I cancelled both accounts, paid one off and well quickly pay off the other. They actually helped me but will screw others who needed the credit. My Bank Of America line was 20K and zero balance and they would not lend me 5K. Always on time and paid off. I just sucked it up and took a little out of savings. US Bank card they raised everyones rates 2% irregardless of credit rating just to get a head of the Federal Law. I will never do business with either again, and will direct my government business elsewhere if the rates are better.

    We are headed for some darker economic times. Have some cash saved and be flexible. Pick up another job skill. Keep you network intact and your resume updated. America will never be the same.

    Keep the change!!!!

  23. ALF | January 1, 2010

    At last! Thanks to you thoughtful rational people to impart some intelligence to a discussion. There are so many mindless loudmouths who seed the ether with blatent idiocy – it scares me that our country miight lask the wisdon to reverse our course. I feel better after reading what has been said so far.

  24. Bill | January 2, 2010

    the author is dead on!

  25. Jonathan | January 3, 2010

    I am just thinking of investing in US real estate market after joining with some international investor. How do the locals see in big cities like LA , New York? Is the house affordable? or the rental market yeild is good?
    If not I will be putting the money in US tech stocks like Microsoft, Googles, Apples cos that is more safer.

  26. Duncan | January 3, 2010

    Jonathan, now more than ever if you don't know the local market, don't invest. Where I live, (a "prime" section of LA) the current data available for due diligence is very misleading. I've just gone through this with a would-be investor. He did everything right as an outsider, pulled stats on the local rental market. Problem is, the vacancies stats are not up to date. And what he "thinks" landlords are getting in rents is not what the several property managers I know say. Sure, 2006-7 — but not anymore. There are at least 40 vacancies on my block, and most due to people not being able to pay the jacked-up rents from the bubble times. Landlords are finally coming down in rent, but it's a slow, slow process. Many of them refinanced and cannot cover their mortgages if they reduce rent.

    The commercial strip near me is full of empty storefronts, so commercial RE is taking a hit. Sure, you can get stats on what those stores rented for last year, the year before. But I can guarantee you they will not rent for those prices this year. Be very careful right now, and for god's sake don't trust salesmen. Go to the neighborhoods and take a few property managers out for a drink. They know what's really happening.

  27. ARC Fleet | January 3, 2010

    Real estate is not the issue. Faulty lending practices to maintain sales of real estate is the problem. When lenders relaxed the rules and qualifications for buyers, they followed in the footsteps of the auto industry.
    Soon there were so many people trying to make money on the housing "boom" that there were not enough truly qualified buyers. So the process cycled, until people who had no business being approved for loans were in houses they could not afford.
    Now, overspenders and unemployed are crushing the market and modest homeowners like myself are feeling the pressure because we cannot refinance without a 720 empirica or 20% equity yet my taxes will bailout the dirtbags that overbought in the brand new subdivision down the street.

  28. Peppi | January 4, 2010

    Finally a commentary that expresses my thoughts. Well done sir! Our housing market is being artificially inflated. It is less expensive and more politically correct to offer incentives than it is to make tax payers absorb a foreclosed piece of real estate. Things are just so rosy. I see more loan defaults in our future directly caused by the current administrations incentive programs. Our finical system is being urged to free up their loaning policies once more. Another democrat named Clinton set this stage.

  29. Dennis Norman | January 5, 2010

    I think Mr. Hutchinson makes some very good points in this article…in fact they are consistent with my sentiment in many of my recent articles regarding the housing market and it's "recovery"….Back in late August I published a very good article from Charles Hugh Smith from "Of Two Minds" about the false bottom in housing at:

  30. Jim Gall | January 6, 2010

    The equation for a Rent/Buy decision is infiitely simple. If the cost to rent is less than the current rate payment on a 100% of selling price mortgage, plus taxes,, HOA fees, maintenance and appreciation, RENT! The kicker there is obviously appreciation and how to accurately calculate it. If you are a renter, keep track of proces in your neighborhood or where you want to buy. Do it regularly, not less often than every 3 months and be ready to move when the market does. Also, bank the difference, otherwise you have just used the savings to live on.

  31. Fred Alexander | January 6, 2010

    Correct me if I am wrong but it is my understanding this mess was started over minority rights.
    The liberals advised Clinton that lenders were not lending in poor areas because they were racists which was false because the real reason was due to poor credit, etc.
    Standards were loosened so there would be no excuse not to lend in these areas and this started the ball rolling.
    We need to go back to standards that require a down payment, job and income qualification.

  32. Marie Saqueton | January 6, 2010

    Don't blame all Mortgage Brokers on the housing foreclosures, because the banks offered the NEGATIVE AMORT. PROGRAMS a couple of months after we close escrows, and replaced the good fully amortized loans with their ARM. Ignorant homeowners, who did not read the fine prints of course took the lower mortgage payments. It was a game the Banks played, because they had the malicious intent to sell the notes overseas on the MARK UP PRICES. They victimized foriegn investors and made a lot of profit. Then they cried WOLF and our Congress gave them the bailout WITHOUT AUDITING WHERE THE PROFITS THEY MADE OVERSEAS WENT? GERNMANY LOST BILLIONS ON THOSE NOTES, AND SO DOES UK, AUSTRALIA, ETC,ETC,… ASK CONGRESS WHY WAS THERE NO AUDITS FIRST????

  33. Chris | January 12, 2010

    As a 17 yr veteran of the Mortgage Biz. I have seen lending go from one extreme to another.
    This entire mess did start back in 1997/1998 when Barney Frank decided Banks were not lending to low income and/or minorities. It was the CRA (community reinvestment act) that mandated banks to lend to certain areas/demographics. Together w/ Fannnie/Freddie the banks built a lending model that allowed for lower/no downpayment, and allowed for more liberal debt to income ratios and employment stability.
    Banks were rated on how many loans were closed using this model. A bank could not get approval for expansion or could get penalized if not enough of these loans were being made.

    After 9/11 we saw a huge increase in the securitization of MBS using the now defunct model of a CDO. The rating agencies were able to put AAA ratings on CDO's b/c of the something known as 'traunching', slicing/reselling slivers of the debt to 'spread the risk'.

    THE ONE PROBLEM WITH THIS MODEL: It made two assumptions

    1. Housing prices would go up for perpituity
    2. The unemployment rate would remain relatively low

    The reason for all the 'failures' on Wall St. was b/c everyone thought they were 'protected' by using Credit Default Swaps and other sophisticated financial instruments.

    From 2003-2007 my business was 'dead'. This was b/c I didn't orlginate sub prime loans. I was an A paper retail originator and all the loans being done were sub prime.

    So you saw a mix of mostly good loans w/ a few bad ones morph into mostly bad loans w/ a few good ones. But hey! If you can get a AAA rating and a credit default swap and have NO SKIN IN THE GAME, what did it matter. The loans were sold before the ink was dry.
    Some loans were already delinquent before they had even been securitized.
    We are in a new era and I love it!

  34. gerald d | January 26, 2010

    thank you everyone for your comments i have learnt and enjoyed reading all.

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