This article disputes the claim that Wall Street is a vital component of a thriving economy and argues the current mortgage lending environment actually stifles the upward mobility of the middle class.
America’s common enemy
Most all Americans have found common ground via a collective disdain for Wall Street. The nation’s largest banks and insurance companies are despised by the working-class majority for the barrage of mortgage fraud committed and deliberately waived by the Securities and Exchange Commission (SEC), retaliatory FICO scoring unchallenged by Congress and Wall Street insider bets against housing loans that always seem to surface after a financial crisis. [For more information about current anti-Wall Street sentiments, see the October 2011 first tuesday article, Unions Occupy Wall Street — where are the Realtors? and the December 2011 first tuesday article, OWS occupies foreclosures.]
But the injustices perpetuated by New York’s rentiers have distorted the benefits of keeping Wall Street around, according to the New York Times. The conduct and statements of the SEC reflects their full agreement. Without such institutions, the Times claims the American lifestyle would suffer more than it already does at the hands of Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America. [See the New York Times article, What does Wall Street Do for You?; For more information about the rentier class, see the September 2011 first tuesday article, Rentiers and debtors: why can’t they get along?]
But would it really?
Other lending options exist
The Times claims most people outside the U.S. have no access to institutions with the means to fund business endeavors, homeownership or other large purchases. Thus, there is little opportunity for upward mobility in the global middle class. They claim Wall Street is the only answer to the plight of low and middle class individuals with dreams of homeownership.
We disagree. Almost the entire developed world has access to lenders through central banking systems operated by their governments. Central banks distribute money to users through private banks, similar to American Wall Street banks, community banks and other local savings institutions. In turn, private banking operations lend to governments, businesses, consumers and homebuyers who use the money to buy the goods and services available to them. This printing, the primary job of central banks, provides a medium of exchange – money – which eliminates the need for one to barter his goods and services for those he desires.
Additionally, the U.S. mortgage lending system of regional mortgage bankers (wholesalers) and community banks did quite well before Wall Street stepped in as lender through acquisition of most mortgage banking operations and the bundling of mortgages into pools to be sold off as mortgage backed bonds (MBBs) to the entire world of investors.
Homebuyers usually have more success qualifying for loans at competitive rates by going through community banks, savings and loans (S&Ls) and credit unions. Local institutions originate loans to keep or later sell in conformance with the secondary mortgage market requirements of government guarantees.
Now small community lenders continue to close, absorbed into those insolvent banks “too big to fail” and owned by too many investors who would lose. [For more information about community banks, see the September 2010 first tuesday article, Bank failures continue amidst increased earnings and growing insolvency, the September 2011 first tuesday article, Self-employed homebuyers: prepare for a bumpy ride and the October 2011 first tuesday article, Secession of California proportions, catalyst for change.]
Big banks now make an unhealthy and disproportionate share of new real estate loans — the direct consequence of the government aid keeping their heads above water to the detriment of their smaller rivals who don’t have the political clout to receive the same assistance. Smaller banks have been slowly muscled out of the mortgage lending industry by big lenders looking to eliminate competition, with help from their friends at the Federal Deposit Insurance Corporation (FDIC).
As the small-bank competition is eliminated, homebuyers are left with fewer lenders to shop and their ability to bargain for lower loan fees and quoted rates is compromised. first tuesday has long recommended brokers and agents steer their buyers who need purchase-assist financing to their local lenders, not to the Wall Street banking operations maintained by thousands of branches, an octopus reaching into all communities. [For more information regarding loan costs, see the August 2010 first tuesday article, The good faith estimate is meant for shopping around and the September 2010 first tuesday article, Bank failures continue amidst increased earnings and growing insolvency.]
Wall Street is not the only answer to a potential homeowner’s needs. In fact, the current U.S. mortgage system — occupied predominantly by Wall Street — hampers the middle class by using a different set of rules to manage their debt — comprised of defaults and bankruptcies — to enhance rentier wealth.
A far cry from the New Deal
As part of the New Deal after the Great Depression, the government created the Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae). The original purpose of Fannie Mae was to create a liquid secondary market through which mortgages could be sold, thus freeing up the capital of mortgage lenders so they could originate more loans, a process called mortgage warehousing. Fannie Mae primarily bought FHA loans and sold them to Wall Street, who then pooled them into MBBs and sold them to investors. The purpose and end result was to facilitate economic stimulus and recovery with housing as the catalyst. Thus began the propagandized American Dream.
The process of fueling the housing market to resuscitate the economy has now become an abuse. The Great Recession of 2008 demonstrated the housing sector is not an appropriate economic driver, but rather a mere indicator of the broader economy’s health. The government should have focused on the financing of small businesses, not houses, which were practically ignored (the Small Business Administration (SBA) being of no consequence except for political window dressing). [For more information about the housing industry’s role in economic recovery, see the January 2012 first tuesday article, Why real estate won’t save us this time.]
MBBs were originally used by Wall Street to entice individual investors from around the world to buy bonds for participation in pools of mortgages with low risk and mid-to-high yield — all directly or implicitly guaranteed by the U.S. government. This was a good thing as it freed lender capital to originate more loans and help pull America out of recession. The system turned sour when credit rating agencies (controlled through fee arrangements by those on Wall Street bundling and selling the mortgages) misrepresented the risk associated with MBBs, abandoning the goal of stabilizing the economy and assisting homeowners in favor of maximizing profit. [For more information about MBBs, see the June 2011 first tuesday article, What the rentiers got from working stiffs.]
In the post-depression economy of the 1930s and 1940s, Wall Street served as a vital conduit for connecting those receiving home loans with the lenders financing them. Since the 1960s, it has become a facilitator of recession and financial elitism; an enabler of the very condition it was called upon to cure. Evidence: the 2008 financial crisis.
When home prices increased from 2002 to 2006, it was the Wall Street lenders who enticed unqualified borrowers into homeownership with offerings of unsustainable mortgage products like hybrid adjustable rate mortgages (ARMs). Most of these exotic loan products carried no government guarantees. Instead, lenders blatantly counseled borrowers to refinance these ARMs before they reset at higher payments — a liquidity loophole to minimize delinquencies. It would have worked, too, if the pull of gravity had not brought the overinflated values of homes (collateral) back to earth — the equilibrium of mean prices to which real estate prices always return. But Wall Street does not understand this real estate fundamental. [For more information about mean prices, see the October 2011 first tuesday article, The equilibrium trendline: the mean-price anchor.]
This financial accelerator dynamic of ever greater loan amounts on jacked up prices of collateral eventually led to the collapse of real estate prices. Excessive lending screeched to a halt when the Great Recession manifested itself in 2007-2009. Homeowners were left unemployed or otherwise unable to meet reset ARM payments, while lenders feigned ignorance in the fallout and their failed promise of refinancing. [For more information about pre-recession lending practices, see the February 2011 first tuesday article, The negative equity plague: California’s home insolvency crisis.]
The current jobless Lesser Depression has ravaged the mortgage-laden middle class, whose members are no longer employed and thus unable to stave off foreclosure. Yet Wall Street lenders refuse to accommodate the economic slam they themselves catalyzed, with the acquiescence of all government agencies.
The New York Times claims their uptown bankers are vital to the economy even though they single-handedly collapsed it with the blessing of Fannie Mae and Freddie Mac (collectively Frannie), Congress, the SEC, the Department of Housing and Urban Development (HUD) and the Federal Reserve (the Fed). But as the government continues to play along with Wall Street’s purported innocence, the 99% face foreclosure or the inability to refinance at current low rates while lenders and large companies (read: General Motors, Chrysler, the large banks and Frannie) get bailed out with taxpayer dollars. [For more information about debt forgiveness double standards, see the January 2011 first tuesday article, The inconsistent cramdown policy and the January 2012 first tuesday article, The morality of strategic default: businesses vs. homeowners.]
Once the solution, now the problem
There is no doubt the most recent financial crisis was sparked by the intensification of lending through big banks that colluded (and merged) with Wall Street bankers. It was the large lenders who created most of the option ARMs and hybrid loans that amassed into millions of foreclosures, not Frannie. It was the large lenders who maintained the political clout to fend off the SEC and FDIC and control the credit rating agencies when their pools of non-performing, misrepresented MBBs were sold to investors.
Worse still, it was the large lenders who made the wrong judgment calls about the real estate market (as they always tend to do – they are bankers, not investors) and lied about their solvency at mark-to-market portfolio prices just days before the 2007 banking collapse began. [For more information regarding the transgressions of Wall Street banks, see the October 2010 first tuesday article, The Fed wants BofA to continue buy-backs of misrepresented mortgage-backed bonds and the January 2011 first tuesday article, BofA looks to settle with Fannie and Freddie.]
So while homeowners, construction workers, real estate agents and every taxpayer in the U.S. who contributed to the bank bailouts continues to pick up the pieces of their tattered financial livelihoods, excuse us for not patting Wall Street on the back. [For more information about the ongoing economic recovery, see the October 2011 first tuesday article, So, who’s got a plan?]
Back to fundamentals
What’s a real estate agent to do? Homeowners scorned by boom-era bad decisions need a resident expert in their corner. As the gatekeepers of real estate, brokers and their agents are charged with the responsibility of teaching and encouraging the public to make financial decisions based on market fundamentals.
Historically, potential homeowners in the market for purchase-assist financing have been required to make a minimum 20% down payment. The requirement ensured the homeowner had skin in the game, a vested interest in keeping their mortgage current. The Millennium Boom lending craze did away with this prerequisite and introduced 100% financing, making it easier for almost anyone to purchase a home by simply signing up for a mortgage. Of course, personal savings rates dropped to 0% at the peak of the boom as homebuyers realized they weren’t required to save.[For more information about personal savings rates, see the November 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]
People waltzed into the first bank they saw and signed on the dotted line without even bringing their checkbook. The huge financial burden of owning a home was trivialized, until those same people saw the value of their properties plummet. Now owing more than their homes are worth and having no money to pay off the shortfall, millions of underwater homeowners are confronted with financial insolvency and the reality of foreclosure — a possibility nobody thought to consider in the days of government-endorsed quick credit and easy money.
Many of the delinquencies and foreclosures today could have been avoided, but homebuyers were not properly counseled before committing to their mortgages. It is not the job of banks to do so in their adversarial role in mortgage originations. Real estate professionals, on the other hand, are armed with their statutorily mandated knowledge about the laws of real estate finance and are thus poised to pull the public out of their boom-time expectations, back to the realities of a recovering housing market. [For more information about real estate agents and homeowner counseling, see the September 2011 first tuesday article, Raising the bar of real estate advice.]
Regardless of Wall Street’s lending standards, agents can encourage potential homeowners to consider these fundamental elements of real estate financing before making decisions.
Be prepared to put 20% down
While low down payments allow homeownership to occur earlier in life, thus generating more fees for all providers over the lifetime of a homeowner, the financial risk for first time homebuyers is beyond their informed comprehension, with rare exception. They have neither the time nor the expertise to make an informed decision.
Mandating a 20% down payment as the criteria to qualify for homeownership will bring about:
- a more sustainable future housing market; and
- a higher concentration of qualified families permanently dedicated to homeownership. [For more information about 20% savings, see the November 2011 first tuesday article, The 20% solution: personal savings rates and homeownership.]
Don’t be lured in by adjustable rates, ever
For those who plan to pay off their mortgage or move three to five years after they buy their house, an ARM can be a deceptively appealing money saver. Of course, the bet is they will be able to sell, and ARMs are popular just as the ability to sell is about to disappear into a recession.
For everyone, the fixed-rate mortgage (FRM) remains the safest long-term bet to avoid disappointment and financial distress. first tuesday opposes the use of ARMs to finance a homebuyer’s purchase, particularly while 30-year FRM interest rates remain at historical lows. The risk of loss imposed on a borrower by an ARM is too dangerous for all but some of the very wealthiest homebuyers (who ought to pay cash, and would but for the tax deduction for debt). [For more information about ARMs, see the November 2011 first tuesday article, The iron grip of ARMs on California real estate.]
Shop around for the best deal
Purchasing a home is the single greatest financial decision in most people’s lives, but the unfortunate reality of American financing is that analysis is abandoned to economists. And the homebuying public and real estate agents pay no attention. According to a survey by Lending Tree, 40% of homeowners obtain a single mortgage loan quote before buying their home and only 28% feel confident they got the best deal. Go figure!
This is when agents must step in. Most homebuyers know very little about lending or what makes financial sense for them. Their disinterest and misunderstanding translates into lackadaisical inquiries that inadequately define the down-stream consequences of a mortgage loan. A lender is an adversarial party to homebuyer transactions in spite of advertising to the contrary (“we are your financial partner”). While a loan is required as a condition for closing, you need to remember this.
A stable and long-term recovery of the real estate market requires agents to strongly encourage homebuyers to inquire beyond just one lender in search of the best home loan. Agents must educate homebuyers about the good faith estimate (GFE) and ensure they understand how a lender determines the loan amount and rate for which a homebuyer qualifies. The buyer who submits two applications for the loan sought has insured he will get the best deal. Only then, at closing, will the lender of choice get competitive and say “We will match them.” [For more information about mortgage shopping, see the December 2010 first tuesday article, Homebuyers shop around for everything but their mortgage.]
Live within your means
If a potential homebuyer does not have enough savings to make a down payment or their income is not consistent enough to ensure their mortgage will be paid, they are not ready to purchase a home. Up until now Americans have overwhelmingly chosen to jump into the shackles of homeownership ― an undisputedly major proponent of the Great Recession and the current Lesser Depression.
Agents must help the public make lucid decisions about what is more important to them, whether it is owning a home with the incumbent responsibility of a mortgage and a single location, or a debt-free, solvent lifestyle that offers the mobility and freedom to pursue future wealth. [For more information about homeownership ideals, see the July 2011 first tuesday article, Like myths, this old dream will never die.]