.: 04/2012

WHAT THE HOUSING CRISIS REALLY MEANS

Just how bad is the US housing crisis? More importantly, how does it – or will it affect you? I can't answer that for you personally since each person's situation is different and anybody's situation can change overnight. What I can do is show you what has happened and what that means for the future.

The bottom line is this; most people are either in some level foreclosure, or know someone that has or is about to lose their home. Think about it for a minute. Who do you know that is 90 or more days behind on their mortgage or has already lost their home? According to Time Magazine (Feb 12, 2012) 22% of home-owners are upside down in their mortgages. That means they owe more on their mortgage than their home is worth and, as such couldn't sell it if they had to.

I live in Billings, Montana; a typical mid-size city. According to the US Census Bureau¹, Montana had an estimated population of 998,119 in 2011. About 104,000 of those live in Billings. The Census Bureau also says that about 66% of families own their own home. In Billings, that would be about 68,640 people. If each family averages 2.59² members then there about 26,501 private homes in Billings.

MainStreet.com³ said:”A total of 2,698,967 properties entered some stage of foreclosure – default notice, scheduled auction or bank repossession – last year.” That (according to them) was 1 in 69. In Billings, that would be about 304 homes in some stage of foreclosure. Los Angeles county has a population a little shy of 10 million, which would mean about 56 THOUSAND families that have lost or will lose their home in LA. You can do the math for your city.

And what is the prognosis? Will things get better or worse? To answer that, we need to know what caused the disaster in the first place. Why did the bubble burst? Was it the Republicans? The Democrats? Greedy Wall Street Moguls or the Evil Bankers? Did Fannie Mae and Freddy Mac just start taking people's homes?

I think that, when pressed, few people can trace the roots back to where it started. Most people that I know don't realize that the base causes stem from President Jimmy Carter's administration and the the Community Reinvestment Act⁴ (CRA), enacted by Congress in 1977.

The CRA, in a nutshell, directed banks to loan money to people to buy homes. Whether those people could afford them or not. And two government institutions known as Fannie Mae and Freddy Mac guaranteed those loans. Many of the loans were adjustable rate. That means that every so often, your interest rate can go up or down. They rarely go down.

When the economy began to tank after the internet bubble burst, the interest rates went up to more than the original payment. Then the payments went up to more than many people could afford. People had to get out from under their mortgages so a lot of houses went on the market all at once. The ever-present law of supply and demand kicked in. More houses for sale meant lower prices and suddenly a whole lot of people owed more on their homes than they were worth. They couldn't sell them and they couldn't afford the payments. The only thing left is foreclosure.

That's the short version. Follow the links for the long version.

And just who are Fannie Mae and Freddy Mac? Why do they have anything to do with your house?

According to Wikipedia, “The Federal National Mortgage Association, commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal...The corporation's purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS),[3] allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts⁵.

About Freddy Mac, Wikipedia says “The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government sponsored enterprise (GSE)...The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market.”

The fact that, as of 1970, we have two government-run and non-elected agencies doing the same job at twice the cost and twice the confusion is another story. Here's what it means as far as the housing crisis.

John Q. Bluecollar takes out a mortgage down at his local bank. Fannie Mae &/or Freddy Mac step up; purchase that loan from the bank, put it together with several other loans they purchased [with your tax dollars] and sell them as a package to some investor.

Since the CRA, the bank doesn't really care if Mr. & Mrs Bluecollar can repay the loan because they know they will get their money from Fannie or Freddy. Ms. Mae and Mr. Mac don't care either, because they know they can pawn it off on some unsuspecting investor who (quite incorrectly) believes that, since they came from the a supposed-government agency (since 1968, Fannie has been public) the package has to be a good investment.

WRONG!!!

Now the investors are stuck with a bunch of bad debts and foreclosed homes; known as Toxic Assets⁶”.They (the investors) lose a bunch of money. They don't want and won't buy any more of these money-losing packages, which leaves Fannie and Freddy stuck with a few BILLION dollars worth of toxic assets and now they can't buy any more mortgages from the banks. The banks can't collect the loans back from people who can't afford the payments so they go bankrupt. The FDIC⁷has to bail out the banks⁸ with more of your tax dollars and the whole thing spirals down to what we have today. More people demanding more free help from the government that has less money because more businesses close down and the ones that remain have less profit so they pay less taxes. Banks are belly-up so businesses can't borrow money so they can't hire more people so unemployment goes up so less people can afford a house so more banks have more foreclosed homes so...ad nauseam!

And just exactly what does all that mean for you, your family and the future?

The good news is that, if history is a reliable indicator, things will get better; and probably before the USA goes the way of Greece. The bad news is that it WILL get worse before it gets better.

WordPress.com says “The housing market won’t recover until employment increases and consumers become more confident.⁹” And, according to the San Francisco Chronicle “"When things turn and there is job growth and there is consumer confidence back, then we'll see a change," said Douglas Yearley, chief executive officer of luxury builder Toll Bros. Inc. "We have to get job growth back.¹⁰"

In other words, until people THINK there is a recovery, there won't be one. Once Americans start to believe that things are getting better, they will spend more of what little money they have. That will bring more capitol into businesses who will then begin to hire more people. Less unemployment will mean even more consumer confidence which will mean more spending which will mean more growth and more taxes collected to help people that haven't caught up yet. With more growth, housing prices will start to recover and more people will have jobs and be able to afford to buy a home.

Someone once told me that it is easier to act yourself into a new way of thinking than to think yourself into a new way of acting.

Apparently we are going to have to do it the hard way. We have to believe in our recovery first. Then and only then will there actually be a recovery.

At least, that's my opinion. Let us know what you think.

Citations

¹http://quickfacts.census.gov/qfd/states/30000.html

²http://quickfacts.census.gov/qfd/states/30000.html

³http://www.mainstreet.com/article/real-estate/foreclosure/2011-foreclosure-rate-was-lowest-4-years

⁴http://www.occ.treas.gov/topics/compliance-bsa/cra/index-cra.html

⁵ A savings and loan association (or S&L), also known as a thrift, is a financial institution that specializes in accepting

savings deposits and making mortgage and other loans.

⁶ http://www.investopedia.com/terms/t/toxic-assets.asp#axzz1rDkCed5C

⁷ http://www.fdic.gov/

⁸ http://www.fdic.gov/bank/individual/failed/banklist.html

⁹http://prof77.wordpress.com/the-20/real-estate-markets-in-crisis/