Fed: Flipping fueled housing collapse
Speculators contributed far more to the housing bust than previously thought, a new Federal Reserve report says.
This post comes from Brian O'Connell at partner site MainStreet.
The icy finger of guilt is hovering over the notorious "house flipper." The real-estate investor with a penchant for buying and selling homes in a short period was a big reason the housing crisis caught fire, says a new report from the Federal Reserve Bank of New York.
Data from the report says that "speculative" investing was "much more important in the housing boom and bust during the 2000s than previously thought."
The study points out that house flippers drove up home prices between 2004 and 2006 -- right before the hammer fell on the housing sector. But in 2007 and 2008, when the housing market was teetering on the brink, speculators began losing serious ground and fell badly behind on payments on multiple homes they hoped would sell quickly.
That helped lead to the first big cycle of property foreclosures, which in turn drove local property values down, further burying the housing sector. The study points out that in hard-hit states like Arizona and California, 20% of all homes sold were purchased by buyers who already owned three or more properties. The Fed report says that's three times the amount measured back in 2000. Post continues below.
Once property prices really began falling in such states, multiple-home speculators headed for the hills -- and left behind an avalanche of busted loans and foreclosed homes.
"Longstanding tradition in the mortgage lending business and the predictions of economic models hold that investors will quickly default if prices begin a persistent fall. This is what happened starting in 2006," the report says. Such "strategic default" has left more than one lender holding a worthless property it's unable to move off its books.
Overall, the Fed report estimates that in the vortex of the housing crisis -- between 2007 and 2009 -- home speculators were responsible for more than 25% of "seriously delinquent" home mortgage loans in the U.S. And that, the study concludes, is a big reason (but not the only reason) why the housing market is in the disrepair it is today.
According to the report, current estimates are that about 23% of active mortgages are underwater, when the balance of the mortgage exceeds the resale value of the house. As of 2010 Q4, nearly 2.8 million homes have gone through foreclosure, and another 2 million homes are in the process of foreclosure.
Nationally, distress sales represent about half of all repeat-sale transactions. These distress sales continue to exert downward pressure on house prices and make it more difficult for housing markets to recover.
That's bad news for the American public, and it looks like house flippers have a lot of explaining to do.
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In my opinion, several factors played a bigger role:
1) Government lowered interest rates to a lower level than they would be naturally. This was done to deal with several crises: Financial crises in '97, '98, the Y2K craze, then the 2000 tech crash, the fear and uncertainty caused by 9/11... etc. This made mortgages cheaper than normal. They might have, could have known about these side effects, but the nature of politics is that you "do something, so you can say later you have done all you could." Hindsight=20/20, I know.
2) Democrats, in order to prevent discrimination in lending, passed certain laws to (de)(un)(mis)regulate this area of finance, which, as a side-effect, made it more costly for banks to say "no" to a mortgage than to say "yes". With the government & taxpayer as a backstop behind Fannie and Freddie, it became "seemingly somewhat less risky to say yes".
The big ratings agencies may not have known enough about their clients, and the big mortgage insurers also didn't see the hidden risks piling up in the market. It's 20/20 to
say that after the fact, but it ought to be said.
3) It became more common for banks to immediately sell their mortgages to Wallstreet syndicators, who packaged these into funds, ETF's, and later bought and sold bets on how fast or how badly these things would fare, etc..
The idea may have been that "you got to take the good with the bad", but the reality "may have been that banks sold the bad ones and kept the good ones." In fact, they would have been stupid not to. If you just think about it.
4) Only after steps 1, 2 3 above came to pass, did the real estate market take off, and only then when the "take off" became visible, around 2003, did speculators become a greater
factor in this. Personally, I don't think it decent to call all of them "flippers", because it takes a lot of hard work to know what to buy, to know what to fix up and renovate, how much to spend on it, how to abide by all sorts of legal, financial and environmental regulations, and then to decide when and for how much to sell. This does not endorse any of the fraudsters who lied on their mortgage applications.
5) Furthermore, the people who bought and fixed up and sold houses for a profit could not have done this without the banks approving these mortgages. It takes two (or more) to tango.
The speculators were there because it, the "price takeoff" became an irresistible invitation.
So, sometimes you have to step back a little further to see the bigger picture. Of course, there will be many ways to disagree, but it's just my opinion and you don't have to go bonkers just because your opinion differs. I hope you enjoyed the "truthiness" of my unfounded opinions.
And of course I thought it was Wall Street lobbyists who talked Congress into passing the Fair Housing Laws that drummed up all these sub-prime buyers.....now I know it was Barney Frank and the all liberals fault....thank God it wasn't the guys on Wall Street....they deserve the Billions not us....no not us...give them all the money, they deserve it, not just some of it, ALL OF IT, ALL THE MONEY....ALL.
It is the government's lack of foresight that created the environment where flippers could exist in the first place.
If they had taken more than two weeks to develop their ideas for boosting the home market, they would've put "anti-flip" measures into the regulation that encouraged lending so people who took advantage of easy lending would have to own the home for at least 2 years or suffer severe tax consequences.
If a private lender wouldn't mind underwriting a risky flip, then speculators could flip to their heart's content without getting the taxpayer indirectly involved.
Or in lieu of all that hassle, the government could stop caring about / tracking / measuring the value of homes and the percentage of home ownership. That way the lenders will set market loan rates and houses will cost market prices and people will buy what they can afford or else the lenders will go out of business and the houses won't be bought/sold.
Flipping properties had a significant impact on the health of the housing market, but there were other contributing factors. Property flipping caused a false sense of demand in the housing market. Home prices increase as demand increases, and the supply decreases . This is the law of supply and demand. As home prices continued to increase, more and more potential buyers were quickly priced out of the market. Others were motivated to buy based on the fear not being able to buy at a later time. As prices continued to increase, more and more tricky hybrid loans were offered to keep people buying even though they were already priced out of the market. Once home prices hit a plateau, and flipping properties was no longer as profitable as it was, investors walked away. This left those who bought a home to live in stuck with a rapidly depreciating investment. Those who lost too much equity faced foreclosure simply because they could not refinance. Property flipping was the light rain before the thunderstorm.
One advantage to 123 Refinance is as you look for a lender to refinance your loan, if the lender you decide to work with fails to come through, you can move on to another lender quickly.
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