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Fed: Flipping fueled housing collapse

Speculators contributed far more to the housing bust than previously thought, a new Federal Reserve report says.

By MSN Money Partner Dec 15, 2011 3:24PM

This post comes from Brian O'Connell at partner site MainStreet.


MainStreet on MSN MoneyThe 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.


More on MainStreet and MSN Money:

Dec 16, 2011 11:05AM
I am a Real Estate Broker in Palm Beach Gardens Florida and I am here to tell you that the housing bust was not caused by the "Flippers" as the Fed speculates in its study. The housing bust was due largely to un-controlled greed in the financial mortgage markets fueled overwhelmingly  by the way mortgages were segmented and packaged into multiple segmented mortgages that were sold off quickly in multiple pieces. This caused uncontrolled and un-monitored  profits  for the banks and the Feds Freddie and Fannie. The Fed was as much of an investor as the Flipper.
The flippers could not have flipped, if their lenders had not loosened their loan requirements to fund the speculation.
Dec 15, 2011 8:16PM

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.


Dec 16, 2011 12:42PM
Who is surprised that the finger pointing and the "not me" chants are coming from the Feds? Not I said the little green Willow.
Dec 16, 2011 9:10AM
When it really started is when people bought into the idea that a house was a can't miss savings and retirement account instead of a place to live in. It all went down hill from that point on. 
Dec 16, 2011 12:42PM
I disagree in part.  Greed played a huge roll and the good times didn't help either as well as the Mortgage Backed Securities.  Maybe if the Fed would have increased rates when the markets were doing so well, people would have thought twice.  Maybe people who had no business buying a home or lenders who managed to make the paperwork right so the buyer could get a house should be looked at?  I do know some flippers and landlords.  Many of the flippers I know did well and are still doing well.  But some others got into flipping as a way to make money and didn't understand it so they lost their butt.  Some landlords I know lost their butts too but every time they would get a house and rent it out, they would take their profits and use that money to make payments on their new cars and living above their means.  When the tenant moved out, the money stopped and they weren't prepared for that or repairs and maintenance that needed to be done.  When the market came down, so did rents but that has turned around somewhat.   What about government greed?  When all was good they just spent more of our money not thinking about the day the good times would end.  Instead of complaining about the President, we should be finding a way to fire or limit Congress, Senate and House career politicians.  The 25% quoted is 25% of the deliquents, not 25% of the housing market which I might agree with given everyone I knew who was trying to make a quick buck and those that didn't know what they were getting into.
Dec 16, 2011 10:49AM
I'm so glad the Fed cleared that up.....I mistakenly thought it was the Fed lowering rates and Wall Street churning derivatives based on bundled foolish......and I thought that state revenues were down because of MERS and the mortgage companies not having to pay filing fees.......we should all know that these corporate owned news companies will straighten us out so we'll get  the real truth.....

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 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 not us...give them all the money, they deserve it, not just some of it, ALL OF IT, ALL THE MONEY....ALL.

Dec 16, 2011 6:13PM
Blaming flippers is an excuse; stop treating us like mushrooms and tell the truth.  To float this story as true is insulting to our intelligence.

The truth is that if banks had maintained proper lending standards instead of handing out liar loans like candy, the housing marking would never have spiked and therefore, the collapse of housing and our economy would not have happened, either.

Just got a call today that the remaining lots in our neighborhood are being sold and BOA is trying to screw us out of $200k in back dues.  Hope our lawyers are good enough to get us paid, otherwise look for us telling our tale of woe on TV in hopes of shaming BOA into paying up.
Dec 16, 2011 10:54AM
The flippers were just leveraging themselves to the system created by the government.

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.

Dec 16, 2011 7:24PM

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.   

Dec 16, 2011 12:26PM
Why does Uncle Sam want higher home prices? Is it wrong if people can actually save to buy a home cash down? Why do they allow mortgage interest deduction from tax? Was housing bubble intentional? Was sub-prime intentional? Google for "How do banks create money" to understand the modern day slavery imposed upon developed nations.

Dec 21, 2011 4:57PM
Don't try to whitewash the lenders.  Banks caused the problem and are still creating problems and worsening the problem.  The banks need to be made to pay back every cent of federal money plus interest and bonuses.  They should have been allowed to fail. 
Dec 16, 2011 2:33AM

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.

Dec 17, 2011 11:30PM
The banks are 100% to blame... Its like dangling candy in front of a baby... the baby does not know of the long term effect they just know they want the candy... the banks knew people would jump at the oppotunity to have "more bigger better"... they have very smart people working for them... when they create the Stated Income Stated Assets, No Income No Assets, No Interest 3,5,7 year ARMs... the people jumped... and it goes up the chain of comand with our mortgage banking system... if Fannie Mae and Feddie Mac would not have bought these types of loans the banks would not have offered them... now Fannie and Freddie are governed by the FTC and our government... lets see who was in charge of the oversight to Fannie and Freddie... hmmm wasnt that Barney Frank 
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