Here we’re going to take a look at what was put in place by the government and private industry to stop the real estate market free fall. We will list what was done, what the results were and where we’re at now.
By 2008 the real estate market was in free fall and people everywhere were in foreclosure and losing their homes.
Everyone everywhere was looking for someone to blame for causing all the problems. The target chosen centered on the Sub-Prime mortgage market and more specifically mortgage brokers. Something just had to be done to right the wrong, so Congress held investigative hearings and put in place new federal agencies and layer upon layer of new regulations in a quest to put the mortgage market back on track. In many ways there was a justifiable basis to have this belief. A look from the outside by a person not familiar with the mortgage origination market would have had the belief that it was the subprime market and those greedy and crooked mortgage brokers that caused all the problems.
What needs to be understood is that the originating banks, mortgage companies and lastly mortgage brokers simply didn’t make the rules. It can be argued that the big banks did hold a lot of power in our country and they did have a large army of lobbyists in Washington. In just about every corner of our economy businesses take very careful steps to protect their money, capital and investments. But banks operate in a vacuum outside the laws of business so that when something goes wrong, such as losing billions of dollars, bailout money is sent with just one call to Washington DC. It’s a process that breaks the basic laws of nature and only exists in the banking world and, as just about everyone knows, the taxpayers ended up footing the bill.
When the banks made money the bank’s stockholders, officers and directors shared in the profits. Mr. and Mrs. Taxpayer were not invited to share in the profits. But when the banks operated in a reckless manner and lost billions of dollars suddenly they needed a partner, a partner that was never considered a partner in good times (the Taxpayer). The banks expected all of us to share in the losses but were never invited to share in the profits. That was tantamount to heads they win and tails we lose. A reckless Las Vegas gambler would find such a proposition unacceptable. But it was good enough for the taxpayers.
There have been so many changes in the financial regulations that time and space would not allow us to delve into all of them so we will only look at the major law changes.
The dominant change in the regulation of the financial industry was with the creation of the Consumer Financial Protection Bureau (CFPB). The CFPB was intended to be a government agency charged with replacing numerous other governmental agencies that were regulating all the financial markets in our country. The combining of all financial market regulation into one agency appeared to be very difficult to achieve at best. The director the CFPB was nominated by the President of the United States and would report directly to the President.
The law known as The Dodd-Frank Law signed by President Obama on July 21, 2010 was the legislation that put into place the CFPB and numerous other changes in the regulation of the financial markets. The laws and changes were so far reaching that many years will be needed to fully implement all aspects of the regulatory changes.
The primary mortgage origination and mortgage broker change that was put in place was a new national licensing program known as the National Mortgage Licensing System (NMLS). Every mortgage originator, mortgage broker, and loan officer in the country was required to go through an education process, background check and a decent fee for the right to do the same thing they were doing prior to the start of all the problems in the mortgage market.
Mortgage originators and loan officers only offer mortgage loan programs that the politicians in Washington DC approved to be offered and FNMA and FHLMC were willing to purchase. On all fronts only mortgage loan programs that are offered by banks, mortgage companies and mortgage brokers to borrowers have the blessing of our elected officials in Washington DC.
The loan originators were unjustly blamed for the mortgage market meltdown, when in reality the politicians and the Wall Street investment houses were the real culprits. Many large and prestigious Wall Street investment companies were actively repackaging and selling interests in mortgages to investors looking for a high return on their money but without the disclosed associated risk that many of the borrowers had little to no ability to ever pay the monthly mortgage payments.
The Federal government has spent about 200 billion dollars propping up both FNMA and FHLMC in an additional attempt to help the mortgage industry and the overall real estate market. The push to relax the lending standards back in 2003 and 2004 to allow nearly everyone the possibility of owning a home was simply a political play by our elected legislators to pander to certain segments of the voting public. As we said earlier, banks, mortgage companies and mortgage brokers only offer loan programs that get the thumbs up in Washington DC.
When everything blew up and borrowers everywhere started defaulting on their mortgages politician ran to get in front of the camera to declare they were going to get to the bottom of this mortgage mess and save the day. Many were the same people that had advocated relaxing the national lending standards in the first place. The parties that caused the problem were the same people that were declaring that they were going to solve the problem. It’s just like an arsonist setting fire to your home and when you call the fire department to come put out the fire the arsonist shows up to put out the fire. In politics it’s OK to set the fire and later show up a take credit for putting the fire out and all along blaming someone else for setting the fire. It’s usually not a good idea to pick the people who caused the problem to be the same people to solve the problem.
Another major change that affected the mortgage industry was contained in the Secure and Fair Enforcement Act. (SAFE Act). It imposed numerous changes and requirements that affected the origination of mortgages all across the country.
Regulations put in place that affected the mortgage industry were:
- Increased lender accountability
- Enhanced consumer protection
- Legal assistance to consumers
- Appraisal accuracy standards
Additionally new lending requirements of banks and institutional lenders were put in place establishing minimum lending standards. Numerous new regulations and reporting requirements of mortgage bankers and mortgage brokers were enacted to curb abuses.
Additionally many loan assistance programs were put in place to assist homeowners in their quest to resolve their mortgage problems and keep their home. Programs such as:
- Housing Affordable Refinance Program (HARP)
- Housing Assistance Modification Program (HAMP)
The results of these and other programs were just a fraction of what was advertised by the politicians that were pushing them at the time. But it can be seen that there were some good results and there were many homeowners who were able to resolve their financing situation and save their homes.
Over the last several years the huge number of houses that were lost in foreclosure have been renovated and re-sold to new and more qualified home buyers. These buyers were subjected to a much more stringent mortgage qualification process. The odds are that the new buyers who purchased many of the foreclosure properties will not be losing their homes.
As the national economy began to recover, albeit at a very slow pace, people who were not employed were able to secure jobs and were again able to return to paying their mortgage. In addition, interest rates as a result of market involvement by the Federal Reserve Bank were reduced to the lowest level ever. This allowed many hopeful home buyers the ability to qualify for financing due to lower monthly mortgage payments. This dramatically increased the demand for houses and led to an imbalance in the supply/demand ratio. Excess demand always leads to higher prices.
So here we are in August 2013, housing prices are up, and interest rates are still low even after going up by 1% over the past several months. Foreclosures are down due to the many government assistance programs and due to efforts by banks and homeowners to “work things out”. Subprime loans are a thing of the past. Only buyers that are able to pay the monthly mortgage payments are able to qualify for a mortgage and purchase a home.
Over the past 12 months many homeowners have seen the value of their homes increase. Since interest rates have gone up about 1% loan refinancing is down and home sales are also down, but interest rates are still very low and the market in still heading in a positive direction. The real estate market still looks good and anyone who might be contemplating purchasing a home would be well suited to dive in and start looking for that dream house.
Our opinion is that the real estate market has recovered greatly; values have come back although not to levels seen at the height of the real estate market back in 2006 and 2007. It would be a good idea to proceed cautiously as there are many economic indicators that could turn negative and move the market back down.
We will monitor the situation and keep everyone posted. Our next post will dive into the underlying factors that just might give an indication as to where we are all headed.