What is happenening in the United States?
The national debt has almost doubled since 2000 from $5.3 trillion to almost $10 trillion, and climbing daily. What does that mean? That means that every man, woman and child living in the United States today would need to write a check in the amount of almost $80,000 to bring us to zero?
Why and how has this happened?
The number one reason is that we have become lazy, and those "in charge" promote and encourage that laziness. Our standard of living has rapidly increase, while our production has plummeted. We are a nation of consumers rather than a nation of producers. Then, when all of the jobs go to Japan, then Korea, then China and Mexico, everyone complains and screams "Buy American Made Products!"
Of course, when they go to buy American Made products they learn that the price is much higher, and in some cases, the quality is less. Then, instead of trying to work together, labor wants higher wages so they can afford the American Made products, while business tries to get the government to reduce its tariffs against products that it has manufactured overseas.
The legislators (local, state and federal) have much more important things to consider ... like re-election. While the signs of imminent disaster regarding the collapse of the housing market, and therefore, the banking industry, the government officials went merrily along throwing mud at their opponents and getting donations in order to win election or re-election. In the mean time, Rome started burning while they played their fiddles.
There are some difficult decisions and actions that need to be taken in the years to come, and it is going to hurt. The world is smaller because of the Internet and the time for travel and shipping.
And we cannot depend on "The Government" to make it all better. They are the ones who helped screw it up in the first place. It has to come from each of us. It starts with education. Turning off the television, dumping the X-Box and making ourselves more valuable to the world economy as producers, rather than consumers.
Watch for my upcoming book: GREED: The American Dream becomes The Global Nightmare.
Friday, May 22, 2009
Friday, April 4, 2008
Mortgage Crisis - The Rise
Oh what a mess has been created in the real estate market. Foreclosures, short sales, job losses and no end in sight. What caused this situation?
The cause can be summed up in one word: GREED!
The residential real estate market was doing well. Prices were going up, interest rates were down, people were moving up and in many cases, keeping their old homes as investments. Homes were appreciating at a slightly above normal pace, but nothing out of the ordinary. So what happened?
1. Where there is money to be made, people will flock to the source. In this case, thousands of people became real estate agents and mortgage brokers. Some of these people had no idea what they were doing, and did not go to work for brokers who would properly train them.
2. Low Doc, no doc and stated income loan programs came into being. Oh, they have been around for many years, but normally required significant down payments. These loan programs allowed for nothing down. Anyone could get a zero down, stated income loan if their FICO scores were high enough. While many mortgage professionals understood the meaning of "stated incomes", others used it to mean that they could write in anything they wanted in order to get a loan approved.
3. Lenders representatives, including some of the big name banks, actually coached mortgage brokers on how to prepare the loan package in order to get the loans through. Some of the things that they were teaching were outright loan fraud.
4. Mortgage brokers not only received a commission for putting a loan together, but could also receive what was known as a "yield spread". What is a yield spread? Well, if you can get the borrower to accept a certain program that benefited the lender, an additional fee would be paid to broker! Often, these fees were as much as 3% of the loan amount, on top of the fees the broker was already collecting. What would trigger these fees? Loans with higher interest rates after the start rate. Adjustable loans instead of fixed loans. Prepayment penalties that would lock in a borrower so they could not refinance for a certain period of time without paying the penalty, even if the rates went down. Didn't these need to be disclosed to the borrower? Of course, but it was just another piece of paper in the midst of dozens, which in many cases were never explained or read.
5. Real Estate agents started doing loans as well as represent buyers and sellers. A real estate agent representing a seller of property could end up representing 5 transactions! Think about it. An agent represents the seller, and meets a buyer at an open house. He gets the buyer to make an offer, using the agent's services as a real estate agent and as a mortgage broker. He is going to represent the seller in the sale of his house, as well as when purchasing a new home and taking care of the financing on that one, too. A transaction like this could amount to $100,000 in commissions to the agent. Where are that agent's loyalties?
6. Prices were too high in California for investors, so mortgage people who could do loans in other states began forming investment groups. They would have meetings, present properties and actually take a bunch of people to places like Las Vegas, Arizona, New Mexico, Florida and North Carolina for the sole purpose of making offers on property in those states. How did they get the money for these purchases? Why, they would refinance their primary residence to make the purchases. Appreciation was now spreading across the country.
7. Finally, the crooked people learned that they could manipulate the paperwork to literally steal from the lenders and from uneducated or naive people. I have worked on cases where a broker literally stole almost $2 million from 22 homeowners, and ruined the credit of those he recruited under the guise of helping people get out of trouble. Another case that I worked on involved identity theft, where an individual ended up owning 5 houses which he did not know he owned. The list goes on.
Yes, there were legitimate reasons for much of the appreciation in the real estate market. Unfortunately, due to the fraudulent loans and easy credit (aka, subprime), part of the increase was an illusion. The "bubble" that everyone predicted for 6 years grew from these illusionary loans, and those loans have created the downfall that is now being experienced in the real estate market place.
There are other reasons for the depth of the downturn. Just as there was artificial appreciation, there is currently artificial depreciation. More on that, next time.
Ken Koenen, LLM
Attorney at Law
Law Offices of Ken Koenen
6200 Stoneridge Mall Rd., #300
Pleasanton, CA 94588
Office: 925-924-0100
Fax: 925-397-3044
Email: ken@lawken.com
Web Site: http://www.lawken.com/
Blog: http://lawkentoday.blogspot.com/
The cause can be summed up in one word: GREED!
The residential real estate market was doing well. Prices were going up, interest rates were down, people were moving up and in many cases, keeping their old homes as investments. Homes were appreciating at a slightly above normal pace, but nothing out of the ordinary. So what happened?
1. Where there is money to be made, people will flock to the source. In this case, thousands of people became real estate agents and mortgage brokers. Some of these people had no idea what they were doing, and did not go to work for brokers who would properly train them.
2. Low Doc, no doc and stated income loan programs came into being. Oh, they have been around for many years, but normally required significant down payments. These loan programs allowed for nothing down. Anyone could get a zero down, stated income loan if their FICO scores were high enough. While many mortgage professionals understood the meaning of "stated incomes", others used it to mean that they could write in anything they wanted in order to get a loan approved.
3. Lenders representatives, including some of the big name banks, actually coached mortgage brokers on how to prepare the loan package in order to get the loans through. Some of the things that they were teaching were outright loan fraud.
4. Mortgage brokers not only received a commission for putting a loan together, but could also receive what was known as a "yield spread". What is a yield spread? Well, if you can get the borrower to accept a certain program that benefited the lender, an additional fee would be paid to broker! Often, these fees were as much as 3% of the loan amount, on top of the fees the broker was already collecting. What would trigger these fees? Loans with higher interest rates after the start rate. Adjustable loans instead of fixed loans. Prepayment penalties that would lock in a borrower so they could not refinance for a certain period of time without paying the penalty, even if the rates went down. Didn't these need to be disclosed to the borrower? Of course, but it was just another piece of paper in the midst of dozens, which in many cases were never explained or read.
5. Real Estate agents started doing loans as well as represent buyers and sellers. A real estate agent representing a seller of property could end up representing 5 transactions! Think about it. An agent represents the seller, and meets a buyer at an open house. He gets the buyer to make an offer, using the agent's services as a real estate agent and as a mortgage broker. He is going to represent the seller in the sale of his house, as well as when purchasing a new home and taking care of the financing on that one, too. A transaction like this could amount to $100,000 in commissions to the agent. Where are that agent's loyalties?
6. Prices were too high in California for investors, so mortgage people who could do loans in other states began forming investment groups. They would have meetings, present properties and actually take a bunch of people to places like Las Vegas, Arizona, New Mexico, Florida and North Carolina for the sole purpose of making offers on property in those states. How did they get the money for these purchases? Why, they would refinance their primary residence to make the purchases. Appreciation was now spreading across the country.
7. Finally, the crooked people learned that they could manipulate the paperwork to literally steal from the lenders and from uneducated or naive people. I have worked on cases where a broker literally stole almost $2 million from 22 homeowners, and ruined the credit of those he recruited under the guise of helping people get out of trouble. Another case that I worked on involved identity theft, where an individual ended up owning 5 houses which he did not know he owned. The list goes on.
Yes, there were legitimate reasons for much of the appreciation in the real estate market. Unfortunately, due to the fraudulent loans and easy credit (aka, subprime), part of the increase was an illusion. The "bubble" that everyone predicted for 6 years grew from these illusionary loans, and those loans have created the downfall that is now being experienced in the real estate market place.
There are other reasons for the depth of the downturn. Just as there was artificial appreciation, there is currently artificial depreciation. More on that, next time.
Ken Koenen, LLM
Attorney at Law
Law Offices of Ken Koenen
6200 Stoneridge Mall Rd., #300
Pleasanton, CA 94588
Office: 925-924-0100
Fax: 925-397-3044
Email: ken@lawken.com
Web Site: http://www.lawken.com/
Blog: http://lawkentoday.blogspot.com/
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