I’m growing weary of reading articles and or listening to various media commentaries on the Real Estate economy. So-called “experts” that clearly have absolutely no concept of the mechanism which control this segment of the U.S. Economy. Even more distressing is listening to the miscellaneous ramblings of various elected officials who express heart-felt concerns over the thickening dread of the American People whilst at the same time crafting legislation that is emblematic of the very cause that lies at the root of the problem.
Regardless of the sophist and their peripatetic tendencies, to me the only resolute explanation I can give to this fundamental observation is this: Either their ignorance has become an obstacle or the conflagration is so extreme they prefer to remain ignorant!
Consider a few examples:
- TARP (Troubled Asset Relief Program) – A $700 Billion bailiwick that did nothing but bail out Union Pension, line the pockets of the top 10 Banks, smother the natural remedial process of the free market, devastate the stockholders of GM and indemnify influential interest against the risk of loss – by assuring profit – in the Chrysler transition to its new “International” ownership. Now really, what did you expect?
- HASP (Homeowner Affordability and Stability Plan) – A $75 Billion venture in to the realm of the absurd. A program intended to “encourage” Lender modification of existing loans or issuance of new encumbrances, all based on the Borrowers “hardship” and “ability to pay”. This week, the U.S. Treasury had to confess that it had “…assisted 1.3 million homeowners thus far but over 40 percent of these, around 530,000, have dropped out of the program.” In short, more folks have dropped out of the program than those who had managed to meet its criteria. Success measured by failure! Oh so very strange these days!
- MDIA / RESPA Reform Act (Mortgage Disclosure Information Act / Real Estate Settlement Procedure Act – The classic response by Government to a problem of its own making, create another mistake to mask the first. In essence, one new reform “act” (MDIA) and an update to an older one (RESPA). The end result, a conflation of incongruent regulations that neither address the underlying issue nor create a mechanism to correct it.
What my readership needs to understand is that I can honestly say, with no self-adulation intended, that I am a fully qualified “expert” in the area of Real Estate and Finance. I was involved in liquidating bank portfolios in “S & L” crisis of the late ‘80’s and I worked in/on the process promulgating federal lending guidelines. You might say I’ve “been there, done that!” Despite the illusion of complexity, banking, real estate and finance is a very simple business. In the case of banking/finance, the degree of complexity is only fabricated to shield how the industry abuses the process then looks for the public to mitigate their losses and this is not the first time. Unfortunately, absent the courage and character necessary to correct and prevent the tendencies, it will occur again, I promise! Here’s why:
Consider Fannie-Freddie (ostensibly the Federal Government who now owns 80% of the enterprise) bought or guaranteed approximately 75% (2009) of all mortgages originated in the U.S. and owns or guarantees 53% of the $10.7 Trillion in residential (U.S.) mortgages. Now then, if that isn’t sufficient to impress you then consider that FHA, who continues to fund new loans with as little as 3.5% “down”, is on track to fund $400 Billion by years end (2010). By the way, FHA insures over 6 million loans with a total portfolio value, as of May 2010, of nearly $900 Billion with a default rate of 8.4%.
Now, what does all this mean to those who have a concern for this Nations, or their own, economic future? Well, to answer the question let me offer a few basic rules governing The Fiat Economy of Real Estate, they bear a rather peculiar similarity with those of the Bank/Financial Markets!
- The only reason Real Estate ever performs beyond the average rate of inflation is due to artificial factors which for now I’ll simply define as: (1.) Speculation. And, (2.) Non-Systemic Demand. Both of these are part of the “Cycle of Predation”.
- Real Estate transaction’s promotes collateral revenue that is purely “consumptive” by nature. An example in the form of a question: What are the chances that a new homeowner’s bank accounts or debt limits decrease after purchasing a home? Or, in the instance of an individual refinancing their home, takes the proceeds and deposits the same in to a Savings Account? Answer: “Zero!” A Federal Reserve Study (2007) concluded that during the period 1991-2005, Americans drew over $4 Trillion in equity, either through “refi’s” or “home equity credit lines”, out of their personal residences. If they didn’t save it, what might one suppose they did with it?
- Home Ownership benefits Lenders over Homeowners by a factor of 2.6 to 1. Why? Cost of financing.
- There is never a “under supply” component to Real Estate inventory. Price “effects” becomes more a function of government intervention and speculation and never a function of “native” demand. And lastly,
- There is only one reason an individual “defaults” on a home loan: financial sustainability. Seems obvious doesn’t it? Few, you may be surprised to learn, actually understand this!
In the end, with all this in mind, I am of the opinion that the Real Estate component of the U.S. Economy has only just begun to “adjust” and it will continue to do so until The People wake up and force their Representatives, at both the State and Federal levels, to list to what they don’t want to hear!
Homeownership, to truly be pervasive, must be made to be affordable and the first place to start is with the “financing component”. The current method of financing a personal residence is usurious at best, in truth, down right thievery! There is a way to make it work through what I call a Personal Acquisition Line, it is revolving and portable. You take it with you from home to home and so long as your payments are timely, you qualify for it only at its initial origination. We’ll talk more about this in the coming days!
Yes they have enacted a system that promotes, encourages and insures “financial unsustainability!” Cure the cause and you fix the problem!
Curtis C. Greco, Founder