Government programs ostensibly designed to benefit homeowners were really intended to bail out the banks. In April of 2008, I wrote a post about the psychology behind the various government programs designed to help banks kick the can until conditions got better. In the nine years that transpired since then, their efforts went from frantic, to desperate, to sublimely ridiculous. Each step along the way, the sheeple were strung along and enticed to make a few more mortgage payments in what will prove an ultimately futile effort to benefit from occupying a property they can’t afford. Over the years, others picked up on the nonsense. This in 2011 from US Congressional Representative Patrick McHenry: How Homeowners Are Hoodwinked. This in…[READ MORE]

Anyone considering buying a house needs to understand debt-to-income ratios because these measures of a borrower's capacity to repay the debt is fundamental to mortgage underwriting. Debt-to-income ratios are concerned with monthly income. These are not measures of total debt or total income, only the monthly payments on debt compared to monthly gross income. Notice also that the benchmark is monthly gross income, not take-home pay. The monthly gross income standard is important because tax policy can pose problems for borrowers with high debt-to-income ratios because after paying their mortgage and their taxes, they don't have much left over to live a life. Strangely, lower income borrowers can often endure higher debt-to-income ratios because they receive other tax benefits that…[READ MORE]

Many housing analysts suggest the lack of inventory is because potential sellers are concerned they can't find another home to buy. This is a red herring. The real reason is the lack of move-up equity. Back in 2012, I postulated that homeowners would list their homes as soon as prices reached near-peak levels when they could get out without completing a short sale. After watching prices inflate to peak levels and the listings failed to materialize, I concluded that the lack of equity to complete a move-up is what kept supply from coming to market. Loan modifications kept homes off the market to facilitate the recovery. As these loan modifications expired, some of these properties came to market as equity…[READ MORE]

Unilaterally modifying home mortgages was a necessary step to ensure banks survived the housing bust. Ostensibly, homeowners and lenders agreed to the price of money (interest rate and payment) when the promissory note was signed. Unfortunately, during the housing bubble, the terms of these notes were onerous, and many borrowers faced excessive monthly housing costs while simultaneously facing declining house prices and the elimination of their equity. With no equity, little hope of future equity, and rising payments, many borrowers opted to strategically default -- and lenders worried that more would follow. Banks were still exposed to $1 trillion in unsecured mortgage debt when housing collapsed. The threat of strategic default and the reality of a trillion dollars in unsecured debt…[READ MORE]

Large down payments shut many borrowers out of the housing market — many unreliable ones -- which is why large down payments make housing so stable. It's also why many rally against it. Down payments form the bedrock of the housing market. Large down payments serve the interests of homeowners and politicians by preserving homeownership, lowering volatility in the market, and reducing the risk to our financial system. The primary people who oppose large down payments profit from short-term boosts in transaction volumes and higher prices, realtors and originate-to-sell lenders. Left-wing housing advocates also view large down payments as a barrier to putting unqualified borrowers into houses -- of course, they fail to acknowledge the "unqualified" nature of many of these…[READ MORE]

The more certain people become that real estate prices can only rise, the most likely they are to make a foolish emotional purchase that ends in disaster. The efficient markets theory postulates that market participants have equal access to good information and they make rational judgments based on the available data. The theory appeals to vanity because everyone likes to believe they have above average financial acumen and that they make rational decisions. Unfortunately, that isn’t the world we live in. People often fall victim to groupthink, pick and chose what data to believe and what to ignore, and seek the perceived safety of the herd when making financial decisions. The housing bubble was defined by one fallacious belief that…[READ MORE]

Many people erroneously believe housing recovered because lenders ran out of delinquent borrowers to foreclose on. They didn't. Instead, they stopped foreclosing in order to dry up the inventory to drive prices back up. When lenders make loans, they far prefer borrowers to repay those loans; in fact, their entire business plan relies on it. As long as borrowers are current with their payments, lenders are happy and making money. When borrowers don’t make their payments, the end result is a distressed sale. If there are enough of these, market prices are reduced dramatically which causes significant lender losses. Lenders know this too, so when distressed loans became an overwhelming problem, they devised can-kicking methods including loan modifications, mark-to-fantasy accounting, and if all…[READ MORE]

When borrowers and lenders petition the government for relief through debt forgiveness and bailouts for losses, you are the one paying for whatever the borrower did with that money; the government is merely a middleman facilitator of a tax heist. In a bygone era, lenders lost money if they made bad loans to irresponsible borrowers. With the advent of securitization, much of this risk of loss transferred to investors, and with the economic catastrophe of 2008, lenders learned the government would bail them out for any losses they were unable to pass on to investors. The too-big-to-fail banks no longer attempt to conceal the moral hazard behind their actions; they know they will be bailed out, so they act accordingly.…[READ MORE]

The housing bubble pulled forward a generation of buyers; the housing bust cost these buyers their homes and their good credit, removing many of them permanently from the housing market. Lenders succeeded in manipulating market prices by restricting supply; however, for a true recovery in housing, the market requires resurgent demand from first-time homebuyers and move-up buyers. These two groups are typically the largest source of housing demand, with the first-time homebuyer the bedrock of the housing market; without first-time homebuyers, no move-up market exists. The first-time homebuyer market propels upward by job growth and household formation; when the economy is strong and creating good-paying jobs, young people form new households and use their new income to bid for real…[READ MORE]

What separates homeowners from people who don’t own homes? The answer is not as simple as you might think. If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun. One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set out to establish who owned what so he could better establish…[READ MORE]