Your Income and Your House

(added first two paragraphs as an update to the post) As if we need any more examples of why you should be very skeptical of what you read these days, take the jump over to Felix Salmon’s fisking of the an opinion piece that should never have been published in the SF Chronicle recently.

The whole piece suffers from an acute case of conspiracytheoryitis, shot through with some very damaging misunderstandings about where legal liability lies in the securitization process. It’s the kind of thing which would be easily ignorable on a blog somewhere, and I’m not surprised that something along these lines has been written. But I am extremely surprised that the editors of the San Francisco Chronicle, whose job is to filter out the nutcases, somehow let this one through and printed it on the front page of the C section on Sunday. Shame on them.

The subprime mess that has been much in the news recently has many fathers, from Congress bullying lenders to expand lending to low income borrowers (which has now been renamed “predatory lending”) to lax regulatory oversight of the mortgage brokering business, securitization excesses on the back end, and lastly, a broadly flawed mortgage services business.

On this last point I would simply ask if you have had your home refinanced in recent years. Home appraisers may take their jobs very seriously but the fact remains that they have an incentive to maximize valuation of properties in order to preserve relationships with their true customers, mortgage brokers. Also, there is self-reinforcing aspect of this process breakdown when appraisers use comparative valuations as the basis for the target valuation.

Over the past few years, the housing market became riddled with bogus lenders funneling mortgage money to bogus owners of houses with bogus prices. Attempting to prop up this phony baloney is a pointless exercise. What the housing market needs in order to get back to normal is a strong dose of reality. [From TCS Daily – Your Income and Your House]

At the end of the day there is but one group in this whole mess that bears ultimate responsibility, borrowers. The facts are simply do not support the victimization theme that some are throwing around, namely that 85% of refinances were for more money than the loan they were replacing and borrowing more money that one can afford the maintenance on is not something the loan industry or government should be protecting borrowers from.

With 20% of the Bay Area foreclosures being held by speculators who often put zero money down on these properties, it’s increasingly clear that the mortgage industry crisis is less about borrowers being hoodwinked by lenders and more about borrowers taking great advantage of the prevailing lending climate. As such, it’s best to let the marketplace deal with this, but if the government really feels the need to get involved, a good place to start would be the appraisal and inspection process and the title process. Streamlining both of those segments of the real estate industry would do more to reduce fees, improve quality, and build stability in the market than any relief for subprime borrowers.

Lastly, for a rather humorous look, in facetious too-close-to-true kind of way, check out Iowahawk’s take on the American dream.

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Read more on Chronicle, Income at Wikinvest

7 thoughts on Your Income and Your House

  1. Jeff, I just want to comment on how much I enjoy your blog. While I often speak about the same issues with friends, your blog posts are always great links to send to folks as a great summary of the issue in question. Thanks for taking the time to write such great posts.

  2. Thanks Noah! While I have always kept the perspective that I write this blog for an audience of one – me – I would be disingenuous to not acknowledge that I greatly appreciate comments such as yours.

  3. Jeff,

    Have to disagree with you on this one–partially. While borrowers should definitely know better than to borrow beyond their means, there is another guilty party here: the banks. They should never have made these loans to begin with, and they know it. They securitized and sold off as much of the risk as possible. Both guilty parties are about to get what’s coming to them, barring gov’t intervention: bankruptcy/insolvency.


  4. Jason,
    I can’t argue with you on that point, but my strong personal responsibility vein weighs me more heavily on the borrowers being at fault here. I think Congress bears some responsibility as well, they have harangued lenders to open up borrowing for low income markets, which they responded to.

    In the end, there’s going to be enough blame to go around on this one.

  5. @Jeff – nah – don’t buy this either but for slightly different reasons. In any market, there has to be supply and demand. In financial services, we already know which way the economic power relationships are tilted so yes, responsible, but that’s you. Many people are vulnerable to offers which almost always turn out ‘too good to be true.’ Extricating my missus from one such deal was one of my first jobs many years ago. She didn’t know any better and had been sold a pile of crap.

  6. It’s not the government’s job to be your nanny. We risk devaluing the underpinnings of what it means to be an adult, and as an unintended consequence, contract law, when public policy shifts from regulating a marketplace and prosecuting criminal abuses, to cleaning up the messes people get themselves in.

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