It takes sellers and buyers and LOANS for houses to sell like hotcakes. We have lots of sellers. If they price their houses affordably, they may be able to sell. But if banks refuse to lend, if they maintain very high lending standards, then houses won't sell like hotcakes again. ..... Freedom_Is_Not_Free
Not having "high standards" for borrowers is what put the financial equivalent of tainted meat into the banking system in the first place.
Not having "high standards" for borrowers is why investors won't touch a Mortgage Back Security today anymore than they would pet a rattlesnake.
Having investors avoid Mortgage Backed Securities like the Plague is why banks won't lend the money they still have.
I wrote this outline of "How the Toxic Mortgage Scam Works" for another thread on FR that was discussing Countrywide:
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How the Toxic Mortgage Scam works:
1. After the Dot.com Bubble burst, investors, not satisfied with slow stock market gains and not satisfied with low interest rates wanted higher returns on their investments.
2. Mortgage Backed Securities looked like a good investment vehicle and they became a hot seller on Wall Street. Mutual funds, pension funds, foreign investors .... they were all eager to buy Mortgage Backed Securities. The more Mortgage Backed Securities loan brokers sold, the more money loan brokers made.
3. One small problem, however. THE SUPPLY OF CREDIT-WORTHY BORROWERS WAS RUNNING OUT. Few credit-worthy borrowers = Few good quality mortgages = Few Mortgage Backed Securities to sell = Fewer profits to be made.
4. What to do?
Easy:
"Forget about 'credit-worthy'. Those pigeons on Wall Street will buy ANY Mortgage Backed Securities we sell. If we put up rotting meat labeled 'Mortgage Backed Securities' for sale, those pigeons will buy the rotted meat from us! If the pigeons die from our rotted meat, we don't care. All we care about is making as much money as we can regardless of the legality of our actions!"
The new business model was: Find an unlimited supply of borrowers with a pulse regardless of ability to repay = Write out an unlimited supply of mortgages to these deadbeats = Bundle up this financial equivalent of tainted meat into an unlimited supply of Mortgage Backed Securities to sell to the pigeons on Wall Street = Rake in an unlimited supply of profits even in we poison the lifeblood of America's economy.
In the Toxic Mortgage Scam, the Wall Street investors (America's mutual funds, America's pension funds, America's individual investors, America's banks) were the "pigeons", the "marks", the "suckers" that were sold that poisonous tainted meat. The so-called "house buyers" were nothing more than the rotted meat used in the scam.
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Yeah, we have lots of "sellers" right now that are desperate to sell. Those desperate "sellers" are the so-called "home owners" (How can you "own" something you never paid for because you "bought" at a price you could never afford to pay?) that were nothing more than the rotted meat used in the scam or the desperate investors that bought the tainted meat.
So, the so-called "home owners" are now "upside down" and facing ridiculously high mortgage payments as a result of the ridiculously expensive houses they bought with borrowed investor money that was given to them under very lax standards as part of the Toxic Mortgage Scam.
Those of us that bought our houses at sane market price with sane financing before the Toxic Mortgage Scam and the Bubble in prices that it spawned are NOT desperate to sell our houses. Our houses are either already paid for, or being paid for by renters whose rent payment almost covers the mortgage or have a mortgage payments so low that it doesn't really affect our budget.
Those sellers, be they the desperate "rotted meat" in the Toxic Mortgage Scam or the desperate investors that bought the tainted meat mortgages only to see them default are then trying to sell these houses at prices that still qualify as Bubble Prices to some Greater Fool out there.
The problem is that the supply of Greater Fools has run out.
The sales will be constrained by the ability of buyers to get loans rather than by the prices of homes.
It is all inter-related. Investors are out there with warehouses full of cash looking for something non-toxic to invest in. The investors have bailed out of the stock market en masse. The investors can only get a 1.6% return on their cash on CD's.
Investors would LOVE to be able to invest in NON TOXIC Mortgage Backed Securities but they won't touch them.
Why?
Because they were sold tainted meat before and poisoned before by people who claimed that Price did not matter and Standards did not matter.
The investors are not buying tainted meat again. Ever.
As a matter of fact, the investors are not buying meat at all and turning vegetarian until they are convinced that the meat processing WILL have high standards in the future.
Buyers with excellent credit, of which there are always few, will have no problem snapping up those houses.
The lack of standards rotted that meat too.
The rotted meat was not just composed of people with "bad credit". During the Bubble, Greater Fools were tripping all over each other to take out $800,000 mortgages they could not afford on $400,000 houses because they knew that when the "Interest Only" gimmick period expired in the year 2008, all they had to to is sell the house for $1.2 million and make a profit.
My sister and brother-in-law had excellent credit. They had no problem paying the mortgage on their house. They had no problem paying the mortgage on their condo on the beach. However, once they were intoxicated by the Bubble mentality and believed the foolishness that "The sales will be constrained by the ability of buyers to get loans rather than by the prices of homes", they went ahead and singed up to buy ANOTHER condo ( a Canyon Ranch Resort condo, no less ) and signed on the dotted line for a during-construction price of $800,000.
The Bubble Mentality was in full force:
"The sales will be constrained by the ability of buyers to get loans rather than by the prices of homes. Buyers with excellent credit, of which there are always few, will have no problem snapping up those houses."
An $800,000 price?
No problem. At the very worst, they could sell the Canyon Ranch condo for $1.2 million when construction was finished.
Getting a loan?
No problem. The mortgage brokers were eager to give them that THIRD mortgage for an ADDITIONAL $800,000 because they had "excellent credit". If they could get an $800,000 loan so easily after already having TWO OTHER LARGE MORTGAGES, anybody else with a decent job could get a loan for $1.2 million after construction was done. After all, the total on their THREE mortgages was more than $1.2 million and the lending standards were so lax that nobody bothered to really ask if they could AFFORD to pay off such mortgages with their income without going bankrupt.
They may have had "excellent credit". They may have had a mortgage already written up and ready to sign. What they did not have was any "LENDING STANDARDS" in the process.
My brother-in-law makes good money but not THAT good. Not good enough to feed THREE mortgages on THREE high-end properties.
The Ponzi Scheme of the Bubble was unraveling. That $800,000 condo could not now be sold for $1.2 million. It could not now be sold for even the $800,000 that they had agreed to pay as a "during-construction" price.
My sister and brother-in-law WERE granted credit. The mortgage papers were all ready to sign. But, they both realized that BUBBLE PRICES and LOW LENDING STANDARDS would turn them from people with "excellent credit" to "rotted, tainted meat" as soon as they signed that third mortgage for an additional $800,000 in debt.
They refuse to sign. They lost their $80,000 deposit. The condo was "foreclosed" before it ever sold and that condo is now For Sale.
Sales will be constrained by the liquidity trap we are currently in.
The "liquidity trap" will go away once we investors know that tainted meat is no longer being sold with the name of Mortgage Backed Securities and that high meat safety standards are in effect.
My portfolio is now 74% in cash as I drastically reduced my stock market exposure before the bottom fell out and I have therefore lost only 19% of my portfolio instead of the 50% loss most other portfolios have suffered. I have a seven-figure pile of cash just begging for a decent but, above all, NON-TOXIC investment and Mortgage Backed Securities would be perfect except for the fact that I am still hearing the swan song:
"The sales will be constrained by the ability of buyers to get loans rather than by the prices of homes. Buyers with excellent credit, of which there are always few, will have no problem snapping up those houses."
Sorry.
No high standards in meat handling, no investrment in meat.
