The big news recently is that the Federal Reserve lowered the fed funds rate by half a percent. What may seem like a great idea to get the real estate housing market moving again is having disastrous results in other areas. The good news is that mortgage rates went down. The other good news is that my rate on my variable home equity line went down a half of one percent. The bad news is that my interest rate on my savings account went down a half a percent as well. This smells of an end around for federally sponsored bailout.
Why should the small guy be left holding the bag? Why should I have to be taking a hit for these big Wall Street investors? Is it fair that I am making less on my saving account just because these big bankers decided to roll the dice on marginal Subprime loans? A lot of these big bankers who littered the landscape with Subprime mortgages are getting off scott free. Why don’t we make them work it out? To me it looks like another Enron. In the Enron meltdown, a lot of the big executives like Ken Lay sold their positions right before the crash. The same thing appears to be going on at Countrywide. Countrywide CEO Angelo Mozilo seems to have made a similar move with his stocks and company earnings. In fact the Securities & Exchange Commission has opened an investigation into his recent stock sales transactions.
Instead of throwing these guys in jail to hang out for awhile, why not put them to work to get it worked out. Let them work out new terms for the mortgages that are in jeopardy.
Let’s look at another company and how crazy the financial world is. Beazer Homes (BZH) has recently admitted that it violated federal housing rules by arranging for non profit companies to lend potential borrowers their down payments which would then be rolled into the new mortgage amount. They are now being fined $15 million dollars for this infraction. What happened to Beazer Homes? Their stock actually went up because Wall Street had projected that the fines would be more. They lost an estimated 68% of their prospective home buyers in the quarter that ended on September 30, 2007. Yet they still end up ok even after performing questionable lending practices because they didn’t get the fine that everyone was expecting. Go figure.
I think where builders have gotten into trouble is when they went into the mortgage business. Not just Beazer, but many builders and their mortgage companies have been caught falsifying loan documents, overstating income, forging asset documents and evening adding fraudulent rental income. A lot of loans that have gone into foreclosure in 2006 and 2007 and will be going into foreclosure in 2008 have come from stated income and no income verification loans. These loans encourage loan officers and borrowers to lie about income and assets which ultimately lead to someone owning a home that they may not be able to afford.
What has happened to the neighborhoods that these builders create? Well for example, some of Beazer’s subdivisions have seen a foreclosure rate as high as 1 in 5 homeowners. If I were living in one of these subdivisions I would be pissed. It does affect your home value when your neighbors are in default. What are you going to do sue your builder because your neighbor went into foreclosure? I’m not an attorney but that seems like a tough case to me. I think that Beazer should have responsibility to their communities that have been damaged by their greed.
I think it’s time to send Wall Street a message: “it’s time for you to clean up your messes. You made it, you clean it up.” I don’t think the public should have to be the mommy of the financial markets.
Written by Dave Mason. Dave has been in the Real Estate, Consumer Finance and Mortgage industry since 1988. He has a degree in Finance from the University of Arizona.
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