Wed 1 Oct 2008
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Contributed by: Ronald Ch. Eleveld
Edited by: Bruce J. Twambly
I am writing about what is going on in the markets to shed some light and to foment some thought on the part of the readers. You may not agree with all aspects, however I believe that the basic facts are correct. I will know I am correct, if while reading this you are upset because of I am hitting chords that resonate.
On an individual basis we all know that having too much debt, can lead to less flexibility, and increased personal anguish. If we do not pay our own bills we get calls and the ability to do things from replacing the tires on our cars, to fixing the bathroom, to buying a new or used car or even a house becomes very difficult. The perils of too much debt should be understood by most if not all.
Our country now is a major debtor to the world! The “bailout of Main Street, and Wall Street” is adding to the total. This debt is growing and it means that more of the budget has to go to servicing or paying only the interest on the debt. We are not even talking about the principal or paying it off! This tremendously limits our ability to provide for our citizens, now and in the future. Even more importantly it places us at the risk of being told what to do by those that lent us the money. This has occurred in history, and history will repeat itself.
This problem was not caused by “Wall Street,” it was caused by “Main Street”! Just like the last housing bubble that in the end took down 100’s of banks in the late 1980’s and 1990’s, and saw real estate prices drop by 50% or more, I will call this the “first bust”. Think about it, where else can you buy something with almost no money down AND pay it off over 30 years. The purchaser has little of their money in the transaction and thus limited risk. Speculators or “investors” also have no risk, and if the value moves up they have a big pay day. However, as we are seeing, as the values decline many just leave. Interestingly we call this by the technical term the “greater fool theory.” It says that I will pay a foolish price for something believing there will be a greater fool that will pay a higher price. The risk is that YOU are the greater fool.
Today we see a rehash of the “first bust” again involving real estate. We can call this the “second bust.” This time the difference is that instead of the banks holding the loans they sold them to “investors.” This means the pension funds, retirement plans, 401(k)’s, mutual funds, and other capital sources now carry the burden and the risk of capital loss.
If we want real change we need to require those that want to buy a house MUST put up 20%. In the stock market of the 1920’s you could control a $100 of stock for a few dollars. You carried little risk, pennies on the dollar you could lose. Today you must put up $0.50 for every $1.00 and if values decline to a certain point you have to add money or sell the position. We all know what happened in 1929, when the stock market dropped and the whole thing came unraveled, causing a major credit crunch that lead us into a depression. At that time the US was NOT a debtor nation, unlike today.
Today its the no money down real estate loan. This four wheeled wagon with purchasers on board is watching the wheels come off as the wagon is starting to careen off the road. The real estate agent gets paid a commission on the value of the house, the higher the value the more money they make. Does the agent want to see prices decline? The mortgage broker gets paid a commission based upon the value of the loan and the difficulty of getting a loan for a particular buyer, or person refinancing the loan. Do they want to see prices decline? The appraiser gets paid for producing the “best”, highest value appraisals. They have less culpability, because they are making a guess. However truthfully, they are swayed to provide a desired value for the real estate agent and mortgage broker. The final wheel is the attorneys that closed these loans and got paid for the closing, proclaiming they had no requirement to “know their client”. They were there to make sure the paperwork was correct. Does the attorney disclose the 50% or more of the title insurance premium they receive as a commission from every home buyer or person refinancing a loan. No! They also profited nicely from this cart.
What did Wall Street do? They provided the cash or grease so that the wagon wheels would roll. The bottom line is there is plenty of blame to go around. That grease came from various sources as mentioned earlier.
So we have lots of people to blame, and every American will pay for the greed in one way or another. The person trying to sell will be limited because of foreclosures in there neighborhood. The properties not being liquidated a rapidly or as fortuitously as possible. Those left with lower values in their respective asset values. All of us will have to pay higher taxes to pay for this bailout. Those benefiting are the people living in properties for “free” because they are not making their payments or contacting their mortgage holders about helping them solve their problems, thus necessitating the foreclosure of the house; a clear minority of Americans. We hear a lot about change. We do need change, but the change we NEED is change none of
us want! All parties must take responsibility. The attorneys must take some responsibility for advising the client about the risks they are entering into. They are college educated professionals that should understand what the client is signing and with a rudimentary examination of the client’s knowledge, should know if the client is being taken advantage of. The “I am here to make sure the paperwork is correct” is an excuse no one should accept. The Real Estate agents have culpability for not knowing their clients and they should be required to know their clients better. The mortgage brokers and bankers need to also know their clients better as well and to disclose the risks of the various loans they offer. Remember all parties will blame the other, but they are ALL a party to the profits, so the are a party to the additional work.
Remember we hear a lot about change. Real change is not what we are hearing from any of our elected officials or prospective officials. Real change involves pain and sacrifice. Getting a job is change and sometimes the sacrifice of a comfortable job for one that is unknown can be beneficial. Leaving the home as young adult is change: sacrificing dependence for independence. Getting married is change: sacrificing independence for companionship. Having a child is also a very major change with sacrifice for a wonderful benefit.
Today we need to sacrifice for our benefit and our children and grandchildren’s benefit. If we do not, then “bust” number three may well be the end of this great nation as we know it.

















