Copy for Real Estate Guide Column for 9-26-08
REAL ESTATE PATTERNS
By Ken DuVall

LET THE FINGER POINTING BEGIN

Most of us are irate and indignant about this financial mess. But blaming the free enterprise system is preposterous. Blame well-intentioned, but as it turns out, disastrous Government intervention for upsetting the market economy. It all began as the result of "redlining", a term coined in the late 1960s by community activists in Chicago. The practice involved lenders actually drawing red lines on maps outlining blighted, usually inner city areas, as designated “no-loan” zones. In 1968 the Fair Housing Act was passed to prohibit redlining when the criteria were based on race, religion, gender, familial status, disability, or ethnic origin.

The Act mandated that ANYONE was entitled to a mortgage- even if they didn't qualify. Before that, if a buyer couldn’t come up with a 20% down payment, he didn’t get a loan, period. It had the ultimate effect over time of crippling the housing market, deteriorating values, and encouraging abandoned properties that survive to this day. It created a gigantic monster that threatens to consume the entire financial world. We messed with the essence of free market dynamics and now we’re paying the price.

In saner days, banks logically designated those areas where making a loan to any buyer, not just a minority, was not only chancy but a recipe for disaster. No banks in their right mind would make home loans in say Chicago ghettos or war torn South Central L.A back then. Suddenly banks were not permitted to be prudent but forced to be “politically correct”, which was completely appropriate and called for at that time. The flip side was that un-creditworthy borrowers then became legally entitled to get mortgages, and compelled lenders to write loans in objectionable neighborhoods.

Enter now those quasi-government banking institutions, Fannie Mae and Freddie Mac, which poured fresh money into the banking system by buying mortgages from banks so they could make more loans to anyone with a pulse. F & F bought billions of dollars worth of those risky mortgages banks had been forced to offer. Lenders now had no risk in the deal! The F & F scandal dwarfs the Enron debacle. With Enron, people went to jail. With F & F, many walked with millions. It’s disgusting.

For example, Franklin Delano Raines ran Fannie for 6 years and swung with $50 million based on overstated earnings. The Government suit against him to recover was settled last April for a paltry fine of under $3 mil. Yes, we now know that greed and corruption were also inherent elements of the meltdown. It is fervently hoped that this ugly episode results in a wake-up call for everyone.

But don’t sell America short. We can, must, and will fix the present run on the world banking system. That's the message I hope my readers take away from this column. Stock markets have plunged globally. Gold and oil prices have shot up. We're witnessing a desperate flight to safety. Investor confidence has vanished. The world is petrified. We’ll know more when the details of the gigantic government $700 billion to a possible $1 trillion bailout are fleshed out. Who would have ever thought home loans would bring us to our knees?

To really “fix” things up, maybe we should let the Government own everything in the country. Then we could all just hang out! For now, take an aspirin and call me in the morning.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings at www.KenDuVall.com and call Ken at 345-3700 for all your real estate needs. Free consulting.

Copy for Real Estate Guide Column for 9-19-08
REAL ESTATE PATTERNS
By Ken DuVall

DODGING BULLETS AND TAKING ARROWS!

The only “good” news is the housing bust has spawned a new “industry”. Building contractors have found a new niche: boarding up foreclosed bank owned homes to protect them from squatters and vandalism! And bargain hunting investors are buying up lots from distressed developers, paying as little as 35 cents on the dollar, betting on big gains in a few more years. We hit “The Perfect Storm” this week, like the movie of the same name.

We just had a major financial meltdown. Like the bursting of the housing bubble destroyed hundreds of billions of dollars in phantom home equity built by the explosion of rogue lending, Wall Street is now suffering through its own evaporation of market value. But I think vultures will snap up the road kill before too long.

The spectacular collapse of the two gigantic financials, Merrill Lynch and Lehman Bros., on the heels of Bear Stearns, and now the scramble by AIG, the world’s largest insurance company that guarantees $60 billion in mortgages to lenders, has many wondering: Is this as bad as it gets?

The answer is: nobody knows. The reason being the true value of the investments held by banks and other financial institutions won’t be known until home prices and the job market stabilize. I guarantee you we haven’t seen the bottom yet. There’s a domino effect in play. More losses are inevitable.

The U.S. has gone from a $5 trillion surplus in 2000 to a crushing debt, now $9.6 trillion, increasing by $1.9 billion each and every day. The Afghanistan and Iraq conflicts cost $12 billion a month. Forget about the housing downturn. That’s small potatoes now. Worry about the very solvency of the country.

We have amassed huge, unfunded obligations and enormous liabilities that exceed our resources. The fundamental economy is not in good shape. One critical question remains: How many more banks face the ultimate penalty? The answer depends on two huge unknowns.

First: When will home prices stop falling? The value of trillions of dollars of assets held by the world’s investors is pegged to the underlying value of the real estate on which those assets are based. If home prices fall more, those assets will have to be further devalued. Who would have ever thought that housing would turn out to be such a gigantic lynch pin economic component?

Second: When will the foreclosure rate stop rising and stabilize? As of July 1st, some 9% of all Americans holding a mortgage were either late on their monthly payments or in foreclosure. Continuing foreclosures will add to the backlog of bank-owned properties putting further pressure on lender resources. More adjustable rate loans will reset next year so it’s not over yet.

With the collapse of these giant financial institutions, it’s clear some acted imprudently, now stuck with too much debt and not enough capital. Just like homeowners who took on mortgages they couldn’t afford, lenders that took the risk now face their own "foreclosure." When will we learn there’s just no free lunch? But if we play our cards right, we’ll emerge victorious once again. The harder the conflict, the more glorious the triumph.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings at www.KenDuVall.com and call Ken at 345-3700 for all your real estate needs. Free consulting.