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19th April 2011
By John Hill in Real Estate Law
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Down, down, down! The latest housing data are downright lousy. New home sales hit a record low, housing prices in general have fallen to their lowest level since housing first hit bottom in April 2009, and the Case Schiller index dropped precipitously by 3.1% in January. The uninformed are saying that this is just a blip in an overall housing recovery. Many pundits who actually read and understand real estate news say that this is a second fall from grace for the vaunted real estate market – a so-called “double dip.”

But really folks, isn’t this really just one long decline in housing prices! Oh sure, it took a brief respite when the U.S. government offered stupid taxpayer-financed programs, but those only caused an unnecessary increase in government debt and gave a temporary illusion of housing stability (a paper floor, if you will). The reality is that property values were over-hyped and over-valued for a number of years, so gravity and other natural laws are new coming into play.

A rational person could hope (and hope and hope) that the government has learned that its programs will only make things worse, and so butt out. However, a keen observer of human nature would know that the government feels a need to placate lobbyists and ignorant taxpayers, so will continue to throw out new programs in the hope that something good will stick.

Most recently, the politicians have made a lot of hay out of the requirement that banks carry at least 5% of the risk on any loan that they originate. One major loophole is big enough to drive a whole fleet of trucks through. That free pass waives the requirement if the banks are selling the loans to Fannie Mae or Freddie Mac, which they have been doing with nearly 90% of the loans. So, good political theater but no real substance.

FHA requires only a 3.5% down payment, which is so ridiculous and asinine that I don’t even know where to start commenting. Have they learned nothing from the most recent crisis? Again, the government entities need to realize that they are only extending out the problem and that higher rates of home ownership are not necessarily a good thing.

The real estate market (and other markets) would be a lot more stable and rational if all parties had skin in the game. That means at least a 10% or 20% cash down payment from the buyer, and requiring the lending institution to always hold a piece of the loan on their books.

A good example of a more pure and transparent transaction is the owner financing market. With owner financing, a property owner sells that property to a willing buyer for an agreed upon price, down payment, etc. and creates a real estate note (also called a mortgage note or deed of trust note). The buyer makes payments against the mortgage note and continues to do so until the mortgage note is paid off. Any time between the creation of the note and its final payoff, the real estate note holder can decide to sell the note to a mortgage note buyer. The mortgage buyer then takes assignment of the mortgage note and receives payments directly from the property buyer. Everything is on the up-and-up, with fewer opportunities for mischievousness or outright fraud. The mortgage note buyer and person selling the mortgage note are happy, as is the original property buyer.

Of course, there are many similar scenarios in the world of more honest transactions. Not surprisingly, none of them have any relation to either Wall Street or the government.

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