Editor's Note: I would like to introduce you to our new editor, Steve Christ. Steve is an expert in the housing market, something Wealth Daily has been quiet about for years. Quite frankly, except for owning our homes, none of us are real experts in real estate.
But Steve is.
In the past 5 years, he's closed over $200 million in loans. However, as Steve is going to tell you, the gravy train is slowing down. And Steve believes that an epic bubble in housing was created by the unspoken lending rule, lend or perish.
Lend or Perish: How Mr. Moon Got Six Loans for $500,000
By Steven T. Christ
You've heard the advertising countless times…"when banks compete you win." But do you?
One company, Lending Tree, would certainly have you believe that… and to a certain extent it is true.
In fact, the commercial that shows anxious bankers falling over themselves to sign a deal is both amusing and effective as it drives home the simple premise that competition is a good thing.
But while competition is undoubtedly good, competition in the lending industry can lead to dangerous excess.
And dear reader, America is the land of excess. If you doubt me, go to the grocery store and see how many different brands of pickles you can buy. Dill suits me just fine.
I can tell you from firsthand experience, being a lender is not any different than being Ford, Target, or Best Buy. A lender must move a product in order to turn a profit. And just like any other business, losses or lackluster earnings are simply not an option. These inevitably lead to closings, layoffs, and falling stock prices.
To keep this from happening, a lender, like any other businessman, has to compete for clients in the open marketplace. And in doing so they have immersed themselves in an arena that revolves around one simple premise – lend or perish.
And that's the dirty little secret of the loan business: Banks not only want to lend you the money, in fact, they have to.
But what makes a bank or lender different than any other business is that their bread and butter is loans. They don't sell cars, tools, or patio furniture. At their core they sell money and selling money in America is a highly profitable endeavor.
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The Dark Side of the Housing Market
Because of this, the competition in the credit business is intense. And like any good business, lenders have adapted their programs to meet the needs of borrowers everywhere. This has led to some potentially dreadful results.
Let me explain.
In their zeal to loan money to everybody and anybody, literally everybody and anybody can now qualify for the loan of their dreams. In fact it has now gotten so bad that practically any loan officer would tell you that they could qualify a ham sandwich if they had to.
I'm not kidding. As long as the ham sandwich had a social security number, it could be done.
Take for instance one such ham sandwich named Johnny Moon Sr. At the time of his death he left behind a watch, a flashlight, and wallet containing the grand sum of $1.00. In short, he was dirt poor and homeless.
But despite his untenable financial situation and his lifelong mire of poverty and drug addiction, Mr. Moon died with a startling secret: He had qualified for and received a total of six loans to purchase Florida real estate at a cost of over a half a million dollars.
Now how Mr. Moon was able to pull off this feat is murky at best. He certainly may have been an unwitting pawn in a flipping scheme, but the truth is he may have indeed been a legitimate real estate investor.
The records that exist, however, do make two things abundantly clear: Mr. Moon was able to attend all of his closings and he somehow managed to qualify for the loans. But regardless, how did he manage to pull it off? I mean, Mr. Moon clearly had no business borrowing money and buying homes. He was homeless!!!
But borrow money and buy homes he did. And as startling as his accomplishments were, Mr. Moon simply could not have pulled off this feat without the help of a lender with an insanely liberal loan program that was desperate to do some loans.
It is here where the competitive excesses in the lending business have created a slippery slope for borrowers everywhere, creating the speculative bubble in housing we find ourselves.
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The stock's already up more than 261% since March! But with major Defense contracts already underway and the drooling interest from the Big Three Automakers, I think it's going to go a lot higher
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You see Mr. Moon was not alone. Millions upon millions of homeowners happily joined him at the trough of easy competitive credit. In doing so, countless borrowers signed onto loan programs that were radically different than any loan that they have ever held.
In short, a brave new world unfolded… and the conventional 30 yr. fixed rate became a loan of the past.
In its place, lenders simply created new programs that could qualify buyers that otherwise wouldn't qualify for loans under the old guidelines.
Furthermore, these programs were also designed to give borrowers the lower monthly payment and the maximum purchasing power that they needed to chase the price of housing higher and higher.
In creating these new programs, however, these lenders essentially trampled over years and years of banking wisdom in their zeal to close loans. Doing so, they have, in practice, completely tossed aside the stricter but time proven lending guidelines that protected borrowers in the past from seeking more than they could truly afford.
As a result, interest only loans, adjustable rate loans, stated income products, and negative amortization products have suddenly become the borrowing tools of choice as loan officers everywhere juggle the numbers to fit their borrowers into their newer but riskier boxes.
To further fit the bill, 100% financing and dramatically altered debt to income ratios-some as high as 55% -are also being utilized as lenders have become even more creative in their efforts to sell loans. While these programs may meet consumer demands, they have only further removed the guardrails that have protected consumers from themselves in the past.
Sadly, these loans have created an untold number of ticking credit time bombs on the marketplace. In California, for instance, these types of loans made up a stunning 60% of all of the loans closed last year.
In due time these and countless other loans will create financial problems nationwide as the borrowers that signed onto these loans will find themselves increasingly hard pressed to get by as their payments skyrocket. For many this will ultimately lead to foreclosure.
To make matters worse, these loans also deepened the speculative bubble in housing. Since these lenders had effectively removed the guardrails, anybody and everybody became able to qualify for the loan of their choice. And of course, as housing became the hot new investment anybody and everybody did get loans. As a result, the traditionally illiquid housing market suddenly became liquid on a flood of easy money.
This caused housing to skyrocket. But it did so not because of rising incomes or an increase in population, but due solely to the flood of easy money provided by countless lenders eager to do business. And as lenders and consumers both embraced maximum loan amounts, that purchasing power ended up being expressed in the sale price of every home on the market which further deepened the housing bubble.
But despite these facts the money machine churns on. It is after all, what they do. And not surprisingly they continue to create new programs to lure new borrowers.
But as the dangers of these loans and their consequences are exposed over time, the foolishness of these loans will become impossible to ignore.
In my home state of Maryland, home sales are down 22% from a year ago. This is just the start.