Markets, Money, Mortgages, and Myths

Posted on Thursday, 16th June 2011 @ 05:47 AM by Text Size A | A | A

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“Deep Throat” had it right! He’s the guy who said, “Follow the money”. So regarding our current economic crisis, why didn’t we follow his directions; or perhaps, why did we stop following them so soon? If we ever got started, that is.

In any case, they didn’t have to track the dollars very far to blame the banks and investment houses since they were screaming for somebody, anybody, to bail them out. But then, why are the mortgage brokers and realtors appearing to escape almost any culpability? Notice I didn’t say mortgage bankers, but I did say realtor with a small letter ‘r’ – there is a difference between small ‘r’ realtors and capital ‘R’ Realtors, or at least so the capital Rs claim; but that is, of course, another story for yet another day.

Deep Throat may have gotten us started down the green brick road, but whatever investigation continues, it needs to include the street people. You know, the street people, the folks actually doing all the work, meaning the real estate and mortgage professionals who really do sell us the houses and really do sell us the loans.

Well, now there goes all my credibility – or at least any I might have acquired so far – since I just said that mortgage lenders sell us the loans. Trust me, I did not make a slip of the paper tongue, I really did mean to say, lenders sell us the money. Here’s why:

To their disadvantage, most Americans have been taught to think of a lender (usually in the guise of a loan officer or so the business card says), as some kind of gift bearing semi-deity. People believe the lender, or banker, or mortgage banker, or mortgage broker, or savings and loan representatives (oops, I forgot, those folks are long gone, gobbled up by banks during the early years of deregulation), is there to lend you money, not sell it to you. After all, you have been taught to believe you are buying a house by borrowing the money from the lender, and then using it to buy the house.

And that, dear home-buyer, is precisely what the lenders want you to think, and perhaps more importantly, want you to believe!

Off the street and behind the scenes, lenders don’t think of home-buyers as borrowers of money; they think of the home buyer as also buying the money, and even change their language to reflect it. When talking among each other, a lender discusses the “price” of the house and the “price” of the money. Because the lender considers money in those terms, and everybody else does not, they carry an enormous advantage over all other members involved in any real estate transaction.

But what advantage might that be, you say? Why it’s the one whereby the lender need not negotiate. Everybody else gets to, but not the lender. And why not, you say? Because only buyers and sellers negotiate, and after all, the lender is lending you the money, not selling you the money. Moreover, you as the buyer of the house are well prepared to bargain with the seller of the house, or with the realtors who are helping the seller sell the house, or even with the used car sales folks right down the street; all because they are selling something, not lending it – of which the pretentious grand financiers are more than well aware, and who intend to keep it just that way.

As someone once said in years long past and while in his full aristocratic glory, these “nattering nabobs” know, that if home buyers thought they were also buying the money they were going to use to buy their new home, they might be tempted to try to negotiate a deal over the price of the money they were going to use to buy their new home. Horrors, how awful!

So, mortgage lenders of any stripe, know they are well served to have borrowers believe they are borrowing money, and that the lenders are lending them money; and most importantly, the deception should remain. Lenders know lending is a transaction like any other; they understand it has buyers and sellers. Lenders know they are selling money, and they know the poor borrower doesn’t know he or she is actually buying money from them.

When purchasing a home the buyer buys from two sources: the seller of the house, and the seller of the money. In other words, he or she buys the home, and buys the money used to buy the home.

Home buyers, meaning borrowers (now understood to be money buyers), real estate brokers, home sellers, and almost anyone else who has ever thought about buying a home, know it will be a difficult, involved, occasionally deceptive, sometimes fraudulent, usually long, and always expensive transaction. The general public – meaning anyone not considered a real estate professional who intends to profit when some one other than themselves buys or sells a home – again, the general public, because they think they are borrowing money instead of buying it, have unfortunately, readily accepted another myth served to them on the proverbial silver platter by the folks called real estate professionals. (Now, now, calm down any of you real estate pros out there who might happen to be reading this, I promise I’ll exonerate you and be nice in a little while.)

This myth is so pervasive, even Bob Herbert, one of the op-ed columnists for the New York Times used it in one of his recent columns entitled, “Chutzpah on Steroids”. He said, “The family home is the largest purchase most Americans ever make”.

Boy, do people believe that one, even though it’s a real howler and a knee-slapper. The lenders love it! After all, they are laughing all the way to the bank. Oh, I forgot, they’re already there, they own the bank. Hmm, or have they already sold their bank to the government, in which case they’re laughing even harder.

The myth works because we have all been taught to believe we borrow money rather than buy it. But then, if we follow the money, certainty returns, because we know we are buying the money just as assuredly as we are buying our new home.

Thus the old saw saying the family home is the single largest purchase most Americans will ever make, is just not the way it is – no matter what the meaning of the word “is” is, or how often somebody claims to smoke a little weed without ever inhaling. (By the way, I believe the President simply misspoke when he claimed he never inhaled; I think he meant to say he never exhaled.)

Anyhow, back to the myths at hand: After all this dancin’ around on my part, the truth is, the family home is not the largest purchase most Americans will ever make; it’s the money. Meaning – the money used to buy the family home, is the largest purchase most Americans will ever make! Lenders know this, or as least some of them know this. In either case, the lenders are once again, laughing all the way to their bank.

Under normal market conditions, some of the lenders are having a much better chuckle than others. But now, perhaps it is more correct to use the past tense on the poor lenders, since it is almost three years after the mortgage bubble burst, and many of those lenders have long since gone, or (because we can’t allow the home builders to go unrecognized) faded into a sunset of their own construction.

When the mortgage markets collapsed several years ago, I wondered why anyone could possibly have been surprised. I called several old friends who were in the mortgage business with me in the 70s and 80s when these fancy financial vehicles then call collateralized mortgage obligations (later called collateralized debt obligations) were created, any of us could easily have told the new regime of financial experts the collapse was bound to happen. Underwriting had become non-existent. Too many people, legally or illegally, were making too much money. At least to some of us, nothing could have been clearer than this pending collapse of the mortgage markets. The world seemed to squirm, while some of us old codgers laughed, but unfortunately, not all the way to the bank.

Anyhow, be of good cheer, I and many others my age worked our way through the last mortgage crisis when interest rates for home mortgages hit 22%. First came Volcker, then came Greenspan. Folks still bought homes, the country survived, and will again.

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