Repeating Our Past Mistakes

December 31, 2012 by · Leave a Comment 

I’m currently about two-thirds of the way through reading a book titled The Greatest Trade Ever by Gregory Zuckerman.  It’s the story about hedge-fund manager John Paulson and his ability to make over $15 billion betting against the housing market in 2007.  Like many, he had sensed the housing market was running out of control and was able to time his wagers against housing perfectly.  These trades, called Credit Default Swaps, provided the vehicle to basically purchase insurance against mortgage defaults on subprime loans while the price was low and sell when everyone realized they were going to loose their shorts on housing. 

The book does a great job of detailing what the folks on Wall Street were thinking, the anaylsis of housing markets on a macro-level, and tendancies and trends of middle-income and high-income Americans as they financed and re-financed over and over again to wring every ounce of equity out of their value-increasing homes.  As I’ve been reading the book, I’m astounded at how out of touch Wall Street and D.C. are with the realities of the bulk of us Americans.  Housing colleagues, co-workers and board members of mine were beginning to question the irrationality of the market over four years ago.  A lot of people in our communities were mis-lead and mis-informed about the types of mortgage products available to them. 

About a year ago we were working with a City of Lakes Community Land Trust (CLCLT) buyer and she had found a foreclosed home that she wanted to buy with our assistance.  As we learned more about the potential property, we recognized the previous name on the home’s title work.  We realized it had been owned by a another woman several years ago who had chosen to purchase her home via a shady adjustable-rate mortgage versus using the CLCLT’s affordability investment and a fixed-rate mortgage.  She lost the home to foreclosure within 2 years, the neighborhood gained a vacant property, and additional equity left our community as a result of her being mis-lead.  This story has been repeated millions of times over across the United States. 

This book I’m reading doesn’t go into who’s being most injured by the housing crash, but with confidence I know in our community it’s those who can least weather the housing storm who are suffering most.  I believe we will look back on the period from 2007 to 2012 as yet another blemish in our history as the divide between the “haves” and “have nots” will have grown more significantly during this short period than any other period in time.  I might be wrong, but suppose we’ll see.  It doesn’t take a New York economist or a D.C. policy wonk to understand how quickly wealth and equity that had taken decades to build in our communities was lost because we lost focus and became irrational.

I remember in a Housing Conference planning meeting about 4 years ago getting a bit uppity about wanting to have a session on “shady” mortgage products for low-income households.  A local HUD representative was also at the table and was very quick to inform me that there were NO shady mortgage products, but rather some might be more appropriate than others.  True.  And not so true.  Tell that to the single mom who wanted a safe and secure place to raise her kids at an affordable price and was mislead by the mortgage broker into thinking her income would support the adjustment on the mortgage rate.  People want and need hope for a better tomorrow, but we can’t afford to allow ourselves to make these same mistakes again.

Over the past six years, the CLCLT has now assisted 115 low-income households into responsible homeownership.  There has been one unfortunate instance where a CLCLT homeowner as lost their home to foreclosure (actually, they just walked away from the home) over that same time period.  By comparison, the average foreclosure rate in the City of Minneapolis over the past two years has been near six percent.  We’ve always required fixed-rate, fixed-term mortgages…even when it wasn’t too popular to do so.  

 

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