Following an unprecedented boom the U.S. housing market in 2007 underwent a *severe* correction.
Existing and new home sales dropped sharply and are at their lowest levels since 1999-2000. Median home prices across the nation basically were flat, but prices dropped sharply in several speculation-driven pockets.
Foreclosures increased. There are now roughly 150,000 additional bank-owned properties across the nation.
It’s a buyer’s market, that’s for certain.
Airheaded liberals in the media in 2007 discovered subprime mortgages. Not two weeks passed without front-page, above-the-fold headlines couched in the most negative and misleading terms practicable.
What actually happened out in the real world was the following: (1) ignorant and feckless subprime borrowers spent the better parts of 2005 and 2006 signing up for loans they had no chance of affording; (2) overaggressive retail and wholesale lenders spent the better parts of 2005 and 2006 making or purchasing 100% financing loans to debt-ridden borrowers without even verifying their stated incomes; (3) overaggressive and highly-leveraged speculators spent the better parts of 2005 and 2006 pouring money into mortgage-backed securities tied to 100% financing loans made to risky borrowers.
Not a good combination.
Neophyte and in some cases fraud-driven mortgage brokers did not help matters. Lazy and in some cases fraud-driven real estate appraisers did not help matters. Brain dead analysts at the national credit rating agencies, Moody’s, Fitch and S&P — responsible for high ratings and thus high prices of risky mortgage-backed securities — certainly did not help matters.
The subprime mortgage markets now have returned to the ways in which they previously had functioned for decades: If you have a lousy credit history and you want to purchase a home you’re going to have to put a minimum of 10-20% down in cash and you’ll have to provide — duh — some type of verification of your income or other assets. Furthermore if a bank wants to borrow a ton of money for which the collateral is ownership of groupings of subprime mortgages it’ll have to pay much higher interest rates to compensate for the substantial risks inherent in that collateral.
There was, of course, political fallout:
— The media/Democrats in Congress have done what one should expect: they’ve drafted nanny state legislation that’s so misguided you’d have to be drain bramaged not to oppose it.
— The Bush administration took the unnecessary step of nudging several major mortgage lenders unilaterally to alter the terms of existing adjustable loans, thereby to avoid a spate of additional foreclosures. This was unnecessary because mortgage lenders for decades have taken various steps of their own accords — forebearance, short sales, etc. — to circumvent foreclosures. Furthermore, and to be quite blunt about it, the lending and real estate markets would be best served if every numbskull who signed up for a mortgage loan they couldn’t possibly afford went through the foreclosure process. The general public needs a good swift kick in the ass, not a reasurring wink and nod.
— The Federal Reserve pumped a massive amount of liquidity into the lending markets. Hopefully that won’t bite the economy on the flip side. Time will tell.
There is, of course, the future:
— Instead of hundreds of subprime lenders out there chasing loans there will be roughly 30 wholesale lenders and 6-8 major retail and portfolio lenders in the business of underwriting subprime mortgages. The secondary markets for subprime mortgages — where loans are purchased in bulk and also packaged together as investable securities on Wall St. — will be risk averse for a long time.
— FHA and Fannie Mae and Freddie Mac will be more involved in the subprime markets than previously. That’s *not* a good thing. FHA is a public-money loan insurance program. Fannie and Freddie are government-sponsored bulk buyers of mortgage loans.
— The inevitable overregulation from the media/Democrat Congress and individual states will do more harm than good over the long term.
— In 2-3 years spacey liberal Democrats in the media and on university campuses won’t know subprime mortgages from Subway sandwiches. By then they’ll long since have moved on.