If you think we are in a real estate bubble, you are wrong.
The first thing to consider is what caused our housing market to meltdown 10 years ago. The main culprit in this economic event was unregulated mortgage underwriting with loan officers securitizing unsound investment vehicles to unwitting consumers.
What does this mean?
I witnessed firsthand what happened. Every predatory loan officer during this period was only selling the highest paying commission product known as an interest only ARM (Adjustable Rate Mortgage). The fact that they could sell these unsound products to a retail consumer who is not considered affluent or sophisticated according to Federal Law Guidelines is a major contribution to our previous meltdown.
The second part of the causation of our meltdown was the ability to use stated income without verification along with not checking into credit utilization. What this means is that a cashier at McDonald’s could apply for a mortgage making $7 an hour. Even though they make $7 an hour, they could put down on the application they make $50 an hour.
Since there was no income verification requirement during the era, the bank would create a predatory loan, even though they knew a cashier does not make $50 an hour and give the cashier at McDonald’s a $300,000 preapproval.
The banks knew all along that the cashier at McDonald’s could not ever afford a $300,000 mortgage, and they had to make sure the individual made monthly payments on time for 6 months in order to receive their commission, so they put them in an interest only ARM for $700 a month.
This seemed like a great concept at the time. The cashier from McDonald’s got to live in a $300,000 home. They were able to make their payments on time because they were only paying interest, and after the 6 months mark, the loan officer got to keep their commission.
What was an externality of this phenomenon?
Demand outpaced supply, everyone could afford a new home, at least for a year, and the real estate market moved as much as 20% a year.
What ended the phenomenon?
The interest only portion of the ARM security ended, and that $700 a month payment turned into a $3,900 a month payment. The cashier at McDonald’s could never afford this, so they squatted and tried to use Right of Possession as a means to prevent being homeless.
This happened on a massive level, the government figured out what the banks did, and they used bail out funds such as TARP as a leverage tool to force banks to adhere to stricter guidelines. That is why we have to verify funds with 2 months bank statements, 2 years tax returns, and your most 2 recent pay check stubs before you can receive a preapproval.
That fixed the front end portion of our epidemic. The last part of our epidemic is the people stuck in their real estate position being squeezed out of their homes through increasing monthly payments. The only way to correct an ARM epidemic is to lower the Fed Rate to 0%, which is what they did.
This kept all the taxpayers stuck in ARM’s in an affordable situation because half of their payment is tied to the Treasury Note trading at 0%. It canceled out the profitability of the banks, and that’s why you saw the bank stocks tank over these years.
The next phase of the operation for the Federal Government is to unwind the ARM trade. They did this through HARP (The Home Affordability Refinance Program). They have been advertising this program for years, so that people stuck in ARM’s could refinance into a fixed rate with the Fed Rate at 0%. They have been doing this for about 10 years now.
This leads me to my last point. Now that they have everyone who was logical out of the ARM’s through programs like HARP, they no longer have to keep interest rates at 0% in order to sustain GDP. Therefore, heed these words, interest rates will go up from here.
Why is that?
They really want illogical people out of the ARM’s, so they will punish them by raising interest rates to force the necessity of trade.
