Phillip Guston ‘Untitled’
I avoid real estate commentary since others such as Calculated Risk do such a thorough job of covering the trade. Nevertheless, what the Federal Government is doing in the mortgage marketplace is beyond outrageous.
Easy Loans in Expensive Areas
By DAVID STREITFELD
Published: November 19, 2009
SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.
“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”
In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default.
In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.
Now the government is guaranteeing an average of six mortgages a week here. Real estate agents say the insurance is such a good deal that there will soon be many more.
Policy changes like the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo. With government finances already under great strain, the policy expansions are creating new risks for American taxpayers.The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the F.H.A. insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200.
“F.H.A. financing was a lost language in San Francisco, the real estate equivalent of Aramaic,” said Michael Ackerman, the agent who represented Mr. Rowland and his friends. “Once the limits were raised, smart buyers started calling.”
“It was kind of crazy we could get this big a loan, If a government official came out here, I would slap him a high-five.” said Mr. Rowland, 27.
If an official came out here, I would slap him!
It will be interesting to watch these smart buyers default. The two- unit building would need to gain 10% of $450,000 per unit, each year in rent to break even, if conventional rent ratios are followed. That is $45,000 or almost $4,000 per month. With the odds against staying employed at a high wage lengthening every day, it is hard to see how this building will ‘earn its keep’ at this inflated price.
Deflation is pitiless. There is NO hedge against deflation, not even gold; certainly not real estate.
With no skin in the game, Rowland will walk leaving the government holding the bag. The future taxpayers will simply refuse to pay. Sovereign default/repudiation and a currency crisis are baked into this transaction and the hundreds of thousands of others just like it.
The FHA/Ginnie Mae is becoming another Fed- like black hole, swallowing more and more value as it gets massively huger, contributing in its own small way to the thermo- nuclear annihilation of what’s left of American commerce.
Little wonder we cannot come to grips with our energy and (looming) climate calamities. Our best tools of capitalism and representative governance are turned against us. They have become robots running amok.
Here is more of the ‘great cashing out’ at work. In the equities markets, investors are turning margin into dollars as insiders sell puffed up stocks to ‘dumb money’. In San Fransisco and other newly hot property markets, property sellers are laundering their own mortgage loans into dollars the same way. The enabler in every instance is the US Treasury and the Federal Reserve.
The approach being used is talking down the dollar, manipulating gold prices – upward, not downward – and printing like there is no tomorrow. Rowland never got any of that FHA cash … he was simply the conduit. The seller got the cash.
Money laundering is a Federal crime under TITLE 18 > PART I > CHAPTER 95 > § 1956 of the US Code.
What is clear is the insiders know there is no future for business as usual. The speculators actions are more eloquent than words. Otherwise, the markets would behave as markets have done in this country since their foundings; they would reflect fundamentals. They would discover prices.
Instead, the government holds steady the gangplank … assisting the rats in their abandonment of the sinking ship of finance.