We all know someone who has lost their home. Nevada has been hard hit in this recent downturn. Many pundits blame Wall Street for generating "investments" that bundled home loans together to minimize risk.
Bundling averages risk out over many loans so that one bad loan does not bankrupt the small investor.
The real culprits in the current mess are bad loans. Back in the days of Jimmy Carter the 95th Congress passed the Community Reinvestment Act which "requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation."
Consequently, financial institutions have for years been forced to make homeownership "affordable" by giving loans to people who really could not afford them. For example, banks that did not make their quota of affordable loans were often told they could not open a new branch until their numbers came into line.
Making "affordable" stimulated the home real estate sector. This made the affordable loans okay, since rising home prices helped everyone, including those in over their heads. But, like any chain letter or pyramid scheme, this came to an end.
And, it turns out the the groups most adversely affected are those who could barely afford to meet loan obligations; the very group that CRA was intended to benefit. Of course, many others have since been hurt too, especially our taxpayers.
On first look, Wall Street did bundle those loans and sell them as viable investments.
Basically what they had a hot potato that they had been handed by government regulations. Bundling allowed them to pass those hot potatoes around so they did not have to hold on to them.
Eventually the hot potato either cools off, or it gets dropped.
Many times in the decades since CRA, the potato cooled off and we were able to go on. This time the potato was dropped, and it made a mess.
As Nevadans, we are only too aware that our real estate market is in bad shape.
But, just as all pyramid schemes eventually collapse, our real estate market will return to vigor. Anytime you can purchase real property for less than the cost to build, it is a long term bargain. Our market is attracting investors for that very reason. It is too bad that this results in families least able to afford home ownership to become renters. This is the direct result of government having too heavy a hand in the market. The heavy hand encouraged affordable loans, gave us loan payment interest tax deductions, and $500,000 tax deduction on home sales profits. Unfortunately, when homes are owned by investors, no one really gets the affordable loan, the home sale profit deduction, or the interest deduction (interest is really paid by the tenant, but he gets no deduction, and the investor just takes it as a cost of doing business).
Robert Dickerson is a Zephyr Cove resident and a 26-year-real-estate veteran, is a Nevada and California licensed real estate broker
