THE FORECLOSURE FOLLIES OF 2008

Googling "foreclosures" on Feb. 14 showed 49.8 million hits. Googling "mortgages" showed 188 million hits. Obviously, something is on the minds of the American public. Our guest expert, Hubert Hindsight, retrospective speculative historian extraordinaire, examined this obsession in his classic book, "What Were They Thinking?" which was published in the year 2020. Here is what H.H. said in the book. "It was like a tsunami. Suddenly, in late 2007 and into 2008, millions of homes of Americans went into foreclosure proceedings. That meant that those millions of citizens could lose their homes. What would this mean? The media spun horror stories of families thrown onto the streets...of lenders in dire financial trouble as a result of their loans going unpaid....a glut of empty houses on the market putting the brakes on new housing starts and all the jobs that go with it. Indeed it was cause for concern. But there were aspects of the problem that weren't fully explained, and full explanations could have reduced the national anxiety many-fold. Here are some examples: SPECULATORS AND THE GREATER FOOL THEORY A huge number of foreclosures were the result of wild and crazy speculation gone wrong. The number of these was impossible to gauge because the guilty parties were not going to admit that they had been foolish gamblers. No one likes to do that. In the early years of the 2000s there was money galore for the borrowing. That enticed developers to start new housing projects---many more than the market really demanded. Abundant money also provided a field day for mortgage lenders: "No Down Payment" loans were there for the asking. "Teaser" interest rates of 1% were offered on every street corner (After the introductory period those rates would soar to double-digit levels , but borrowers paid that no mind.) Appraisals were made with blindfolds, and verification of income was ignored. This was fertile territory for speculators. They bought up houses helter-skelter, using more and more borrowed money in the process. They were operating on the Greater Fool Theory, which states that if you buy something at whatever price, sooner or later a Greater Fool than yourself will come along and buy it for a higher price. This is all fine, until you run out of Greater Fools. That's what happened in 2008. Higher interest rates and an excess of loans gone bad brought the housing market crashing down. The supply of Greater Fools had been exhausted. But the speculators didn't care! The houses had cost them nothing---and many had already profited nicely from the game---so they could walk away from the deals. Let them go into foreclosure. Let the greedy lenders eat the losses. "I'm outa here." So much for Act One of the Foreclosure Follies. "FORECLOSURE? WHAT MEANS FORECLOSURE?" Another huge but uncountable source of foreclosures came from people who, a year or two earlier, had never even heard the word "foreclosure," let alone knew what it meant. They bought homes and signed loan agreements that they didn't understand. When they couldn't make the payments the lenders started legal actions called "foreclosure." Word spread rapidly that if you had bought a house with little or nothing down, and you had lived in it almost for free for a few years, and you could no longer make the payments, just walk away and give the key back to the lender. No harm. No penalty. No problem. You've lived virtually rent free, and so the house goes into foreclosure. So what? That's the lender's problem. (Their ruined credit history will come back to haunt them sooner than later, but at their foreclosure party they could care less about that.) THE PROPERTY PIMPS All of this buying and lending was fueled by real estate agents---a few among the many legitimate ones---who smelled a fast buck in the game. They enticed speculators with lures of "can't miss" big profts. They lured the unwary home buyers by failing to adequately divulge the hidden traps in their loan agreements. They wooed developers into building more houses than the market really need in order to create more inventory for them to broker. As word of the fast buck possibilities spread, peopel who were otherwise gainfully employed as car salesmen, waitresses, teachers and the like, gave up their jobs to get real estate licenses. This excess of agents stirred the pot to an even greater boil. When the bubble burst---and they had spent their real estate profits and their life-savings trying to buck the collapse---they had to start looking again for jobs as car salesmen and waitresses and teachers. THE MONEY MEN Countless Wall Street Suits bought their first class air tickets for London and Hong Kong and Dubai and Singapore and all points in between to sell dubious deals tied mortgages to greedy buyers abroad who knew next to nothing about the exotic securities that the Wall Streeters had created. They were aided by the very influential Ratings Companies who bent their standards far enough to designate sour loan packages as sweet. THE MEDIA If you sell advertising space or time, and you're making a bundle of money from the real estate and home loan industries, you wouldn't want to upset those big advertisers by saying precautionary things about the rapidly growing housing bubble. That could cause them to stop advertising. That would mean less income for you. That would be bad. So don't do it. Thus did greed trump knowledge yet again. THANK HEAVEN FOR THE POPULATION GROWTH At the time this was going on, the population of the U.S. was about 300 million, and growing at roughly two percent net per year. That's six million new Americans annually, and with an average family having around three people, we're talking two millions homes per year just to accomodate the newcomers. In due time, the population growth would absorb the excess of homes in 2008, and would make way for new building to resume at a less insane pace. Today, in 2020, it's still too early to tell if the Americans learned a lesson from all of this."