Tuesday, July 13, 2010

The Housing Crisis: Investors

This NY Times opinion piece by Paul Reyes left a bad taste in my mouth. What Mr. Reyes seems to be missing is his own point. Alan, the savior of neighborhoods, is simply continuing a streak of predatory lending and crap renovations. The result will be owners with limited incomes who will need to make major repairs down the road. Guess what? These homes have no equity so these new homeowners will have to pay out of pocket or get more questionable lending to make these repairs. It seems the cycle continues on and on.

From the article:

True, the very speculators who helped lead this economy into a crisis are becoming an increasing part of the solution, especially as banks continue to shy away from financing, preferring instead to work with “all cash” offers. But if banks persist in their financial stubbornness, you could very well see such investors filling the financing void for a portion of the housing market — a longstanding trend known as “owner financing.”

Here’s how it works: Alan buys property on the cheap — he sets his threshold at $50,000; other investors I’ve met set theirs even lower. He makes a few repairs (or not, depending on the condition of the property) and puts out a sign to attract a buyer.

In many cases, in poor and blue-collar neighborhoods especially, the would-be homeowner has trouble getting traditional financing from the bank. And this is where Alan and others fill the void left by the banks, financing a mortgage or even leasing with an option to buy. In the past, Alan had success financing mortgages to new buyers for a low down payment (around $5,000) and a reasonable rate of interest (around 10 percent). To protect himself — and to give him a return on his money so he could reinvest it — he’d set a balloon rate, in which the new buyer was given three to five years to find a conventional mortgage before the entire sum on the house was due.

I firmly believe we don't have a housing market currently. We have not bottomed out and new buyers looking at rehab of foreclosures are going to loose out in the end. We need some national leadership right now and a program to support it. More tax credits for first time home buyers are not the answer.

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