MCAR Blog & Forum

By Sandy Haney

CEO, MCAR

Below is a letter written by one of our REALTOR® members and former MCAR Director, Eugene Ferris.  Eugene wrote of his concerns regarding the loose lending practices in January, 2005 and sent it to three of our local newspapers. His prediction was six months prior to when the market started its downturn.  Like many of our members, Eugene saw the train wreck about to happen and tried to send out the warning.  MCAR did the same.  We saw and heard horror stories regarding lender fraud, over inflated fees, loans being made to buyers who certainly would not be able to keep their homes.  We shared that information with regulatory agencies, law enforcement offices and anyone else we hoped would be able to correct the direction in which we were headed.  Unfortunately, due process is much longer than the loan process!

Letter from Eugene, January 2005

As I read the reference to Salinas in last week’s Wall Street journal article on housing affordability, it struck me that blind trust in the short term real estate value and some mortgage lenders’ practices are going to hurt a lot of people throughout our country.

In 1849 the word went out that gold, and therefore fortune, was readily available for those brave souls who reached California. Some, very few, indeed prospered from their time spent stooping on a river bank in the Sierras. But most who toiled in summer heat and winter frost went broke and scores stayed broke for many years. The people made rich by the gold rush were those selling the dream of the fortune, mineral rights dealers, and supply brokers of simple shovels, pans and goods. It’s now important to look at the period with vision clarified by time, and then apply those lessons to our local housing train chugging down the tracks in the fog.

Owning a home changes everything; options for the future immediately expand, the vision of retirement becomes considerably clearer, education options for your children broaden and provide generational improvements, not to mention the huge benefit it has for growth in a participating society that has a vested interest, and our revenue basis. But it is so important that buying a house is in fact, building equity and a future. Paying interest only on a home loan is gambling three ways against the odds: A) That your home value goes up; B) That your personal income goes up; and C) That the prevailing interest rates stay low. A and B may go your way, but the obvious news is that sooner or later interest rates are going to rise. As referenced in the WSJ, 60% of home buyers in Salinas during 2004 have interest-only loans.

The secondary market that buys mortgages and dictates the terms of lending policies may well reel in financial pain if the move in interest rates is up and quick. But the real sufferers of such a move will be the thousands of new home owners left financially marooned, and a real estate market left wounded for years. The secondary market must create home ownership options that provide stability and affordability, such as longer term loans with no prepayment penalties. The government authorities should compliment such home ownership opportunities by sensible planning for generations to own their own homes, easing zoning and arduous building processes.

Like man of the mineral rights dealers and supply brokers of the 49ers, the mortgage lenders of today know that what they sell to dreamers for home ownership probably won’t deliver. Worse still, their tools are going to cause big trouble to some home owners if A, B or C don’t happen. Some mortgage lenders may have a lot to answer for in the coming years. Are they doing anything illegal? No. Do they have an obligation to look out for the interests of their clients? Yes, and I know some that do that every day, every client. But others have a churn and burn production mentality that will crush the dream of many and hurt all of us in the long run.

Eugene Ferris