Money! Money! Money! Money!

More than just the title to an O'Jays song, money is an important commodity in the real estate business. Otherwise we wouldn't have a home ownership rate approaching 70% of our families. That's an astonishing record even among large industrialized countries.

Mortgage rates fluctuate bases on the cost and risk of capital. Economic factors and government policy are additional primary determinants to mortgage rates.

There's been lots of news about the "sub-prime" capital markets and how they may be affecting foreclosures, and other capital markets - including the "prime" and "alt-prime" markets where most homeowners get their home mortgages. While it is TRUE that there is some fault with lenders for being too "lenient" with "no-doc" and "stated income" loans, the primary fault lies with the borrowers who may have "obfuscated" the truth. Newspapers and other media are quick to "expose" lender culpability for making "sucker rate" loans, some of which shouldn't have been made, they don't talk about the actual fraud committed by borrowers who lied about their "stated income."

There were great stories just a couple of years ago. I call them the "Robin Hood" stories. Bell-hops buying $250,000 condos and "flipping them at $50,000 profit per unit. How do you think the Bell-hop go the dough, on his salary? Or, the $30,000 a year assistant manager who bought 5 houses on an option with borrowed money, and flipped them into $125,000 in profits; quit his job, entered the investment business as an "investor," and proceeded to write a book about "How I made a Million Dollars" in my spare time on my dad's 401k money. These two are not actuals, but the stuff is still floating all over the internet. You know the ones I'm talking about.

Now it's time to pay the piper. Homeowners bought in too, with 1% "sucker rates " that amortize negatively, rising each year until the rate becomes exorbitant in order to pay back the negative amortization on principal.. Why did they do it? For many reasons. Some wanted to buy a bigger, better home to "get in the game." It doesn't take many brains to figure out that 10% a year appreciation on a $140,000 house is increasing in value at $14,000 a year, initially, but a $640,000 house appreciates at $64,000 a year, increasing the perceived "yield" substantially even with negative amortization on a 1% loan compared to a full rate loan on the lower priced home. So a lot of amateurs thought they would become overnight millionaires - substantially "encouraged" by real estate agents, of course.

Now, these amateur speculators are crying foul! It's not MY fault they say. It's the big bad lenders who "never told me...," with some encouragement by lawyers in some instances. What do you think the poor downtrodden buyers who "obfuscated" the truth are going to get when the class action suits are filed? You guessed it. They'll likely get 3 free home seminars, and half an insurance policy from a government insured agency while the attorney firms pocket most much of the settlement cash. You know, I have never figured out why the public and government entities worry so much about real estate agents getting a 6% commission, which they almost never receive anymore because of the high incidence of commission halving between brokers because there is so many listing now co-brokered - yet when an attorney takes 40% of a doctor's malpractice settlement from a maimed for life patient, that is OK. It's just me I guess. I just never understood it.

Now your government wants to "straighten this mess out" and make the big bad lenders PAY. They will tighten up guidelines and scrutinize every loan. Several new layers of restrictions and rules will be enacted, etc., etc. So, what's the bottom line? The costs are just going to be passed along to the consumer who borrows the money. The more "lenient" the terms are for borrowers against the big bad lenders, the more costly loans are going to become. Why? It's no secret. It's the Golden Rule. Those who have the gold rules. If you want to borrow money from someone who has some you get to play by their rules, or they'll place their money elsewhere.

Certainly there is no room for fraud from anyone. Defrauders should go to jail - lenders and borrowers alike. But legitimate capital needs to continue to be available in the market otherwise, capital dries up, and there is no reasonable money for mortgages. I actually was in business when interest rates were 18%. So, it can happen.

Chris Michaud