The Real Estate Crunch Has Had A Ripple Effect Throughout The Nation

Category: Finance.

The real estate crunch has had a ripple effect throughout the nation. With the recent Bear Stearns collapse, which was due in much part to real estate investors pulling out of the investment bank, many on Wall Street are just now realizing how deep the real estate fallout cut into our nation s economy.

Many banking and investing firms are now feeling the pinch of foreclosure and lack of investor confidence. Unfortunately, there are still many problems looming in regard to the fallout from the real estate markets for financial and lending institutions. Ironically, the proposed regulations would only give force of law to what many people would consider good business sense, reinforcing the adage, "you can lead investors to the proper information but you can t make them think. " Just about everyone in the disastrous sub- prime mortgage deals can and has been blamed by the media pundits for putting the nation s economy in such a bind. Hopefully, there will soon be more federal or state regulations in place to prevent lender such misfeasance or negligence that led to the 1987 and the most recent national real estate crashes. Secretary of the Treasury, Henry M. The subject of this article focuses on the prospect of new federal regulations, which would give force of government law to what some presumed should have been under the purview of rational market self- regulation.

Paulson, summarized the overwhelming criticism of the practices that led to the current real estate markets when he said, "poor judgment and poor market practices led to mistakes by all participants. " One part of the puzzle that has recently been addressed is the practice of banks hiring their own real estate appraisers to evaluate, the value of, and inflate homes in order to approve loan amounts that exceeded the fair market value of homes. Traditionally, home loans were considered some of the most reliable repayment loans on the market. In brief, people who did not qualify for prime loans were extended lines of credit towards purchasing real estate, so long as the real estate was worth the investment. With the advent of sub- prime zero- down loans the dependence upon past market performance existed only on paper. Lenders figured that real estate values were going to go up regardless of the business climate, because home values had been rising for such a long time that it was considered a good investment. The belief was that even if a few borrowers would go into foreclosure, the market demand for real estate would outpace the anticipated losses from such foreclosures. Also, the ostensibly low percentage of people who would only be approved for sub prime loans was an added incentive to extend the line of credit.

Home loans operate in such a way as to require the interrelationship of many purportedly disparate functionaries. In the past few years many banks owned the real estate appraisal firms in order to get a value for the house set home prices higher than their actual fair market worth so that the banks could approve higher loans. In some jurisdictions lenders like mortgage companies or banks must work with real estate appraisers. This type of fraud is disturbing on many levels. A Presidential Financial Committee headed by Secretary Paulson and Federal Reserve Chairman Ben Bernanke claimed to have made recommendations that, in the words of Bernanke, "constitutes an appropriate and effective response to the deficiencies in our financial framework that contributed to the current turmoil in financial markets. " However, we have yet to see any concrete proof that these suggestions will crack down on lending misfeasance and potential fraud. As of yet, there is only a discouragement of lenders owning the appraisal companies that evaluate the real estate properties upon which loans are being sought. We can only hope that our best economic advisers have come up with a list of suggestions that will tighten the reigns on predatory lending and fraudulent realty appraisal.

The financial advisors to our current executive branch will have much work ahead if it truly wishes to reverse the disastrous effect of the sub prime loan implosion. There are many loopholes to be closed, and so long as our economy has thrived on entrepreneurs exploiting these loopholes our government has been reluctant to shut them down.