Attorney’s are now preparing for the legal battles that will ensue from this dramatic fall out. As the economic picture becomes clearer and the new regulatory regime is put in place, lawsuits are sure to follow:

SubprimeLawyers [org]
SubprimeLaw [org]
SubprimeAttorneys [net]

After deciding not to put these domain names to use, I am putting them up for sale on GoDaddy.com. The reserve price is $50, but feel free to bid as much as you want

…At least when it’s the banks doing the grading. An informed public keeps the wheels of democracy and capitalism greased. However, financial illiteracy still plagues many in the “middle class.”

Underlining the need for reform in schools, disgruntled and desperate borrowers are turning to the courts for help in an effort which should serve as a warning; and if in doubt, just look south of the border where a wave of socialist reformers have recently been swept into power:

“Across the nation, anger and litigation are growing against the tactics of subprime lenders, who offer easy credit for homes that are turning out to be too expensive for millions of Americans now that mortgage rates are going up.”

The King of Consumption or the Queen of Denial
The recent run up in asset values was largely influenced by the easy money atmosphere which prevailed following the economic downturn in 2001. It’s really just a result of basic supply and demand:

1. Cheap money and loose lending standards flood the housing market with buyers (many of whom were never truly fiscally viable)
2. Multiple bidders compete for limited goods (homes) and prices rise
3. Builders struggle to keep pace, resulting in a supply glut once rates rise and standards tighten

A simple analysis by anyone looking at the loan types these “boom” buyers used, could’ve concluded with confidence just when all this trouble would begin.

Some of the most popular loans during this period were ARM’s. Such mortgages typically have rate adjustments (per terms of the note) based on some index plus prime after a fixed period of time (frequently 2 to 3 years). 2007 is the year during which many homeowners will feel that pinch according to various reports.

Coming to Terms
You could argue that many believed rates would stay low, but this is major folly at best. The simple fact that interest rates were at all-time lows should have given many pause. It wasn’t just laymen who fell into this trap; as the WSJ noted in an article last year; Lenders Try to Keep Mortgage Boom Alive:

“More than $300 billion of ARMs issued to borrowers with good credit will begin resetting over the next two years, according to Lehman Brothers Mortgage Research, with $718 billion more of these loans resetting in 2008 and 2009. An additional $507 billion of ARMs issued to borrowers with poor credit will reset over the next four years.”

This over-exuberance may just be a cultural thing, but the best way for government to impact culture is through our public school system, not with laws and regulations limiting democracy and capitalism.

Back in 2005, it could be argued, that even Greenspan got in on the irrational exuberance:

“Lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately,” he argued at the height of the housing boom.

While Mr. Greenspan may have been right about the ability of lenders, I guess that when a final decision is left to human beings, reason and reality aren’t always the best of friends. It must be said, when enough demand exists for something, you can be sure that some go-getter will be right there looking to make a quick buck; even to the detriment of others.

Strong Minds Break Chains
If you take the loan of your own volition, sign up for the class, the lender has the right and the responsibility to hold you accountable for your financial literacy, or lack thereof. Even with these challenges, we should not be deterred – Demand for things that society agrees are “unhealthy” can be minimized, but only to the extent we successfully use our resources to educate the public. In the end, it’s the responsibility of the individual to make the right choice – it’s society ‘s responsibility to provide access to the tools for making that choice.

“Yet without a well-informed public, our liberty itself is in peril.”
– Thomas Jefferson

Related Resources
- Real Estate Finance In-Depth, a retrospective (.pdf)
- Annenberg Institute for School Reform
- TIME.com: How to Bring Schools Out of the 20th Century
- Federal Reserve | Personal Financial Education
- The Wall Street Journal Classroom Edition
- State of the Nation’s Housing 2006 | Harvard JCHS
- Residential Mortgage Market in 2007 | MBA
- The Fed’s Consumer Handbook on ARMs

[UPDATE - 3.22.07]
Debating government intervention on Kudlow & Company tonight was Robert Reich, former labor secretary under Bill Clinton. The falseness of his heart was abundantly clear; if not outright frightening – especially given the position he held…I suspect this may have had something to do with Hillary’s comments on the mortgage market.

Watch the debate between the Dynamic Duo.

New website, postlets.com (currently in beta), streamlines the process of placing classified ads across multiple websites. Here’s a list of the sites they currently work with to eliminate those reduntant practices of yesteryear:

craigslist
backpage.com
LiveDeal
Google Base (automatic submital)
Oodle (automatic submital)
Trulia (automatic submital)
Propsmart (automatic submital)

Real Estate agents have lost some of their value with a site like Postlets; but they may not be the only ones who may need to be concerned. Listings are created in one of three categories: cars & trucks, rentals, and real estate.

More Features:

Don’t worry about a steep learning curve; they claim the service is so straight-forward that even a monkey can use it, but I don’t suspect we’ll see many listings from Chiquita any time soon.

I’ve also scanned their privacy policy and it seems that they are playing fair, here are a couple of snippets that I thought might be cause for some minor concern:

If at some point Postlets sells all or a portion of its assets, or merges with another entity, user information is an asset that may be transferred or acquired by a third party. We will notify all affected users of any such transaction, and users will have the opportunity to retrieve their user information and cease usage of the service…

Postlets will never sell, rent or share your personal information with any third parties for marketing purposes without your express permission.

I’m looking forward to having an excuse to use this valuable new site. It’s a truly useful tool for real estate agents, for-sale-by-owners (FSBO’s) & anyone else looking to syndicate their products.

Many recent home buyers bet the house (literally) on expectations of continued low interest rates and dramatic appreciation gains. Many believed that a new market reality was emerging. This was due in large part to factors associated with ‘globalization.’ Here the prevailing wisdom said that greater liquidity in capital markets would put a cap on inflation concerns and that low rates would persist ad infinitum. Wow; they couldn’t have been more wrong. Energy, massive federal debt, and politically destablizing factors were somehow left out of this equation. Here are a couple of thorough articles that may finally help put this argument to rest (you can tell that ‘PIMCO’ – in the first article – has a good deal of experience here):

Bond giant makes ‘good case’ for real estate slowdown

Foreclosure Inventory Up Drastically, Report Says

I couldn’t have said this better myself…in fact, I probably wouldn’t have even come close. If you’re in a pinch there are a number of resources I’d like to recommend…I’ll discuss those in a later post though.

[UPDATE: 03.02.2006]

The evidence mounts: Home-price growth hits the brakes

Seattle-based Zillow, which raised $32 million in funding before launch, currently operates via an advertising model. The company displays Google AdSense ads alongside home data results [which include sales history for regions, individual homes, and a projection of their current value] and is selling banner ads on its site in two different positions. Advertisers can target their ads by ZIP code, with more target options opening up over time, according to Bohutinsky.

Real Estate Industry Owes Zillow Debt Of Thanks – by Realty Times editor Blanche Evans

Like comedians are mining Vice President Cheney’s hunting accident in which he peppered a 78-year-old lawyer with birdshot, real estate professionals are having a grand time ridiculing Zillow’s AVM.

This has publicized one of the many controversial issues that the NAR is dealing with; namely, How important it is that licensed brokerages provide a minimum level of service to customers? Too often with the NAR, it’s the customers that are almost entirely left out of the picture. As more companies emerge that take full advantage of the internet’s capabilities, the NAR will need to re-assess its age-old policies.
In Part II, I’ll explore more of these issues in detail, what this means for consumer’s pocketbooks and also look to what the future might hold for this industry in turmoil.