Real Estate Disaster the Result of Greedy Lenders and Homebuilders, Says Watchdog Group

In a Sept. 24 press release, America's Watchdog (AW) and its offshoot, the Homeowners Consumer Center, explain the greed they say is behind the real estate bubble that has imploded, leaving homeowners in financial straits.

According to the release, the single biggest contributor to the 2007-2008 real estate disaster has been mortgage lenders being most concerned about making fast profits, regardless of the long term impact on the economy. This boils down to nothing more than greed, which AW says manifested itself in three primary ways: pay option adjustable rate mortgages, stated income loans and massive appraisal fraud on the part of homebuilders.

Pay option adjustable rate mortgages are said by AW to be nothing more than "a suicidal mortgage product for the consumer and for pension funds or mutual funds." The Federal Reserve Board explains that this type of adjustable rate mortgage allows the consumer to choose among several payment options each month, including what's called a minimum or limited payment. The limited payment option can actually result in negative amortization, leaving the borrower owing more than they did when the loan was initiated.

With stated income loans, the borrower, broker, or bank actually makes up or falsifies the borrower's income in order to get loan approval - even if the borrower would not be able to make the mortgage payments.

Massive appraisal fraud occurred when homebuilders conspired with appraisers to over-value builders' new houses by as much as 25 to 35 percent. As a result, says AW, homeowners in existing neighborhoods naturally assumed their homes were worth more money than they actually were. AW says that now "our big worry is formerly hot real estate markets adjusting down 25% to 35% to pre-frenzy levels by this time next year."

AW also says that in some areas of the country, homebuilders hired undocumented workers, many of whom didn't read or speak English. Although the workers were given the required IRS forms, many did not report their income or pay the required taxes. As a result, there are now thousands of unemployed, undocumented workers who are not included in the government's labor statistics. AW also states that the language barrier has contributed to "literally millions of defective or unsafe homes."

AW also points to 100 percent financing as "a disaster all by itself" because as home values fell, millions of homeowners now live in houses that have lost some 10 to 15 percent of their value. AW predicts housing values will fall another 10 to 15 percent in 2008.

AW also lays blame on both the Federal Government and the Federal Reserve, stating they "looked the other way" because the housing boom was good politics. "The Federal Government, Congress and the Administration are just as guilty as the greedy banks and greedy homebuilders in this real estate disaster," says AW.

Sources:

Press release, Americas Watchdog Explains How The 2007 Real Estate Disaster Happened Along With A Grim Preview of 2008; http://www.prweb.com/releases/2007/09/prweb555568.htm

Homeowners Consumer Center; http://homeownersconsumercenter.com/

Federal Reserve Board; http://www.federalreserve.gov/pubs/arms/arms_english.htm