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Real estate meltdown...why aren't things improving, part 2

In my last examination “Why aren’t things improving",  I discussed several reasons why the real estate and banking systems don’t appear to be getting better. I mentioned that opinions among professional commentators almost seem schizophrenic. In this examination I have more bad news: The government, and its various agencies that purport to be helping solve the problem and get the economy back on track, are themselves behaving schizophrenically.   The North American Encarta Dictionary describes schizophrenia as “an offensive term, meaning characterized by conflicts and contradictions.” What are some of these conflicts and contradictions? I’ll mention a few of them by name:

President Obama’s Mortgage Relief Plan, House Bill 3044, 125% mortgage, Home Valuation Code of Conduct, HVCC, Fannie/Freddie Underwriting Guidelines for real estate investors, and there are others.

The net effect of all of these governmental attempts to solve the problems inherent in the real estate and banking crisis has been to create a situation much like that represented in the picture to the right. The player in the middle, call him  “Free Enterprise At Work”, is single minded in his focus to get the basketball in the goal. The players on either side, call them “Bureaucrats At Work”, look far less intense in their efforts than “Free Enterprise”. But notice something very significant: They are fouling “Free Enterprise”, on both sides of the ball…and more importantly..there are TWO of them.  They don’t have a goal to achieve; only instructions from their coach to stop “Free Enterprise”. Why you may ask? Because “Bureaucrats At Work” only regulate and quite often foul, whether unintentionally or purposefully. “Bureaucrats At Work” NEVER create. They NEVER passionately pursue a goal to accomplish something worthwhile. Let me give you a real life example of a failure of just one of the governmental plans described above.  

Imagine a perfect borrower; Fully Documented Income, a 20 year employment history, a 780 credit score, (800 is considered perfect in many parts of the country), a home that he bought for $151,000 10 years ago that he wants to refinance into a lower interest rate and wants to maintain his very low interest rate Home Equity Line of Credit as a second mortgage. He needs a value of $175,000 to accomplish this.   A local appraiser values his property at $180,000. “Bureaucrats At Work”, i.e, the HVCC appraisal process valued his property at $156,000, using comparable properties that were inferior, and worse, that were sold as foreclosures or short sale’s. This perfect borrower now has to decide: Do I want to achieve the lower rate and give up the Home Equity Line of Credit or do I leave things the same.

The HVCC program was supposedly created to help Fannie and Freddie ensure that the property values they were financing were “real”. Instead, the process is creating unrealistic values that are lower than the market supports. Multiply this problem by thousands and thousands of home loan applications nationwide. Worse, remember, this is not a “refinance” problem overall, although it is in the example I’ve used here. This is a home purchase problem that is making properties harder to sell and harder to buy everywhere, particularly in those geographic regions most affected by the real estate crisis; Nevada, California, Arizona, and Florida.