Solano Real Estate Scene: How this recession compares to last one
This recession is totally different than the last one.
From 2003 to 2007, home values in every middle- and upper middle-class neighborhood in California doubled because huge Wall Street financial institutions knowingly supported mortgage fraud. The supply of homes couldn’t keep up with the demand because suddenly almost anyone could qualify to buy a house with no down payment and no proof of income.
In 2004, 2005 and 2006, a retail grocery clerk could buy five or six single-family rental homes with no down payment and no proof of income. The liar loans and NINA (no income no asset) loans were bundled in big pools of mortgage-backed securities and sold on the secondary market to innocent investors and pension funds and rated as low-risk, high-quality investments.
Historically, residential mortgages had always performed with very low default and delinquency rates, so banks like Lehman Brothers and many others that are still alive today made a fortune in 2004, 2005, 2006 and the first half of 2007 selling these fraud-filled, mortgage-backed securities to the public markets on Wall Street.
It was like a Ponzi scheme because there were almost no foreclosures in 2006, even though 40 to 50 percent of the mortgage loans done in 2004 and 2005 were liar loans, and most of these were pick-a-payment, option-adjustable-rate mortgage loans and combo first and second mortgage interest-only and negative amortization loans at 100 percent loan-to-value.
Home values were increasing so fast that in 2005 and 2006, tens of thousands of people who were about to default on their unaffordable mortgages could escape by refinancing out of their bad loan to another bad loan and pull even more cash out of their home equity to stay up to date on their mortgage and use the cash to make payments and delay the inevitable outcome.
The people that suffered the most from the Great Recession were the upper middle-class folks that started 2004 with a solid financial statement and by 2008 lost 50 percent of their net worth. The rich were still rich and the middle class and poor folks with no net worth in 2004 were in the same position four years later.
The saddest victims of the Ponzi scheme were the folks that bought homes in 2005, 2006 and most of 2007 that qualified with pay stubs, tax returns and down payments and obtained good fixed-rate Freddie and Fannie conventional, FHA and VA mortgage loans only to see their home value drop by 50 to even 75 percent in value.
This made that recession a depression for many good people.
This recession is different because 99.9 percent of every mortgage loan closed in the past 10 years has been fully underwritten with provable income, down payments, mortgage insurance, VA guarantees and good credit scores. Mortgage companies are now under more scrutiny to protect the consumer and the investors that invest in mortgage-backed securities than they have been in history.
Home values are finally back to what they were in 2006 in the suburbs and the middle-class neighborhoods of California and are not artificially inflated. The only areas that are substantially higher today than 2006, are the wealthy coastal parts of California where there are only two classes, the rich and the poor.
I don’t think the housing market in the middle- and upper-class parts of Northern California will be significantly affected by this recession because of our huge housing shortage, low interest rates and the exceptional credit quality of all the mortgages outstanding today in our market.