We saw this happen in Bressi Ranch when Jenae and Company went on their 100% financing spree. Her victims weren’t deadbeats – instead, they had good credit scores and other assets, and they were just duped into the get-rich-quick scheme. When it didn’t pan out, they dumped everything.
Hat tip Richard!
The grim tale of America’s “subprime mortgage crisis” delivers one of those stinging moral slaps that Americans seem to favor in their histories. Poor people were reckless and stupid, banks got greedy. Layer in some Wall Street dark arts, and there you have it: a global financial crisis.
Dark arts notwithstanding, that’s not what really happened, though.
Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.
Analyzing a huge dataset of anonymous credit scores from Equifax, a credit reporting bureau, the economists—Stefania Albanesi of the University of Pittsburgh, the University of Geneva’s Giacomo De Giorgi, and Jaromir Nosal of Boston College—found that the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and that these borrowers accounted for a disproportionate share of defaults.
As for those with low credit scores—the “subprime” borrowers who supposedly caused the crisis—their borrowing stayed virtually constant throughout the boom. And while it’s true that these types of borrowers usually default at relatively higher rates, they didn’t after the 2007 housing collapse. The lowest quartile in the credit score distribution accounted for 70% of foreclosures during the boom years, falling to just 35% during the crisis.
So why were relatively wealthier folks borrowing so much?
Recall that back then the mantra was that housing prices would keep rising forever. Since owning a home is one of the best ways to build wealth in America, most of those with sterling credit already did. Low rates encouraged some of them to parlay their credit pedigree and growing existing home value into mortgages for additional homes. Some of these were long-term purchases (e.g. vacation homes, homes held for rental income). But as a Federal Reserve Bank of New York report from 2011 reveals (pdf, p.26), an increasing share bought with the aim to “flip” the home a few months or years later for a tidy profit.
Read full article here:
Do tell more about this Jenae character and Bressi. I feel like it must have recovered at some level by now – certainly not much available < 1mn at this point. Did she pump + dump way beyond 2017 prices? Is it a case of "if they only had the capital / patience to wait 10 years they'd have made good money"?
I knew a guy who owned a home and owed maybe 30% of its value back then. He went to a seminar, and then took out a 2nd and bought another. He leveraged both of them and bought a 3rd. He leveraged the latter two and bought a fourth. He lost the whole shebang in the crash including his original house that was well on its way to being paid off.
There are many stories about those whose greed gets the better of their judgement.
The house we currently rent from the bank was previously owned by a broker who did exactly what you and CB describe. Parlayed many transtions with the intent to develop a large land purchase. It all blew and came crashing down with a 50% reduction in value. The first on our home was hit hard, but the second lost it all. Smart people, right?
Come on people when did buying a home go from the American dream to the American get rich scam? When you start thinking that inflation will make you rich a red flag has to go up. Houses are not liquid assets. Acquisition fees, monthly expenses, legal risk, and disposition fees are very high. Unless you bought the home at a big discount and rental income exceeds your cash burn rate you might turn a profit. If its a rental the down payment that “justifies” your positive cash flow can be better invested with lower cost, risk, and liquidity. Buying a home should be a sound judgement call for your family to live in long term. Not because the dollar goes down. Might as well take out a loan and go the Vegas. That’s my 2 cents which I speculate will be worth 4 cents next month.
“Come on people when did buying a home go from the American dream to the American get rich scam?”
When a little fat guy in a cheap suit from Queens who worked for Soloman Brothers figured out a novel way to monetize mortgages to trade, back in the eighties. Never been done before. Read “Liar’s Poker” by Michael Lewis. He worked there at the time, and watched the whole thing happen.
It also illustrates why Clinton allowing banks to behave like brokerages, and vice-versa, was perhaps the dumbest move made by a President in the last century. Republican congress were just as guilty. They just followed the bouncing hillbilly, along with lowbrow brokerages. It changed the character of this country for the worse. It solicited everyone have a quiet contempt for each other, and transformed normally law-abiding Americans into shady entitled weasels.
Do tell more about this Jenae character and Bressi.
Jenae was the naive broker who worked with the kingpin who was a slick-talking snake-oil salesman. They advertised ballroom seminars around town where they promised that you could buy a big fancy newer house for no money down, and they would manage it for you until the the price went up enough to get rich. The victims were directed to Bressi Ranch where they bought about ten houses for 10% over the list price. As part of the sale, the seller would funnel back the 10% extra into a property-manager slush fund for expenses. This was back when you could get your own appraiser, so he/she was a key component to the fraud too.
Because the buyers could finance 100% of the purchase, it sounded great – except the promised rents were exaggerated way beyond reality, and they couldn’t find any tenants who would cover the high payments. The salesman – and the slush funds – disappeared, and the 100%-financed owners were left to fend for themselves.
One owner actually hung in there and kept making the five-figure payments for months before giving up – and he was a real estate broker too. The other houses were foreclosed or sold short.
I ran into Jenae and had a full conversation with her, and even though she was the broker of record and made commissions on every sale, she claimed she was duped too. She still has her broker’s license with no disciplinary action ever taken against her.
The salesman did eventually go to jail, and when he got out he called me to plead his case that my blog posts were killing his chance to get a job, so I took them down. I got some flak from Bressi owners too, but I haven’t had any death threats for years now.
I’m nominating “flip” as the new filthy curse word for our generation…
https://youtu.be/TwJheWwW7rw
For a pejorative term I would go with “Tanman”. He and the folks at NewCentury should all be in jail.
This is very true. I remember several of coworkers “strategically” defaulted because the “subprime borrowers had ruined the market.”
They all would’ve been better off if they had just hung on, it’s not like they couldn’t afford the payments either, these were all people making $90K+.