NO BREAKS FOR EMPTY POCKETS
WPCNR NEWS & COMMENT By John F. Bailey. December 12, 2024:
I could not help but laugh at the poppycock I read last week about the poor banks suffering from regulations that keep them from making money, investing in stocks, investing in property, mortgages, and creating trusts and funds, and financial instruments of their own.
The banks and the billionaire owners are whining again.
Beware.
This is typical corporate-speak. It’s always so tough on the whining baby CEOs. Corporations hate rules, restrictions on deals where there is a conflict of interest, hate lowering interest rates, and love to foreclose on you the individual homeowner and business when you cannot pay off your bond or loans, except if the loan foreclosure would take a big chunk out of their assets.
That’s what happened in The Great Crash 1929, history that reads like a thriller by John Kenneth Galbreaith, of Harvard University published in 1954.
It shows you just what big businessmen and women are like when it is their money on the line they want to increase it keep it and take yours. They do anything to keep the money train with then in the engine cab going even if it is ruining the economy and a nation at the same time even when the tracks are out.
Nobody likes to believe this is the way the banks and businesses and investment firms work. But they do.
Galbraith’s superb, no-holds-barred analysis, impeccably sourced, names the villains and enablers of how big investment banks and stock shorting brokers, lenders wrecked the country’s prosperity for 12 years. Nothing they could do could stop the bleeding of cash. It took World War II and its blood and spending for war to bring American back from the robber barons of the ‘20s.
Now where are we today as we are watching a new administration attempt to make America prosperous again?
The situation today is eerie economically compared to 1928, 97 years ago. In 1928 the stock market was going up it seemed like nothing would slow Wall Street’s appeal. It promoted itself as the everyday American could get rich. Loans were made by brokerage firms to allow new investors to buy stocks on credit. Goldman Sachs invented the notorious invest trust which threw lit gasoline on stocks
The bandit banks and brokers did virtually nothing to stop it, and looked out for their self-interest that made them money while investors lost virtually all theirs.
Today the money men in America are licking their collective lips are eagerly looking forward to an “anything goes” era.
The 20’s were era of “anything goes.”
People were so eager to buy stocks, they borrowed money from brokers to buy stocks. As long as their stocks went up everything seemed good but if they could not pay off their loans when they were forced to sell they lost their investment and profit.
Then banks, most notably Goldman-Sachs invented the investment trust system where a bank would create a trust with its own money, sell shares in its trust and then lend money to brokerages, investors and professional short sellers which increased the credit burdens of familiar and new investors in the market. Trusts proliferated, based on the Goldman-Sachs model and so did consumer debt owned stock brokers. As stocks started to fall they continued to fall and short sellers reaped profits buying out the stocks as it it the short sell price for a lower price but pity investors who bought at the top and lost their original invested money and the loans they had been willingly offered to buy the stocks.
In February, 1929 The Federal Reserve raised interest rates from 5 to 6% to stocks. This deepened the crisis. Note this parallel to 2024 after the Federal Reserve had raised interest rates to keep inflation under control. Now rates have been lowered to banks to 7%
Now the greatest problem in reviving the economy after covid and making the housing industry grow is how the banks and the realtors are reacting to the lowered interest from the Federal Reserve.
As CNN explains the new commission rule:
The (key) change, which was the primary subject of the DOJ’s warning, requires buyers’ agents to discuss their compensation upfront, meaning that all agents working with a prospective homebuyer must enter into a written buyer agreement before touring a property together. The agreement is designed to inform buyers that they are responsible for paying their own Realtors if a seller chooses not to cover the cost.
The new rules came after a series of lawsuits alleged that home sellers should not be responsible for paying the fees for buyers. NAR maintained that commissions were always negotiable.
I walked with a mortgage broker in the metro area about how the realtors and the banks are coping with mortgage availability and keeping commission costs at 6% and the realtors with the federal ruling that real estate commissions can no longer be negotiated.
My source who has been finding affordable mortgage loans for families for over a decase says the hardest thing about my job is informing clients that they have been turned down because they have too much debt, not enough income, and not enough down payment.
The banks are being very tough on qualifications and credit scores, he reports and not enough down payments. He said banks are requiring 1/3 of the cost for a downpayment. On a 600,000 home in Westchester that is $200,000 dollars. A $400,000 home $133,200. I asked him what the banks were giving mortgages he said it was 7 to 8%.
Now, I recall the last three years in Westchester when sales of high end real estate were soaring, but lower priced homes lagged in sales.
It has only been recently the lower priced residential opportunities: condominiums have become attractive.
Another assurance that it was time to buy now, well it may be good to buy now if your wallet is fat and your credit is good. If you’re a young couple want a first home, the two of you employed as many are, the down payment which you may have already saved for may no longer be enough. My mortgage lender sees banks not lowering interest rates and keeping them at 7 to 8%. They are not going to take a chance on you you have to show them the money.
He also says there are a lot less home refinancing mortgage brokers like him. He estimates 25% have left the business.
On the commissions situation, the mortgage man says there is a trend that if a buyer is not willing to compensate the realtor broker for his or her services by paying 6% or more even if the seller refuses to pay the other half of the commission.
This is why a written agreement is now required by the buyer after a ruling and settlement with the National Association of Realtors last March.
With this ruling the buyer is required to iron out a signed written agreement with the broker on who is paid what and how much at the closing.
This is a very sensitive point to me when Brenda Starr and I bought our second house in White Plains.
At the closing, my wife and I were informed the owner wanted us to pay their share of the commission. Our lawyer who was recommended by the realtor did not say a thing.
Now supposedly the new written agreement law prohibits this flagrant surprise cost. It was only $6,000 more at the time. We did not want to lose the house by refusing. What a shifty maneuver. Beware. Today if you buy a $650,000 house the commission is $39,000. If your seller does not want to pay the commission you have to fork up $80,000 for a commission. That is robbery. (And we do not a Consumer Fraud Bureau?)
High prices in real estate only make money for realtors and bankers.
Why aren’t homes selling it’s not low inventory it is because they cost so much money, thanks to banks reaping the profit of the high interest rate and lowering to 6% as predicted would happen. You think banks like low interest rates? They don’t. They have to be jawboned.
My mortgage broker friend said this created another trend in real estate “marketing.”
The way he describes it: If realtor introduces them to the house they want, and the homeowner refuses to pay the commission, this creates a problem.
The person seeking a house, refusing to agree to pay more than 6%, may not be shown many houses. Conversely if the owner of a house refuses to pay commission to the broker representing the house, that homeowner may have his or home not shown much. The mortgage broker pointed out brokers are discriminating among clients they show homes to and owners who refuse to pay the 6% to the broker that reps them.
The banks are not making loans at interest rates that persons looking to buy can afford, the mortgage hunter says.
What does this mean for the real estate market? If inventory comes on the market maybe buyer’s interest rates will come down. But how far down.
Realtors call me, John Bailey, every two months to see if I want to put my home on the market. However, we have to move out. We want to get our equity out. If you as a homeowner have not paid off your mortgage you cannot afford to lower the price of your house to where you cannot pay off your mortgage, and you are whipsawed by the gun-to-your head commission charge.
The commission on a mid market price in White Plains if you have to pay it all almost makes you want to sell the house yourself.
Will real estate comeback? Did the banks bring the economy back in the depression? No. They foreclosed a lot. But the bad actors in the 1930s are saying their deregulation to bring back the speculation and ability to invest in new ventures, with your money. Beware of whining banks.
Until banks take on a new sense of public service to the citizens it lends to based on society need that is not good. To find out how the wise money men thought in the depression it compelling and disgusting to read about the greed of these men all who headed the big name banks of today back then, I suggest reading The Great Crash 1929.
