The Economic Blame Game
Why does it continue to be so tough in the building industry? A lot of our current economic situation is a direct result of banks and their lending practices. Somehow the blame for the sub-prime meltdown has been deflected from the banks to the “greed” in the building industry. I for one have known very few greedy remodeling contractors who are big enough to rattle the global economy. Production builders have always followed the market, “if there is demand for housing we will provide it”.
A major contributor to the economic free fall or our industry was making mortgages available to families that were not economically prepared for the responsibility of owning a house. In 2007 a buddy of mine and I investigated buying a house in the Bay Area of California. Real Estate had been appreciating 17% per year over the previous few years. We thought we would take advantage of the growth in equity. As we shopped for loans we found that we didn’t even have to show income or tax returns. We were offered several 90% loans and one broker suggested he could get us a 20% loan to cover the down payment and have some left over for improvements once we got in the house.
Foreseeing the Bubble Bursting
My friend and I had both been contractors and had bought and sold many properties over the years. We looked at each other and both realized that if banks were willing to lend 110% of the price of the property the bubble was about to burst. We didn’t buy the house and just a few months later the California real estate market went over a cliff. No builder in this equation that created the bubble.
To take a deeper look it turns out that some of the really big banks like Goldman Sachs were behind the whole bubble phenomenon. They packaged mortgages that would clearly fail and sold them as AAA bonds to their clients. They then bet against the future of those bonds (selling them short) and made billions on failed mortgages that turned into foreclosures. But that is a different story (See the Great American Bubble Maker, Rolling Stone Magazine 2010).
Who Can Qualify for a Bank Loan?
Banks are now the real cause of the freefall of our industry. Getting a mortgage is like running the gauntlet. The only way to get on in many parts of the country is if you can buy the house with cash and don’t really need a mortgage. Getting a second mortgage to remodel your home is harder than tanning lotion on a Louisiana beach today. They have created underwriting regulations so stiff that many of us in their world can’t afford to live in our own homes today, and it is not getting much better.
Because the banks weren’t and aren’t doing their jobs, the State of California and 40 cities and counties across the country have passed legislation to sell bonds for energy retrofits. In Boulder 75% of the bonds sold were bought by Boulder residents to fund local jobs that save carbon and improve the local economy. It is truly a win-win-win proposition. The loans made to residents get repaid through increases in property taxes with no money down. It has proven that if the financial instrument is right there is plenty of homeowner demand for energy upgrades.
But wait, the banks that are so busy making money in derivatives and credit default swaps again, have filed a court action to stop PACE programs from going forward nationally. It seems they don’t want to have those loans paid off in front of their (the banks) interests in a home. It is called first position. If the home goes into foreclosure and is resold, taxes get paid first, the mortgage holder gets paid second and a second mortgage or other liens then get paid, if there is any money left. The banks want to stay in first position whether they are willing to loan money or not. That is having your cake and eating it too.
PACE programs are what I call a Parallel Economic Ecosystem. It is local jurisdictions doing what is best for their constituents, creating secure investments in the local economy, reducing carbon emissions, increasing the local job pool, using saved money to be spent on local shopping and resulting in increased sales tax that keeps our cities and counties afloat. If the banks won’t do their job I believe we should take our local economies back into our own hands.