“What they [Wall Street] don’t take into account is what’s called “systemic risk.” The risk that if their investments collapse, the whole system may collapse. Well, that’s what happened, has repeatedly happened, and is probably going to happen again.”
Chomsky, Noam. Requiem for the American Dream . Seven Stories Press. Kindle Edition.
A Note Before Reading:
I implore you to take as much time as you need to fully digest this rather lengthy post. If you can read it all at once, more power to you. But feel free to take breaks and come back to it if you need to, or divide it into different sections for each day until finishing.
While there are some more advanced financial terms used here, it’s certainly nothing you can’t handle. I have bolded such terms that require further explanation, to let you know that they will in fact be properly explained at the appropriate time in this post.
Wall Street elites and regular American citizens alike once scorned Soviet communal apartments, preferring instead to privately own land and property for themselves. To privately own land and property was the Capitalist American Dream, the way for most middle-class folk to accumulate substantial and generational wealth over time.
Times have really changed since then. Now we’re seeing a plethora of khrushchyovka-like apartment complexes under construction, popping up everywhere throughout the nation. But unlike those Soviet-style apartments, these multi-family units are coming in hot with heavy price tags.
Both housing and rental rates in the US have soared over the past few years. From 2021 to 2022 alone, real estate prices, on average, nationwide, have increased a staggering 68%. According to realtor and YouTube analyst Jason Walter, that amounts to an $837/month increase in mortgage payments nationwide. And apartments haven’t fared much better, with nationwide rents rising an average of 25% in the past two years alone.
Despite these ghastly cost hikes in the housing and rental markets, the quality of living inside those units have not improved in conjunction with those prices. In fact, the opposite seems to be more true—with renters and homeowners alike complaining about the wretched conditions they find their apartments and houses in due to lack of proper care and maintenance. We’ve somehow found ourselves today living a Soviet-socialist lifestyle in cramped apartment and townhome spaces (or dilapidated houses in desperate need of repairs), but with an extravagantly Capitalist price tag attached to it. This oxymoron is the ultimate betrayal to the alleged American Dream.
How did this even happen?
This is the question anyone even slightly interested in the financial or real estate sectors (or those unfortunate folk currently looking to buy their first home in this tumultuous market) has been trying to figure out.
The answer is as simple as it is complex. It’s simple in that the obvious answer to this real estate crisis always directly involves the ones running the show (cough cough Wall Street, investors, and their paid out political parties, surprise surprise). It’s complicated in terms of the mechanisms at play. That is to say, what their cunning plans are and which risky financial instruments they utilize to generate massive wealth in the real estate sector, at the expense of us regular plebs ever owning a home for ourselves.
And boy does it ever cost the regular folk! We’re the ones forced to bail them out every time, with our tax dollars, whenever they muck up. This even happened after folks were kicked out of their own homes when they defaulted on the shady subprime mortgage loans Wall Street knowingly handed them. Talk about rubbing salt on an already gaping wound. I’m referring to the 2008 Housing Crisis.
If you look into the details of that convoluted period in American history, you’ll see how the elites of Wall Street preyed on the hopeful middle-class Americans searching for that special place to call—and own as—their home. Even more, you’ll discover along the road that the effects of the 2008 crisis are still bleeding into the lifestream of today’s real estate markets. In fact, the 2008 subprime mortgage and housing crisis essentially opened a new, creaky door for Wall Street to slip through into the shadows once more, to devise even riskier schemes that would inevitably—once again—screw over lower- and middle-class Americans from ever owning a home. More on that later. For now, we need to revisit the 2008 House crisis in much more excruciating detail.
The 2008 Housing Crisis
(In this paragraph, please dress the words with a garnish of satire.) In the early 2000s, Wall Street investment firms heavily involved in the real estate industry were facing an elite-class, white-privileged, first-world problem. They weren’t making enough money! Stupid middle-class Americans were paying off their mortgages too slowly. Hmph! This meant the poor, little investors of mortgage-backed securities (MBSs) were only getting slow and steady streams of income through mortgage and interest payments. Why couldn’t they have both slow and steady riches, and fast cash in heaps all at once? They wanted both kinds of riches! And a whole lot more of both! So they set to work figuring out what they could do to hastily stockpile their piggy stashes further with even more bloated wealth.
If you read and/or watched The Big Short, you might understand the premise above. But if you haven’t dug into the details of the 2008 subprime mortgage crisis, you need to learn about it now. You must know what Wall Street did to the regular American people during this period if you want to get a sense for what’s happening in the real estate markets today…
In the early 2000s, Wall Street was growing impatient with the tens of millions they were making from the residential real estate industry. It just wasn’t enough for their already expansive capital reserves. They wanted hundreds of millions now. Even billions. Greed has no bounds after all.
Middle-class Americans were paying off their mortgages slowly and steadily over time. This wasn’t making the already-filthy-rich mortgage investors of Wall Street even wealthier fast enough, and they were losing patience. Not only that, but if middle-class Americans’ homes rose in value, or if mortgage rates went down a bit, then qualified families in need during emergencies could refinance their homes, get some money back for themselves from the equity, maybe even lower their monthly mortgage payments and/or interest in the process, and replace the original mortgage loan. It was a win-win-win scenario for homeowners, but it ticked off the Wall Street investors who owned the securities to the original mortgage loans.
Mortgage bond investors (mortgage bonds are just a vast pool of thousands of homeowners’ mortgage loans combined) rely on the monthly interest payments of mortgages to make a profit. When houses are refinanced, the original mortgages are replaced with new ones, so monthly interest payments to the original investors are kaput. Instead of having a mortgage paid off in the typical fifteen- or thirty-year timespan, those original mortgages could prematurely terminate in as little as a few years. An investor who would have made more money off those mortgage payments from interest over a longer period of time has now lost a chunk of that would-be change to refinanced households. Poor, wealthy baby…
Because of these obstacles for the wealthy elite of Wall Street, they schemed up ways to create even more wealth out of thin air from the residential real estate market. Enter subprime mortgages, the beginning of the end to homeownership by the average American. (Highlighted and bolded because this sentence has a lot more weight to it than you think, but I’ll explain more later on).
Mortgage loan originators (the creators of mortgages) learned in the early 2000s that they could sell a higher volume of mortgages—and therefore make more money—by handing out subprime mortgages to lower-income Americans who normally wouldn’t qualify for mortgages. The name itself, subprime, indicates that the mortgages handed out to this targeted class of Americans were less than ideal. They were “subprime” because they did not require the borrower to have a good credit score in order to obtain them. A good chunk of these subprime mortgages didn’t even require proof of income or proof of assets from the borrowers, in the now notoriously coined acronym NINJA loans, which stands for No Income, No Job, No Assets.
The subprime mortgage was devised specifically to screw over lower-middle class and low-income Americans. Credit-risky, low-income borrowers would get approved for these NINJA subprime mortgages with very misleading and sometimes downright fraudulent terms. Some of these fraudulent terms included “no monthly payments” or “interest-only payments” for the first few years, and then BAM. After that “teaser rate” period was up, a floating interest rate would be tacked on upwards of twelve to twenty percent on the mortgage. The “updated” principal balance would be near bursting from the lump sum balloon payment these poor folk were suddenly required to pay off.
If your gut is churning with the uneasy feeling that something is awry here, you would be right. It’s never a good idea to hand a loan over to someone who has no proof of being able to repay that debt plus accrued interest! Duh! That’s kind of a no-brainer. But it wasn’t ignorance that prompted Wall Street bankers and investors to create and distribute these subprime mortgages to credit-risky borrowers. They knew exactly what they were doing.
In Michael Lewis’s bestseller The Big Short, hedge fund manager Steven Eisman, who went on to short the subprime housing market himself, said of these loans:
“They were making loans to lower-income people at a teaser rate when they knew they couldn’t afford to pay the go-to rate…They were doing it so that when the borrowers get to the end of the teaser rate period, they’d have to refinance, so the lenders can make more money off them.” Thirty-year loans were thus designed to be repaid in a few years.
Here’s the opening for the get-rich-quick scheme of Wall Street from the early 21st century: You have the mortgage loan originators concocting these godawful subprime mortgages with teaser rates including “no interest,” “low interest,” and even “deferred monthly” payments for the first two years. After those two or three years were up, these poorer American families would find themselves with interest piled up so high on their principal mortgage balances, they couldn’t afford the new monthly payments. They’d be forced to refinance their house in hopes of keeping it. If their house went up in value, that is…
I mentioned in the beginning of this section that investors of mortgage bonds didn’t like it when borrowers normally refinanced. But these were poor American folk who didn’t know any better and shouldn’t have obtained such duplicitous subprime mortgages to begin with. These subprime mortgages were meant to blow up in their faces, precisely so they would be forced to refinance their homes. The investors would yield a greater profit margin from the poor homeowners if their houses rose in value and were consequently refinanced. Easy, extra money for the investors. Here’s an example:
Let’s say some subprime borrowers have paid $20,000 on their $200,000 subprime mortgage (a fair number considering some subprime borrowers didn’t even need to pay the principal on their subprime mortgages for the first two years during the teaser period). When their subprime mortgage loan teaser rate ends, the borrowers find themselves unable to afford the sharp increase in monthly mortgage payments due to the ballooning of interest on their principal mortgage. Thankfully their home value has risen to $250,000, so they can refinance, narrowly dodge a nasty default on their mortgage, and hold onto their home for the time being. The subprime borrowers refinance with their current lender for “the best deal.” They pull out equity from their newly appraised home in exchange for a higher mortgage ($250,000) they now have to pay off.
Equity is the difference of the newly appraised home value ($250,000 in this example) and the amount still owed on the original mortgage ($200,000 – $20,000 paid off is $180,000). The equity for the subprime borrowers in this example would be $70,000 ($250,000 – $180,000).
This may seem amazing for the borrowers to have the opportunity to receive $70,000 in cash from equity after refinancing to a new mortgage of $250,000. But don’t be fooled. This is all according to plan for the original lender. The investors of these volatile, explosive subprime mortgages knew the teaser rates would expire in a few years and blow up in the borrowers’ faces, forcing them to refinance to a higher and/or longer-lasting mortgage balance. When that pinnacle moment in time came, they could suggest the borrowers refinance with them.
The subprime borrowers would receive their equity of $70,000, but after closing costs and transfer fees and perhaps a down payment on the new mortgage they pull out, it would amount to significantly less than that in the end. Meanwhile, the original lender, having already profited from the monthly payments toward the original $200,000 mortgage, manages to tug out a few more years of extra payments from the same borrowers on the same home, but this time at an even higher, more profitable principal amount of $250,000. (He might even sell this newly refinanced mortgage to another investor for a wider profit margin through mortgage-backed securities.) And if this second refinanced mortgage is a floating-rate, subprime mortgage like the first? You best pray the house appreciates in value again (or the subprime borrowers suddenly become wealthier) for their sake. If not, refinancing won’t be possible and that means defaulting on the subprime mortgage, which translates to bye-bye house and on the streets the subprime borrowers go.
The loan originators intentionally created these subprime mortgages to turn sour in a couple years when the teaser rate expired on them to make a heftier profit when these low-income homeowners were forced to refinance because of them. Preying on the poor who didn’t know any better—how charming. But it gets much worse than that. Because what happens when the houses of these subprime mortgages with the expiring teaser rates and volatile floating rates didn’t appreciate in value? UH-OH.
In this most unfortunate circumstance, borrowers defaulted on their subprime mortgages because they couldn’t afford them and couldn’t refinance them to a rate they could afford. They lost their homes to foreclosure; their credit scores tanked for years and years as a result; and the houses went up for sale at a foreclosure auction, at a heavily discounted, cash-only price. (We will go into more detail on this in a bit, because the result of this huge housing scam by investors led to the biggest one happening today.)
Mortgage loan originators produced and sold these deceptive subprime mortgages. Wall Street investment banks like Deutsche Bank, Lehman Brothers, Morgan Stanley, Bear Stearns et cetera bought these subprime mortgages from the loan originators in bundles of thousands and thousands called subprime mortgage bonds. They proceeded to slice these subprime mortgage bonds into pieces (called mortgage-backed securities or MBSs) to sell and distribute (for a profit, of course) to other investors hoping to stick their forks into this juicy meat of the real estate market.*
*How did the investors buying these MBSs make a profit? By collecting more interest on them for one, and by dispersing the risk of owning these subprime mortgages among other investors through the tranche system they set up for themselves. Don’t worry, I’ll go into more detail on this in just a few paragraphs.
These outright scams on poor folk hoping to own a home still wasn’t enough to satiate these greedy, gluttonous hogs. They took the subprime mortgage market one step further, and created one of the riskiest and highest-stake financial instruments, synthetic CDOs, to essentially bet on the outcome of this most assured housing disaster.
To start, normal, non-synthetic CDOs stand for collateral debt obligations which, when you break it down word for word, simply means a debt one is required to pay with collateral to back it up. In this case, if the house mortgage (the debt) is not paid in time according to the terms agreed on, then the collateral (the actual, physical house itself) is confiscated as the payment.
[If this is still too confusing to grasp, don’t worry. It’s meant to be. These fuckers at the top are always obfuscating simple concepts with complicated-sounding jargon to make us feel like stupid, smooth-brained apes. But have no fear, Reddit is here to save you. I LOVE this subreddit ELI5 (Explain it Like I’m 5). Hopefully the top-rated post on that linked page can baby-talk and baby-walk you through the meaning of CDOs like it did for me.]
So we have these regular CDOs, which contained thousands of these subprime mortgage bonds with the real houses as collateral to back them up. To make matters even worse, the subprime mortgage bonds within these CDOs were only the worst and riskiest lower tranches (or “mezzanine” in their fancy bullshit jargon) of the subprime mortgage-backed securities (MBSs).
Thousands of subprime mortgages within a subprime mortgage bond were pooled together and divvied up to investors (as mortgage-backed securities), into layers called tranches. The lowest tranches posed the most risk for losses because they absorbed the first blow of defaults, but they also collected the highest interest (i.e., the most profit) on these subprime mortgages…provided they didn’t go into default. (That was a big IF of course). The higher the tranche level, the less risk involved (since the lower tranches were taking the losses before the higher tranches were), but the less profit you received from interest. It was a tradeoff between risk and reward for each tranche level, with the lowest level tranches yielding the highest risk and reward, and the highest level tranches receiving the lowest risk and therefore lowest reward in interest.
Well, Goldman Sachs (the leader on Wall Street) and a few other Wall Street bank bullies found a clever way to build towers and towers of only the riskiest, lowest tranches of these subprime MBSs and crammed them into a CDO package. They proceeded to bring these nasty-smelling CDOs to the loan rating agencies, Moody’s and Standard & Poor’s, and literally bribed them with substantial payoffs to rate these terribly risky CDOs a “triple-A” rating! The very worst, lowest tranches of these thousands of subprime mortgage bonds crammed into these CDOs were putatively rated by Standard & Poor’s and Moody’s as “triple-A ,” meaning they were supposedly only the most secure and riskless of loans.
It was all bull crap. Had the rating agencies not been bribed and had they looked into the contents of these CDOs, they’d find only “triple-B-rated” (the worst) types of loans. Yikes.
Ignorant investors who bought these putrid piles of dog crap CDOs from Goldman Sachs and the other bank bullies were fooled by the ratings. They took the ratings at face value, a perilous decision. Blinded by their greed, they bought as many of these CDOs as they could, not entirely understanding how risky the subprime mortgage bonds within these CDOS were.
CDO investors* were essentially buying CDOs of the worst subprime mortgage bonds in existence. These subprime mortgages were destined to default in droves once the teaser rates on them expired and the homeowners couldn’t afford the adjusted mortgage payments. Defaulted loans meant these investors weren’t going to get paid once their investments in CDOs went to zero in value. They’d most assuredly lose all their money and more on these lazy investments which they failed to properly research before purchasing. Can you sense the impending doom that follows from these stupidly risky investments?
*Something to consider: international investment banks outside of America were also involved in this subprime mortgage mess. Such international banks involved in the CDO business: AIG FP (England), Germany Dusseldorf (Germany), Credit Suisse FP and Swiss Re FP(Switzerland), and Japan (Bank of Japan) among many others. The Great Recession which this subprime mortgage crisis warped into affected the whole world, not just America.
That’s the situation with the regular, “organic” CDOs containing the lowest tranches of MBSs, which contained thousands of only the worst subprime mortgage bonds in existence. These CDOs in and of themselves were a real threat to the American (and global) economy. If they went sour, all of the ignorant investors and their associated firms that possessed these risky CDOs in their investment portfolios would take a massive—perhaps even fatal—fall, and would have to file for bankruptcy. But it gets even worse than that. There was an additional layer of risky investments these bastards created on top of the regular CDOs. These were the synthetic CDOs.
Synthetic CDOs were different in that they contained nothing but essentially paper side bets on the performance of the regular CDOs and subprime mortgage bonds. Confused? Everyone in and out of Wall Street was confused by what this meant at the time. All according to Wall Street’s plan to obscure things and confuse everyone but themselves, naturally.
Synthetic CDOs were not composed of the real subprime mortgages and the corresponding houses put up as collateral. Rather, they contained only purchased and sold insurance on those regular CDOs. The “insurance” on those CDOs was better known as credit default swaps. Credit default swaps (CDSs) are insurance on a corporate bond—in this case, insurance on a subprime mortgage bond or a CDO filled with thousands and thousands of nothing but the worst subprime mortgage bonds.
The buyer of the CDS—the buyer of the insurance on these subprime mortgage bonds and CDOs—agrees to make semiannual premium payments to the seller of the CDS over a fixed term, let’s say ten years, to insure those subprime mortgage bonds and CDOs. If the buyer pays $200,000 in premium payments annually over ten years, they stand to lose $2 million this way ($200,000/year x 10 years). The seller, however, stands to lose much more.
On the seller’s side of the CDS agreement, the seller agrees to collect the semiannual premium payments from the CDS buyer (insurer) over the ten year period. This seems like an easy $2 million to make passively because essentially it is…if there wasn’t so much at stake in this situation. The seller of credit default swaps must also agree to fork over a boatload of cash to the CDS buyer/insurer if, at any point in those ten years, the seller defaults on their subprime mortgage bond and CDO investments. How much exactly would the seller of credit default swaps have to fork over? This zero-sum bet was so ineffably in favor of the outcome for the seller of credit default swaps, it held hundreds of millions to billions of dollars at stake on the seller’s side!
In exchange for a comparatively measly $2 million from the CDS buyer over a possible span of ten years, the seller of such credit default swaps stood to lose hundreds of millions to billions of dollars on their end if their subprime mortgage bonds and CDOs defaulted at any point during that ten year period. And all it took for those subprime mortgage bonds and CDOs to be worth absolutely nothing was a default rate of just four to eight percent in each bond. Yikes. (Source for this data is The Big Short novel by Michael Lewis).
If you had to make that “bet” and buy credit default swaps that might cost you $2 million in ten years, to potentially make anywhere from one hundred million to a billion dollars should the seller at any point in that ten year span default on their very risky, highly-likely-to-default debt comprised of nothing but the worst subprime mortgage bonds in existence, would you lay your chips on the table? With risk minimized on your end, and odds in your favor to earn too much money to spend in your lifetime, why the hell wouldn’t you!? That’s exactly what hedge fund managers Steven Eisman, Michael Burry and the select few others cognizant of this situation did.
Michael Burry created this CDS goldmine opportunity by signing an ISDA agreement with Goldman Sachs. Goldman Sachs sniffed out this highly profitable opportunity and immediately went on the search for the perfect seller of credit default swaps on the other side of the bet. Goldman Sachs found the highly-rated, giant lending firm, AIG FP, a perfect fit for the job, and took a two percent cut off this zero-sum bet placed between the CDS buyers (e.g. Michael Burry and other investors shorting this market) and CDS sellers (e.g. AIG FP and other similar loan-lending companies). This amounted to an astronomical $400 million a year for Goldman Sachs to merely play the role of middleman for this asymmetrical, disastrous, zero-sum bet. (AIG FP would file for bankruptcy years later from this trickery, while Goldman Sachs gorged itself to a near-whopping $2 billion profit.) Goldman Sachs playing the middleman like this between the lose-all, win-all synthetic CDO bets laid the foundation for the wrecking ball to come crashing later.
AIG FP, the seller of the credit default swaps, was essentially betting for the subprime mortgage bonds to continue operating and making profits with no risk of defaulting and plummeting in value. Michael Burry and the other hedge fund guys who bought the credit default swaps were in essence betting against the entire subprime mortgage industry. They were betting on the subprime mortgage market to sink, along with all the Americans who took out these subprime mortgages. Pretty morbid stuff, if you ask me.
These synthetic CDOs, which inherently were just the purchased and sold credit default swaps (insurance) on these subprime mortgage-filled CDOs, were packaged together and traded between Wall Street desks for what would amount to tens of billions of dollars at stake. Inflated amounts of paper money were being weaved out of whole cloth.
[To reiterate if you’re still confused: Normal CDOs contain the actual subprime mortgages with their corresponding houses put up as collateral in case of default. Synthetic CDOs, on the other hand, only consist of the purchased and sold credit default swaps (insurance) on those regular CDOs. The buyer of credit default swaps was expecting the other side to default on their subprime mortgages within the timeframe given on the CDS terms of agreement. The seller of credit default swaps on these CDOs expected the subprime mortgage bonds to continue making money for the investors without fail. This essentially made the synthetic CDOs nothing more than very expensive paper side bets on the performance of the original CDOs.]
So why does all this complicated stuff matter? As I said before, it laid out the foundation for the wrecking ball to come crashing. Trading these synthetic CDO papers worth tens of billions of dollars between white-collar, wealthy men in a zero-sum game meant the winners would win bigger than ever before, and the losers stood to lose everything and more. And that’s exactly what happened. In this case, though, there were only a select few winners. Everyone else stood to lose it all. It impacted not only Wall Street, but all of the infected American and international markets as well.
Bear Stearns, Morgan Stanley, Deutsche Bank, and Lehman Brothers (among plenty others) were so neck-deep in the subprime mortgage bond business, they risked drowning in debt if their investments poured over. And the tsunami came crashing down. Bear Stearns, Lehman Brothers, and Wachovia Bank, to name a few that come immediately to mind, no longer existed after the 2008 subprime mortgage crisis because their long positions on subprime mortgage bonds and CDOs wiped them out. With the biggest investment banks of America tanking, anyone directly or indirectly involved with those failing banks—those who invested with them, for instance—stood to lose everything as well. And they did. It was a dominoes effect that cascaded all the way down to the poor American families that would lose everything including the roof over their heads.
The Aftermath of the 2008 Crisis
As subprime mortgage bonds and CDOs started defaulting at stellar rates between the middle of 2007 and 2008, bankers and traders heavily invested in the subprime mortgage game in one way or another panicked. Most of them were long on their subprime mortgage bond and CDO positions, meaning their investment portfolios contained either the regular CDOs, the synthetic CDOs, or both. Many of them were foolish enough to trade the riskiest synthetic CDOs. They went from passively collecting “easy” credit default swap premium payments from the CDS buyers/insurers, to owing the CDS buyers/insurers hundreds of millions to billions of dollars overnight. Most of these investment firms were so overleveraged (meaning they took out a whole lot of debt themselves to make these risky bets), they had no way of paying the CDS buyers on the other side of the bet without going under themselves.
In a truly free, capitalist market, these investment banks should have been left for dead. They should have forked over the hefty fee on their risky CDO bets, went under, and learned a hard lesson from this. But of course, the rules of society didn’t apply to them. They ran crying to the “nanny,” aka the government, to bail them out. The nanny government hushed baby Wall Street,* kissed the boo boos away, and gave them their warm milk and blankets in the form of our tax dollars. Our tax dollars would be used to sell Wall Street these abominable CDSs (insurance) to cushion their fatal tumble to the ground.
*YouTuber Andrew Rousso made an excellent depiction of this in one of his shorts. It’s extremely hilarious, but also probably NSFW. I warned you. Hopefully you can get a good laugh from the dark irony of it like I did:
https://www.youtube.com/shorts/JFQMyxbMkcs
Once again, the innocent American people had to bail out the Wall Street culprits. Hundreds of billions of dollars that destroyed the domestic as well as the international markets through outright fraud, and destroyed lower-income American families’ dreams of owning a home, were swept under the rug. Never mind that this blunder in the real estate markets led to the Great Recession as well. The true victims of this catastrophe were the normal American folk with the subprime mortgages. Yet despite their innocence in this twisted game, they were forced to clean up the mess Wall Street created. If your blood isn’t boiling, you either have the patience of a saint or you have become completely desensitized to the constant extortion of the people by this country’s financial sector.
As a result of the 2008 Housing Crisis, lending practices were tightened and regulated. Subprime mortgages would no longer be a thing*, and Americans who clearly couldn’t afford them wouldn’t be lent them. While that specific area of real estate (mortgage lending) improved, a new menace to the real estate market was already taking root. This newly born scandal of Wall Street emerged from the ashes of the 2008 crisis. Its detrimental effects are still being realized today in 2023.
*I say this, but I’ve learned recently that Bank of America is starting to hand out NINJA loans again to targeted minority families….History sure has a way of repeating itself, doesn’t it? You really can’t make this stuff up.
What am I talking about here? Well, you see, when you don’t get punished for your crimes, you tend not to mull over your sins and repent. Rather, you learn that you can get away with anything scandalous and morally corrupt, and you push your luck further with even grander schemes next time around. Wall Street investors, private equity firms, and other real estate investors have contrived something even more disastrous today for hopeful homeowners (and the entire economy if I’m being honest). But if they aren’t allowed to hand out shady, subprime mortgage loans anymore, then what could they possibly do to mess up the real estate markets this time?
Remember what I wrote earlier in this post? The subprime mortgage was “the beginning of the end to homeownership by the average American.” The next section is where this falls into place.
The New Housing Crisis
The best answer relies on the quality of the questions asked.
One day I asked myself the golden question: What, exactly, happened to those foreclosed homes from the 2008 crisis, and what, if any, effect did that have on the real estate markets of today? If you decided to research that question, you’d find that there was something more to unveil behind the curtains of the 2008 crisis.
If you pulled back those curtains post-2008 and took a peek, you’d find that investors were huddled together drooling over the succulent opportunity to mass-purchase foreclosed family homes from the aftermath of 2008. The alternative to refinancing your home when your subprime mortgage exploded in your face back then was losing it to foreclosure. Well, that foreclosed house eventually went to the auction house.
Once everything was finalized—the exploited families were evicted from their homes in a trail of tears and the paperwork was all ready—the foreclosed houses were put up for sale at the auction. And they were sold at significantly discounted prices. Sounds like an investment opportunity for anyone to snatch up, right? The only catch, of course, was that you needed to buy those foreclosed homes in cash, and you could not inspect the houses beforehand. Those two conditions alone wiped out most regular American people from the pool for the investment opportunity of a lifetime. After all, who can afford to pay, in cash, that same day, a foreclosed home at $100,000? Only those with substantial assets and capital reserves could afford that.
Those who had a lot of cash in hand—or enough collateral in assets to acquire leveraged cash through lenders—could buy up these foreclosed homes at bargain prices. I’m talking about up to twenty-five percent discounts, on average, on these foreclosed homes at the time. You can see that data here.
Not only that, but because you couldn’t inspect the foreclosed houses you were buying, it led to a whole lot of risk that most regular American families couldn’t afford to take on. Rather than run the risk of buying a foreclosed home that would need expensive repairs from damages left by spiteful evictees, regular American families sought homes the safer, traditional way. The opportunity to mass-purchase these discounted foreclosed homes at auctions was therefore set up ideally for wealthy investors, and wealthy investors alone.
Wall Street and other real estate investors smacked their lips and dug right into this money-making plate of opportunity. They bought up over 200,000 foreclosed homes the moment the market started recovering from The Great Recession (which they had caused, ironically), in 2012. Their plan for these foreclosed homes this time around? Rent them out to the very same families they personally screwed over from owning a home during the subprime mortgage crisis. Daniel Herriges of Strongtowns.org said it best:
“It’s fair to say that Wall Street ownership of single-family homes is a new trend. Its roots are in the wave of foreclosures that followed the 2006–2008 subprime mortgage crisis. This wave, and the subsequent rise in rental demand from displaced former homeowners, created a tantalizing opportunity for large-scale investors, and they seized it.”
When the subprime mortgage borrowers defaulted and were consequently evicted from their homes, they didn’t just find themselves homeless—they found themselves with terrible credit scores, too. The statute of limitations on a bad credit mark, depending on the state, takes anywhere from three to ten years to wipe off. These pitiful, homeless victims were no longer capable of even buying a house the traditional way for up to ten years. This left them with only two options: living with family members who actually had shelter for the time being, or more typically, renting. The door to a rental-focused market was opening. Guess who paved the way?
If you read that article from 2013 above, you’d see that Blackstone was one of the largest companies at the time buying up all the foreclosed homes from 2008. In 2012, JP Morgan and Morgan Stanley among many other Wall Street investment banks—the very same Wall Street banks that sold and securitized the subprime mortgages of 2008—were institutional owners of Blackstone. Ponder that for a moment. The very culprits of Wall Street who detonated the housing market in 2008, resulting in the Great Recession, were back at it again in the real estate markets just four years later in 2012, as if 2008 never even occurred! This time they shrouded themselves in the Blackstone veil.
It’s absolutely mind-boggling that these Wall Street investors were even permitted to dip their feet in the real estate market again, especially so soon after the national catastrophe they were complicit in creating just a few years earlier. But to no surprise to anyone with basic knowledge on the inner workings at play, they all got away with doing it again.
At this point the stage was set for brand new scandals. Remember the mortgage-backed securities (MBSs) of subprime mortgages? Thousands of subprime home mortgages were pooled together into subprime mortgage bonds, then these subprime mortgage bonds were divided up into different levels of risk called tranches? Remember how this exploded in all the investors’ faces when they didn’t account for all the MBSs of subprime mortgages that would default and be worth nothing in all tranches? Well, I bring this up because Wall Street didn’t learn from this mistake, either: Blackstone proposed the securitization of rental payments in 2013.
This meant that Blackstone could sell the rental payments—generated from renting out its hoard of foreclosed homes—to investors through securities the same way they did with the MBSs of subprime mortgages in 2008. Risky investments of billions of dollars in securities that mirror the 2008 subprime MBSs and entangle all these investors together again. What could possibly go wrong?
To them, it couldn’t have worked out better in their favor. With over ten million American families losing their homes to the 2008 crisis and their credit scores devastated as a result, renting was the only option for them. The rental business was set to boom. They were prepared to make disgusting amounts of wealth again. And they already factored into the equation the amount of bailout money they’d extract from regular Americans should it fail again.
“…[I]t’s just going to go on and on like this. Until the next crash—which is so much expected that credit agencies, which evaluate the status of firms, are now counting into their calculations the taxpayer bailout that they expect to come after the next crash.”
This is from Noam Chomsky’s book, Requiem for the American Dream. A very ominous message indeed, yet he couldn’t be more truthful, for if this “innovative rental business” of Wall Street and similar investors fails, guess who’s paying the price? Hint: it ain’t gonna be them.
Now that this horrific predicament is laid out before us, what comes next? The screw drills even deeper. The looming danger of this burgeoning rental business has compounded even further now, with copycats deciding to play along with the Wall Street boys. Private equity firms (big investment companies that use pooled wealthy investors’ money to buy out businesses and restructure them to turn over and sell for a profit just a few years later) have sniffed out Wall Street’s tactics in the real estate market and have decided to participate. TikTok and YouTube influencers like these privileged beneficiaries of nepotism touting the glories of real estate investing (and showing YOU how EASY it is to GeT RiCH bY BuYiNG tO ReNT oR FLiP!) have also followed suit. And these influencers’ followers have also joined the Wall Street game, taking the advice from their beloved influencers too seriously and renting out properties they own as rentals and Airbnbs in hopes of scavenging whatever crumbs of wealth remain of the American Dream. It has compounded to something worse and worse with each passing year, to the point where regular, middle-class folk are now entangled in the Wall Street web. This means that should Wall Street’s game crash yet again, the fates of the common, middle-class Americans enmeshed in this game will crash with it.
Can it get any worse than this? Unfortunately, it can. Enter iBuying and the heavily intrusive involvement of private equity firms in the real estate markets.
I already briefly mentioned private equity firms and will expound upon them in a bit, but what is iBuying? iBuying is the practice of companies purchasing homes directly from the owners in a quick, seamless, online sale. Zillow Offers, the iBuying branch of Zillow, purchased homes online directly from families, and hoarded them in their inventory for years, under the pretext they were “repairing” them to flip for profit. By hoarding all these homes in their inventory—which actual families could have bought instead—Zillow Offers artificially raised the prices on all of the single-family homes as a result. In this way, they finagled higher mortgages out of Americans by artificially tampering with the natural supply and demand of homes. This yielded a greater profit margin for them, of course. But it screwed over many families from affording a single-family home, too.
Well, last year in November 2021, Zillow Offers lost to its own greed. It tanked, losing hundreds of millions of dollars in the process. That’s what you should get for tampering with the normal supply and demand of homes. Better stick to Zestimates, Zillow.
Isn’t this good news? Yes and no. It’s great news that Zillow bit the bullet and dismantled Zillow Offers, ending their corrupt practices of tinkering with home prices artificially like this. But like the hydra effect, more snakes poked their heads out to play in the game afterwards. Opendoor became the new Zillow Offers, and continued the iBuying practice. (Source: “iBuying Trouble,” by Steven Levy [@Steven-Levy], Wired Magazine, May 2022.)
iBuyers like Zillow and Opendoor artificially inflated house prices not only by prepping them and storing them in their dark cellars until the prices leavened, but also by selling a big chunk of them (at discount prices over twenty percent off market value) to institutional investors—institutional investors like private equity firms and Wall Street—when they weren’t selling quickly enough. According to Wired Magazine author Steven Levy of “iBuying Trouble,” upwards of twenty to forty percent of single-family homes throughout the United States were mass-purchased this way in the past few years alone! If you think that’s an insignificant percentage that in no way affects all house prices today, you should probably crawl back into your hole and wait for the apocalypse to come or something. Your head would already be too far buried in the sand to accept the truth for what it is.
Your concern meter should be through the roof right now. We have some companies like Opendoor and Zillow hoarding single-family homes to artificially raise prices on them, and then selling them wholesale to institutional investors at big discounts if they can’t sell them to regular American folks “fast enough”. (Where’s our discounted house prices? Why not just sell those discounted house prices to us instead of Wall Street?) Essentially, one wholesale retailer of homes is selling the unwanted homes to another wholesale retailer, compounding the hoarding problem even more. This institutional buying and hoarding of houses by Opendoor, Zillow, and the like has made buying for first-time home buyers—and renting for those unable to buy a home—just barely affordable in less popular areas, and simply unaffordable in more popular areas. Yet Wall Street and other institutional firms who already own excessive amounts of wealth get the discounts. It’s truly remarkable how this is playing out.
To add fuel to this already blazing fire, private equity firms are now officially the most dominant overseers of rental properties. According to that ProPublica report just linked, private equity firms are behind 85% of Freddie Mac’s biggest apartment complex deals. And the tenants of these apartment buildings are not happy about it.
The stories of tenants interviewed in this ProPublica article are glaringly negative on private equity firms’ takeover of the rental business. Rather than noticing improvements from these takeovers in their apartment buildings, tenants are only grieving on what once was.
“Rents soared. Trash collected in the hallways and on the rooftop deck…The security guard showed up less often. One tenant said she was frightened when she encountered a large, seemingly drunk man she didn’t know dancing in a leotard and tutu in the parking garage. Another renter described having to heat her bathwater on the stove after she woke several times to find only cold water flowing from her tap.”
Does that sound like private equity firms are doing more good or harm for tenants?
You might be wondering why private equity firms allow the quality of services in their own apartment buildings to go downhill. After all, isn’t it counterintuitive to displease your own customers? The answer is pretty unsettling: it’s simply because they don’t need to care.
Private equity firms flip these apartment buildings for a profit just a few years after acquiring them. That’s what private equity firms do best. They resell and abandon post with no strings attached. They’re just a pool of wealthy investors’ money, with a leader at the top making the executive decisions, set on one goal and one goal only: making profits for all their shareholders. During the process of flipping and selling these multifamily apartment buildings in the typically ten-year timespan they spend restructuring the businesses, private equity firms don’t invest too much of their time worrying about the tenants’ overall satisfaction. Tenants don’t matter. The only thing that talks and is heard by private equity firms is money.
To reiterate and drill the message further, private equity firms don’t give a hoot about the well-being of their tenants, and they don’t have to. The only thing they concern themselves with are the profits they can extract from their tenants:
“Private equity firms often act like a corporate version of a house flipper: They seek deals on apartment buildings, slash costs or hike rents to boost income, then unload the buildings at a higher price.
The influx of private equity comes during a national affordable housing crisis and has dire consequences…Such firms use economies of scale to more aggressively squeeze profits from their buildings than traditional landlords usually do…The firms’ tactics can include sharply increasing rent or fees and neglecting upkeep. Sometimes landlords force out existing tenants and replace them with those who can pay more.” –ProPublica
Please tell me where I can find the good news in this? Because they now dominate the multifamily rental business, private equity firms can continue to dictate higher and higher rent prices on tenants, simultaneously lower standards of living by cutting costs and services provided to these tenants, and, best part, completely get away with it. It’s sickening and extremely concerning for the livelihoods of non-wealthy Americans. It’s also rather ironic, considering Americans in the 1960s and 1970s regarded such apartment complex living as dystopian.
Take this newspaper article from 1971, for example. In Syliva Porter’s article, Soviet Lifestyle Still Inadequate, she writes of the Soviet communal housing:
Housing for Ivan [the hypothetical citizen of Moscow used as a figurative example in this article] remains dreadfully cramped…Soviet housing is “notorious for its scarcity, poor quality of construction, and problems of maintenance.”
Honestly, is there any difference between Soviet housing then and American housing today? I don’t see any glaring differences. Oh! Except it costs way more to live in these cramped, dilapidated units in America! You gotta love when capitalism copies certain aspects of socialism (communal apartments), but adds a capitalist price tag to it. Talk about the very worst of both worlds… Such is the result when you allow greedy, wealthy investors to control such a vital component to living as shelter.
[To summarize this section, we have a dire situation where Wall Street and other big real estate investors have opportunistically bought up significantly discounted foreclosed homes at auctions from the 2008 crisis. They hoarded these houses to rent out to the very Americans they robbed from owning homes during the subprime mortgage crisis. iBuying businesses such as ZillowOffers and the newer Opendoor have followed suit and started hoarding their own homes to flip for profit or rent out. When these iBuyers can’t profit from these malicious manipulations of the real estate market, they sell them wholesale, at significant discounts, to Wall Street and similarly wealthy investors. Private equity firms are one such problematic group of investors that have virtually taken over the rental markets in America today. Private equity’s single focus on profits has resulted in rental rates soaring, but with apartment conditions and services worsening to cut back on costs so shareholders profit more.]
You may be wondering, can it get any worse than this? I may seem to be beating a dead horse with this message, but it’s truly, remarkably, worsening each passing year. The situation Wall Street and similar investors have placed the average American in today is downright dreadful.
Hoarding single-family homes have artificially driven up the prices on both rentals and home mortgages, to unforeseen levels. A New Jersey house that was $200,000 just a year ago is now $300,000, a $100K increase in a span of just one year. This was a fairly typical phenomenon not just in New Jersey, but nationwide. From this NYT article, for example: “Between soaring prices and rising rates, the typical home buyer in October [2022] paid 77 percent more on their loan, per month, than they would have last year, according to Realtor.com.” And trust me, it isn’t “repairs” or “improvements on the home” that made the prices jump so high. It’s the same raggedy old house on the same plot of land with some minor improvements at best. It was the big honchos’ blatant manipulation of the markets using the tactics described above that made this happen. But we have one other major party to blame for all of this real estate drama in this messed up game: the government.
Journalist Karl Evers-Hillstrom from Opensecrets.org wrote a rather insightful article on this topic of concern. He claims that ever since OpenSecrets started tracking lawmakers’ finances from 2008 onward, Congress has invested the most in real estate out of any other industry. This isn’t too surprising, of course, considering wealthy politicians are only wealthy because they’re endorsed by similarly wealthy investors. Wealthy politicians bailed out these Wall Street investor scum (with our tax money, remember?) during the 2008 crisis. Why would that change now?
What is most concerning about that OpenSecrets article, however, is how these fuckers surreptitiously slipped in real estate provisions to the $2.2 trillion CARES act. Under these provisions, wealthy real estate investors will save billions in taxes through bullshit reasons like counting real estate depreciations towards tax deductions.
“The Joint Committee on Taxation estimated that the tax changes will save taxpayers $135 billion over 10 years, with the vast majority of the benefit going to households making at least $1 million,” states Evers-Hillstrom. “President Donald Trump and his family members could personally benefit from the CARES Act, given their extensive investments in real estate,” he continues. “House Speaker Nancy Pelosi (D-Calif.) and her husband Paul, a real estate investor, have millions of dollars invested in several properties.”
Would you look at that! Once again, both political parties are involved in this forthcoming real estate disaster. Didn’t I already mention in a previous blog post that both political parties are actually on the same team? Well, here’s proof of that concept once again.
My point in bringing up the direct involvement of the government in real estate is to drive home the message that, when the next real estate crisis comes—which, at the rate it’s going, it inevitably will—you should absolutely not expect the government to save the regular American people. Ironically, it is the regular American people who will get screwed from this the most and have to bail out the bad guys yet again. How comforting to know.
The Final Act
The stage for the next disaster has been set. It’s been set for years, actually, since the aftermath of the 2008 crisis. Private equity firms and other such wealthy investors derived from Wall Street have pounced on the opportunity for the bonanza of their lifetime, wholesale-purchasing and hoarding these discounted single-family homes to use as rentals for peak profits. It’s only worsened with each passing year as more and more real estate discounts and deductibles—granted only to the wealthiest investors—have slipped into policies right under regular American citizens’ noses.
Now the final act is about to play out. What that entails, nobody quite knows. But we’ve seen so much of the plot already, we can make some reasonably educated guesses as to what’s going to happen this time around.
I’ll premise my hypothesis for the next real estate crisis with this quote by Michael Lewis from his book The Big Short:
“The opacity and complexity of the bond market was, for big Wall Street firms, a huge advantage. The bond market customer lived in perpetual fear of what he didn’t know. If Wall Street bond departments were increasingly the source of Wall Street profits, it was in part because of this: In the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers.” (bolded for emphasis)
Although Lewis was referring to the 2008 subprime mortgage crisis when he wrote this, the quote applies to today’s situation just as much, if not more. As usual, most people are in the dark about what’s really going on in the real estate markets today. It’s not our fault by any means, but Wall Street bond investors,’ because these jerks purposely obscure and confuse us to hold their oppressive rule over us. They even pay off soulless bloggers and journalist shills like these to write bullshit articles about how well the housing market is doing and how, no, absolutely not, under no circumstances whatsoever, is there a housing bubble! Once again, these messages are laced with nothing but lies to lull the average American into false senses of security.
I remember researching the housing market in 2020 because of my suspicions then, only to find articles like these touting the impossibility of a housing bubble and subsequent crash. Now when you Google “housing bubble” or “housing crash,” just two years later, you get the exact opposite search results! (Go ahead, try it for yourself. Here’s what I got):
If I were a betting person, I would bet my life savings that Wall Street and the rest of the lot paid these “journalist” shills two years ago to keep quiet on the matter so they could continue deluding us. Money talks to silence others.
There was one additional benefit to this underhanded method of deception by Wall Street, and that was to instill fear, uncertainty, and doubt (FUD) in American citizens. They wanted it so Americans looking to buy their first homes or move to a new location would look at the drastically rising house prices and panic. “In the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers.” How does this FUD turn into profits for Wall Street? Here is where psychology plays a major role in the consumers’ decisions:
FUD makes people desperate. FOMO (Fear Of Missing Out) starts to take root. Customers looking to buy a home in 2020 start browsing and find, amazingly, that houses are starting to skyrocket in price. They bide their time in hopes of finding better deals later. They look just a year later in 2021, and find that the house prices have risen up to $100K in that small span of time!
If you were these potential homebuyers, imagine how you’d feel observing this unwarranted spike in housing prices. You’d probably be freaking out (FUD), wondering when, if ever, the house prices would settle to something more reasonable you could afford. As more and more time passes, the house prices through the end of 2021 have not only remained the same, but have continued to soar.
At this point as a potential homebuyer, you’d probably be feeling significant FOMO on owning a home whose price could continue to climb upwards. You might think, “I better buy a house NOW, or I won’t be able to afford it later!” Or, “Man, I could flip one of these houses in a couple years for WAY MORE at the rate they keep climbing in price!” And so these potential customers play right into the hands of the conniving Wall Street investors, bidding up higher and higher above the asking prices of these already inflated houses. A house priced at $300,000 starts receiving multiple offers above asking price for $350,000, maybe even up to $400,000. The sale goes to the highest bidder, who has now offered $50,000 to $100,000 more on an already inflated house price. What could go wrong?
Psychology is truly fascinating, because as illogical as this may all seem, this is really happening in the markets today. People are letting the FUD and FOMO take over their reasoning, panic-buying already overpriced houses well above the asking price! They are compounding one problem over another out of fear and ignorance. They’re also being fooled by the prices themselves.
Take this Psychology Today article about high prices attracting customers, deluding them into thinking the higher the price, the higher the value. “High prices attract consumers when assessing quality is difficult,” writes Utpal Dholakia. “When a product’s quality is hard to assess, that’s when savvy marketers tend to set prices at a high level to signal that they are selling high-quality items.”
This housing market today is already baffling; imagine trying to figure out the real prices on these homes by yourself? You’d probably want to leave it to the professionals, too. But unfortunately for you, these professionals are either being duped themselves or duping you for profit.
“In the bond market it was still possible to make huge sums of money from the fear, and the ignorance, of customers.” Once again I put this quote here, because it is the recurring theme for Wall Street’s Final Act. Do you see where I’m getting at here? FUD from this real estate market created the FOMO on buying a home. FOMO made potential homebuyers desperate enough to bid above asking price on these homes. The high prices on these houses led to the psychological delusion of high value, confirming potential homebuyers’ decisions to buy now at whatever price they could, rather than wait and risk the prices rising even more. Wall Street banked on these consumer behaviors to further exploit the people.
We are now at the climax of this performance. This is where it gets really ugly for future prospects of the real estate markets.
New homeowners today have been fooled into buying, well above asking price, homes that are already overpriced. Do you remember what happened in the subprime mortgage market when cash-strapped Americans couldn’t afford their mortgage payments? They’d either 1) refinance or 2) default and lose their homes.
To refinance, your house needs to appreciate in value or the federal mortgage interest rate has to go down below your current rate. Well, mortgage interest rates are climbing higher than they have since the 1980s, so your only option, really, is to pray that your house doesn’t depreciate in value so you can refinance if you need to. For if your home depreciates, your mortgage will cost more than the actual value of your home, and you’ll be stuck with negative equity. Negative equity means you ain’t gonna be able to refinance because your house is literally worth less than your mortgage loan. Your second prayer would probably be that you never have emergencies where you’d need to refinance your home, since you wouldn’t be able to.
How’s the 2008 subprime mortgage market looking now? Probably a lot more innocent and less deceitful by comparison, eh?
This is the situation we find ourselves in today. We all better hope these newer homebuyers in this unjustly manipulated market won’t need to refinance their homes during an emergency. For if they do, and they find themselve unable to refinance because they bidded too high on their house price when its real worth was worth a whole lot less; or if the mortgage rates keep climbing the way they are thanks to the impotent Federal Reserve, then we’ll all be in deep trouble. The homebuyers with the overpriced mortgages they can’t afford anymore and who are unable to refinance will default in droves once again. Can you guess what will happen next? This is starting to sound familiar, isn’t it?
Repeat the aftermath of 2008. All. Over. Again. Massive defaults on homes. Subsequently losing those homes to foreclosure. Placing those foreclosed homes on sale at auctions. Investors will have a whole new wave of discounted homes for sale to mass-purchase and rent out for profit once more! And that means more rental income for them, which most likely means even higher rents and home mortgages for us the next time around! The only problem is, next time around, private equity and other Wall Street investors will own the majority of homes and rentals in the US. From their track record so far, that’s a rather terrible sign, isn’t it? Can you even imagine such a dystopian reality? I’ve been plagued with this FUD for months now.
You may think I’m being a doomer here. I get it, it’s a rather gloomy viewpoint on the matter. But there’s objective evidence this has already happened and continues to happen between the elite of Wall Street and the normal American people. Consider the simple fact that 75% of homebuyers from Covid times are already regretting their home purchases. This alone is an ominous indication that things are going to get much worse.
These homeowners now regret having bidded too high above asking price on their Covid-era homes ridden with hidden repair costs. What’s worse for them is the fact that they probably bought a house that was already overpriced to begin with (due to all the parties involved and reasons already mentioned earlier) before they even factored into the equation those hidden repair costs and above-asking-price bids.
We know that if these houses cannot be refinanced when it’s desperately needed, these American families are going to be at severe risk of defaulting on their mortgages if they can’t find a way to afford them. As grave as this seems, there’s already evidence that this exact scenario will come to fruition. All we need to do to confirm this theory is to observe the performances of the largest refinancing companies from this year and last. The Wall Street Journal has already done extensive research on one of the largest refinancing lenders, Rocket Mortgage.
Having displaced investment banks as the largest issuer of U.S. mortgages today, Rocket is one of the fastest-growing mortgage originators and refinancers in the country. According to this WSJ article, Rocket grew from issuing $12 billion in mortgages in 2008, to a whopping $320 billion in 2020. Obviously, business has been soaring to the moon for Rocket.
Recently, that’s come to a standstill. Rocket has been experiencing less and less eligible homes for refinancing of late. The first graph of this WSJ article shows the number of homeowners who are able to save money by refinancing today. That number has taken a major dive, plummeting from a peak of 19 million eligible homes in 2020, to just 133,000 households with today’s 7% mortgage rates! I really can’t believe this number myself, but it’s the incredibly alarming truth of the situation. What’s even more alarming is the fact that the Mortgage Bankers Association projects an even greater drop in refinancings for 2023. Imagine it getting worse than the mere 133,000 U.S. houses currently eligible for beneficial refinancing..! The truth gets scarier and scarier with each agonizing day.
With statistics such as these, it’s hopeless to expect Americans to come out of this new housing crisis unscathed. Any new homeowners currently burdened with finances (and who isn’t hurting a little bit post-Covid?) will most likely be unqualified to refinance their homes for at least the next few years, as interest rates climb up higher and higher and new house prices refuse to budge to any notable extent.
It already looks like Rocket is suffering major casualties from its dependency on refinancing. Last year alone, refinancing accounted for 82% of Rocket’s total dollar volume. Although not perfectly aligned, Rocket’s business performance is closely correlated with the number of currently eligible homes for refinancing. If there aren’t many houses eligible for refinancing, then by this logic, approximately 82% of Rocket’s current business plummets. Welp…Rocket’s stock performance has already fallen by half in one year alone. If you look at its public stock performance, it peaked in December 2021 at $15.92 a share. In December 2022 that number fell to $8.49 a share:
Doesn’t this seem to imply that a large number of households are already deemed ineligible for refinancing through companies like Rocket? It’s not a perfect indication, but it’s certainly pointing in the direction of a refinancing crisis. And it’s most likely only getting worse in 2023, when refinancing is projected to decline even more.
This might be doomerish speculation to some, but the statistics and financial journals of today are only supporting my hypothesis. We’re not merely suffering a housing crisis today. We’re encountering a refinancing crisis, too. It’s safe to say that if a large number of American families in need of refinancing find themselves ineligible in the coming years and end up defaulting on their mortgages, potential first-time home buyers are screwed.
It will be the Final Act of Wall Street. The last time they pull strings like this before they take over the real estate industry entirely. As more and more of these homes in need of refinancing default in the coming years, more and more of these single-family homes will be bought at discounts at auction sales (yet again) and shelved in Wall Street’s inventories once more. Their prices will continue to artificially rise or refuse to budge. And Wall Street will soon have free rein to dictate whatever mortgage prices and rental rates they want to extort from the American people.
They managed to rake in even more of these homes during the Covid crisis lockdown, too, when the Federal Reserve was either too stupid or too corrupt and decided to lower interest rates to nearly zero in 2020. The moment the greediest investors heard news of this nationwide sale on homes, they swooped in to buy as many as they could. They stuffed these new purchases at discount mortgage rates into their already expansive housing inventories for future price gouging. Meanwhile, so many young people today are desperately seeking homes for themselves to start a family.
It’s a depressing reality Americans face today, especially for the youth. Inflation as it is today has already rendered the middle-class poor. The middle-class purchasing power has been steadily shrinking from inflation and stagflation (aka where are our damn raises?), yet we are somehow expected to pay even more on groceries, gas, homes, and rent.
While we struggle just to survive in this economy, Wall Street and its government buddies have been sipping on scotch and slurping down shrimp cocktails like the good times never left. Wall Street and the federal government have taken on dictatorship roles that have turned our country into a capitalistic dystopia, where young families can have both partners working full-time and still can’t afford a roof over their heads. They don’t see a problem with this. For them, it’s just paper trades worth hundreds of billions of dollars on the outcome of our livelihood.
WE Draw the Line
The picture I painted throughout this post has been rather somber. I don’t try to be a doomer. I try to be as realistic as possible in any given situation, with facts and critical analysis to back up my points . But the reality is, it’s pretty fucking depressing…(sorry, just being honest…)
That being said, I wanted to make one final remark. I quoted Noam Chomsky earlier, but intentionally redacted the full quote. I wanted to end this on a more hopeful note, so I’m including the quote in its entirety here (in bold):
“If the population allows it to proceed, it’s just going to go on and on like this. Until the next crash—which is so much expected that credit agencies, which evaluate the status of firms, are now counting into their calculations the taxpayer bailout that they expect to come after the next crash.”
“If the population allows it to proceed,” we’ll be forced to take on larger and larger amounts of debt for the same basic essentials we all need to survive. “If the population allows it to proceed,” we’ll have to bend over backwards for them and take the price gouging on rents and mortgages right up our arses. “If the population allows it to proceed,” Wall Street and its circle of jerks will continue to bully us the way they have all these years.
But we don’t have to keep taking their bullshit. We can start taking action just by voting—in EVERY election. We can vote out the seediest politicians (aka most of them). We can also call our local statesmen and stateswomen to express our concerns. We can contact the White House regularly to disclose our true feelings on every single matter and threaten to take our votes elsewhere if they don’t give us what we want. We can protest on the streets in front of the White House and other buildings that house these politicians. We can stick our noses up at Wall Street’s lofty price tags on homes and rentals that we need to live in to survive, and stick it to them by sharing living spaces with roommates or moving back to parents’ homes until We the Customers dictate the prices again. If we joined together to fight back one way or another, we could make them bend to our will.
If you don’t believe this is possible, consider this: It was our tax money that bailed them out in 2008 and many times before and after. It’s our money that purchases their goods and services. It’s our decision where our money goes. So it is absolutely in our power to decide what the prices of everything will be…if we just fight back.
It’s high time they return the favor to us for bailing them out in a rough spot. This iBuying and hoarding nonsense needs to end now. Their price gouging on mortgages and rentals needs to stop now. If we joined together and stood against them and demanded the government hold them accountable for their reckless investments, we could finally elicit positive change in the financial sector again. The People hold the true power and value. Wall Street is just a bunch of expensive, but nevertheless worthless, paper.