Risky business by not taking risk in the housing market in Santa Cruz

I am reminded as I see front page articles of major institutions how risk is fundamental to success. I am also reminded that without risk the odds of success are greatly diminished. As stock brokerage companies and banks had created the MBS ( mortgage backed securities) and the SIV’s, they were taking risk, and for a time, being handsomely rewarded. The lure of a new”drug” was a panacea for the ever higher and higher stock market mentality. Like the tech stock collapse in the late 90’s, this was the new thing. So banks, surely approached by Wall Street types, with a new way to make money, and banks with an unending stream of buyers, all took this bet that they could make money and get out before the end. Problem people rarely see the end.

There were no doubt scammers, and they will hopefully rot in some prison cell somewhere soon in a prison, near you. Some people were glorified as flippers, and I have a  no real problem with those who remodel and refurbish old housing stock. Those I have problems with, are the ones who either fraudulently bought multiple properties, or did nothing to improve the property, but sell later at handsome profits. These were the speculators, and they were at times, allied with unethical mortgage brokers generating multiple loans, with huge fees. Many of these buyers would later simply walk away from their loans.

I can’t paint mortgage broker with a broad brush, as most all the ones I know are very good and competent, and do a good job for their clients. Mortgage brokers serve a good function on giving a borrower a range of loan choices that one bank can’t. In the Santa Cruz County, California area, the southern part of our county is hard hit with sub-prime loans that were sold to farm workers. Most of these borrowers I don’t doubt are hard working folks. I think we will find that many of these people didn’t know what they were getting, and paid huge fees to a few unscrupulous banks and mortgage brokers. With nothing down, 100% loans, the idea of risk seemed an adverse concept. With no skin in the game, it is easy to walk away. While no one sets out to make bad decisions, many were made.

The Wall Street company of Bear Stearns, once a financial powerhouse, got hit with diminished income from these foreclosures, and liquidity issues as people, got fearful and pulled their money out. Pulling your money out of institutions and investments, contributes to a recession. Enough got so concerned, that the company became a shell of its former self, and was taken under by a conservative old institution, J.P. Morgan. A good move no doubt, as with the blessing of the Federal Reserve’s backing and guaranteeing of approximately $30 billion in possible defaults, they got a bargain. Their risk is negligible, but they saw an opportunity and I think will be handsomely rewarded. They will get great real estate in the company buildings, and some of the top personnel in the business for their expected 2 billion dollar investment. Many banks who took imprudent risk, have failed, and I am sure there will be some more bad news in the financial sector for at least another quarter.

Risk is not a bad thing. We take risks all the time, some big, getting married, having kids, etc., and other smaller risks like taking a route to wedding and missing the ceremony because we were late. Buying a house is a risk, but a different risk than buying a fund backed by MBS. A stock certificate has never been good to sleep under. A house, is a home, and a 5-10 year investment. Many people looked at stocks and home as short term investments. In Santa Cruz if you hold on to your real estate, in almost any 5 year period, you will be fine. Buying a house in Santa Cruz or Capitola or Aptos, almost always has appealing. Living by the beach is a dream for many. How many people do you know that say they want to retire to Modesto or Las Vegas, probably not many? Now is the time to venture into the real estate market. The prices are beaten down and there are some great values. Unlike stocks, homes have great tax benefits. Take a look around and see if a property in Santa Cruz, such as a beach home is in your future; these opportunities don’t come around all that often. Life’s a beach; call me to find out how to get yours today! Sometimes the biggest risk is not taking one.

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