Returning to the basics of real estate financing

Beginning in the late ’90s and in response to the Community Redevelopment Act, the Inland Empire and the rest of this country saw a rise in “fantasy financing” unprecedented since the practice of buying stocks on margin in the 1920s . Banks have been forced to lend to prospective homeowners in a spirit of egalitarianism, rather than the more traditional profiling used to identify a viable loan candidate.

Responding to the frenzy of funding homeowners who want the “American Dream,” homebuilders, lenders, and real estate agents across the nation have become extremely successful by filling the pipeline. Residential and commercial real estate financing became “exotic,” and such loans, which provided “less than principal and interest payments,” became more common than traditional products. Both borrowers and short-sighted lenders ignored the realities of the economy, starting the “borrow any amount, buy at any price” trend. Value didn’t matter. Inland Empire properties were snapped up by teams of investors who thought they could lease these houses.

The argument was, “Since real estate is always going up, it doesn’t matter how much you pay because you can always sell for more money later.” It was not trendy to finance on terms that paid off a mortgage, because equity came from appreciation. Debts had to be serviced, not repaid; and there was no need to build equity through the traditional practice of paying off debt through amortization. Also, paying off the mortgage required sacrifice, thrift, and was a slow process, and building justice through the rapid appreciation experienced here in the Inland Empire was much quicker and required far fewer sacrifices. This euphoria appealed to fantasies of unlimited wealth and spending power.

Today, the fundamental belief in unstoppable real estate value has been challenged. All the necessary terms that enable such thinking now require the discussion of principles of economics. Fortunately, many people have now started to change their thinking. A homebuyer can no longer rely on the pretense of borrowing real estate purchase funds without disclosing and verifying income, savings, and employment.