Another concern is appraisals that are made to fit purchase prices. "Incomes" adjust to meet mortgage payments. Today's bankers and mortgage lenders often view their world as short-term. Since most loans are sold off, this is no surprise. The problem becomes someone else's! The irony here is that the secondary market in home loans is being perverted by the system rather than generating liquidity for home buyers.
Thus I see a major problem for banks, the mortgage industry and housing. Will the banking industry collapse? I do not think so, but I do see significant strains and the loss of billions of dollars of inflated real estate. Since loss reserves have been reduced for the banking industry by new accounting rules, the situation will not be pretty.
What is needed is federal regulation of the mortgage industry, the outlawing of 100-percent second mortgages for down payments and the monitoring of appraisals and credit practices.
Control and regulation of predatory lending practices should be implemented, especially when regulated banks buy these loans. Importantly, prepayment "penalties" should be forbidden for predatory loans.
The sub-prime market is about 19 percent of all loans originated, according to the Christian Science Monitor, a ten-fold increase since 1994. This industry has ethical challenges. Household International paid a $500 million settlement for charging higher rates than disclosed. And Ameriquest agreed to a $325 million settlement to 725,000 borrowers for similar abuses, such as concealing high interest rates.
This is chump change to these folks, and they are not the worst offenders in this market that serves the most vulnerable of our population.
The Federal Reserve Bank could dampen overheated real estate markets by restricting interest only loans, by forbidding "second mortgages" for down payments and by closely monitoring appraisals and credits. Will Federal Reserve Chairman Ben Bernaeke take these steps rather than use interest rates as a blunt instrument? It is doubtful. His interest lies with his banker friends, not the long-term health of the economy. The Fed is currently devising regulations to curtail interest only options and other "exotics." There is no sign that these regulations will be created soon.
Now let us look at what the investment world will look like in 10 to 15 years?
First of all I see a divide between the rich and the rest, and a battle for cost efficiencies vs. performance.
But what is little understood by pundits and public administrators is the battle for talent. Talent is rare and is becoming rarer as the bad and mediocre crowd out the competent, say, most currently, in the hedge fund arena.
Talent is needed to create and preserve wealth. The market will pay for talent. Boutiques and giant firms will dominate and the small independent or financial planner will become a "consultant" for clearinghouses, or disappear.
I see, therefore, an industry where most people will use packaged products and index funds and will purchase these products at a fixed fee or price. Brokerage firms will dominate, but banks and insurance companies will take an increasing piece of the pie. Discount houses will maintain their share of "do it yourselfers," but many will "move up the chain" to become more full-service.
People will continue to pay for wisdom, not merely information or "smarts." They will pay for human contact, a give-and-take, and, importantly, courage.
People might also deal with financial experts who are not local. Inexpensive telephone calls have allowed brokers and other financial types to deal with clients who live outside their territories. Geographic expansion will expand, and if regulatory licensing eases, non-U.S. based brokers might serve clients in America.
Computers will some day be developed so that there will be "virtual relations," but I am guessing that this will not take place within the next 15 years. In this scenario, you interact with a robot. But these robots will need to be creative, thinking out of the box.
The crowding out theory is also at work here. When too many people jump on the same wagon, few succeed. The convertible market once had many bargains; it was an exotic. Over the last decade, institutions and mutual funds have entered this market, and few "bargains" exist, in my opinion.
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