Peter Schiff Mortgage Bankers Speech 2006 – Transcript, part 5

Continuing with the transcription of Peter Schiff’s speech from 2006, here is part five.

You can view the second part of his speech on YouTube on the following link:

Read more for the transcript.

[Because it’s going to be too expensive, rates are going to rise and the bottom is going to drop out of the subprime market]. And of course, the subprime market is at the margin, determining home prices. It’s these who were lying about their income or were overstretching themselves who were coming in here, and it’s been made possible through this credit market where the buyers of these instruments are somehow believing they are insulated from losses and people were willing to buy these risky tranches. Once they don’t want to buy those tranches anymore you are going to start to see a big big drop or a big rise in interest rates and that whole market is going to shut down. Because all of the sudden, when the mortgage people who are buying these bonds from you guys, when they can’t re-sell them because Goldman Sachs and Morgan Stanley won’t buy them anymore because they can’t sell them, then it’s over. There is no more market. There is no more secondary market for these products.

And credit really starts to contract. It’s almost like a perpetuating spiral. Because the minute you take away the credit and you make it harder for people to borrow to buy property, well you have fewer buyers. Of course, a lot of property is going to be coming on the market the next year or two because, as I said, when these adjustment rate mortgages reset a lot of people are going to be in the situation where they can’t make these payments.  Even if they cut back everywhere they can’t make these payments.  And, of course, a lot of them are going to be unemployed if they happened to work in the service sector and they lost their job because other people have cut back.  So a lot of properties are going to come on the market.  If you think there is a high inventory now, wait a while.  Who’s going to buy these properties if there is no credit flowing? And besides, everyone already owns houses, I mean we have home ownership right now is at an all time record high.  You know, there’s never been more people that own homes.

I mean, look at all the homes that are being bought by single women in their twenties.  You know, it used to be – back I don’t know, ten, fifteen years ago – if two people got married they were both renters. They got married and they bought a house.  Now when two people are going to get married, they are both home owners.  They got to sell one of them.  You know the whole dynamic.

And one of the reasons this downturn is going to be particularly severe – you know, when people are stressed to the limit on their mortgages and they have no savings [sic]. You know back in the 1950’s or 1960’s a guy lost his job, it wasn’t a big crisis.  He had a stay at home wife, she could get a part time job, he could get a part time job, they had plenty of savings, they had a fixed rate mortgage (and it wasn’t adjustable), they could get by. No big deal, it wasn’t a crisis.

Today, most people who have a home you got two bread winners. And even if one of them looses a job – they are done. They can’t make their payments. The only reason they were able to do it before was because OK, they borrowed some more money. They went to that ATM and extracted some equity. But all of the sudden, when you can’t do that – you know [sic] a lot of the people who own homes, I used to laugh all these people would be buying with adjustable rate mortgages. And they’d be asked in a survey “why did you buy with an adjustable rate mortgage, why didn’t you get a 30 year fixed?” “Well I’m only going to live in the house for two or three years.” Well, I was thinking, then why are they buying it? If you are going to live in a house for two or three years, just rent. But they were buying it because they were speculating. They said – I’m going to buy this house, it is going to go up and I’ll sell it in three years.

Well, what happens when it doesn’t go up? And what happens now that the mortgage rate re-sets and you can’t afford it? Well, you just walk away.

In fact, what a lot of people don’t realize – and I used to read a lot of articles about all the risks of nothing down mortgages and zero down mortgages. And I would say, yes you are right there are a lot of risks but the papers had it wrong. The risks weren’t being born by the borrower, they were being born by the lender. That’s the whole idea. When you put nothing down, you got nothing to loose. It’s the lender that takes all the risk. And of course, when you give somebody that situation, when you tell somebody – “Hey you can buy this house for 500 000 dollars, you can lie about your income, you can put nothing down, and if it goes up it’s all yours. That two million buck, yours. You can borrow it out tax free. It’s all your money. And if it goes bad, just move out. You have nothing to loose”. Especially if they took a negative am, teaser rate, adjustable rate mortgage where for the first two or three years the mortgage payment was really low, it might even have been lower then what they were paying in rent. And so they figured, what the hell!

And in fact for a while in California, it was much easier to buy a house then rent. Because, for renters the landlords, you know, wanted to prove your income. The lenders didn’t need to prove your income. You can’t do a stated income rent, you always do a credit check, they always check on your stuff. Landlords wanted first month, they wanted last month, they wanted a security deposit. Hell, you didn’t need any of that to buy a house. So a lot of people were just making this gamble. Because as we put that in their minds.

Of course, this is all going to unravel. This is all going to unravel. And as real-estate prices start to fall, right, and you say wait a minute – when they rose… look what happened to real estate prices, I mean what have they done [sic]? When people talk about that we’ve created all this wealth, I mean Barry mentioned all the wealth we’ve created, we really haven’t created wealth. What’s happened is that the value of our assets are now appraising at a higher price. But prices can change over time. The NASDAQ was 5000 then it was 1000. The stocks were still the same stocks the perception of the value is all that changed. So the reason that real-estate prices were so elevated was supply and demand – right? Everybody wanted to buy, but nobody wanted to sell. Why would you sell a house? It just kept going up. If you needed money – just borrow against it. And everybody wanted to buy because it was your ticket to easy-street. If you were renting, you were an idiot, you were throwing away your money – you got to buy. So everybody wanted to buy, nobody wanted to sell so prices went up.

Well, what’s going to happen? All of the sudden, nobody wants to buy anymore. Who wants to buy houses when they are falling in value? Who wants to lend money to buy houses? When real-estate prices were rising, the lenders didn’t care. Default? Who cares about default? The guy defaults we sell the house and make a profit. But when prices are falling and lenders are worried about defaults, they are going to contract their lending – “I’m not going to lend money out. Nothing down, are you kidding me? You know, I need 20% down.” Of course, when you require a down payment, it makes it much more difficult for someone to buy a house, especially when the prices are so high. You know, if the average house is 500 000 dollars and you need a 100 000 dollars down, the average guy doesn’t have that kind of money. It was the fact that they abolished the down-payment that made so many people able to pay these prices. In fact, there was a whole lending industry constantly lowering their standards. And lowering their standards which enabled prices to rise. Historically, the lenders provided a check on home lending. If you look at a chart, if you go back a hundred years, you look at the price of houses in the United States, until 2000 it maxed the CPI. Basically all that happened is that housing prices stayed even with the CPI but only because the owners of those houses spent a bunch of money every year maintaining them. If you didn’t maintain it, you didn’t fix the roof, you didn’t fix the pipe, if you didn’t do all that stuff your house lost value. It was only because you kept it current, that you maintained it, that it kept pace with inflation. It wasn’t until 2000 that it went off the charts because something weird happened. And this is all going to be corrected.

But also, you know, when pendulums swing, they don’t swing way to one side and then come and stop in the middle. They go all the way to the other way first. It takes a while before you find a balance. So as expensive as real-estate got, that’s how cheap it’s going to get. People are going to be completely amazed at the prices houses are going to be selling for in the next couple of years. Amazed. Just as amazed as the people were when they saw their shares of stocks go from 200 to nothing, or practically nothing. It’s the same thing. It’s the same dynamic because you are going to have lots of sellers, you’re going to have very little buyers, you are going to have a lot of foreclosures, you are going to have a lot of developers going bankrupt, you are going to have a lot of speculators.

You know, I know lots of people that own five, six, seven, eight houses. Maybe they’ve had negative cash flow on these houses. Their negative cash flow is going to get bigger because a lot of them are re-financed with adjustment rate mortgages. You know, I know people who own many many houses and when they even qualified [sic] for their loans they wrote “Owner occupied”. I mean there are people that have seven, eight or nine owner occupied homes in different states. I mean, everybody is looking the other way at these speculators buying houses. But you know they are all going to come out of the market. Look where we are here in Las Vegas. I mean, there are so many condominiums that have been built in this town, that nobody lives in. Their lights are never on. I mean they weren’t even bought with the intention of living in them. Some of them are so small, it’s like nobody would even wanna live… [sic] I mean why would you even want to buy a condo in this town. Look at all the hotel rooms, and they are pretty reasonably priced. Why would you wanna own a condo? The only reason people wanted condos was because they thought they could flip them to somebody else.

But it’s this huge supply of houses coming back on the market from speculators who got caught. And a lot of people who were speculators are home owners. Just because you own your home and live in it doesn’t mean you are not a speculator. If you bought a house using an adjustable rate mortgage knowing that you can’t afford to make the payments when they re-set – you’re a speculator. If you bought a house planing on selling it in two, three or four years – you are a speculator. That’s all you are.

So we had rampant speculation in this housing market, much more so then we had in the stock market. But the bigger problem is how intertwined the economy and the stock market are.