Written by attorney Richard Paul Zaretsky


About a decade plus a few days from the date this is written our government was swimming in a budget surplus, and we as a whole, were substantially employed, had lots of equity in our homes and the prospects for our futures seemed bright. Few if any of us knew of - or if we did - paid any attention to a report dated June 29, 2001 about the likelihood of a soon to come financial disaster. The name of the 31 page report was ** Housing In The New Millennium: A Home Without Equity Is Just a Rental With Debt.**

This week, my college student son encouraged me to read one of the books on his Business Finance reading list. The book is the background from a Wall Street perspective of the financial collapse caused by the financial meltdown that was part of the Big Recession that we are still in. The book, The Big Short: Inside the Doomsday Machine by Michael Lewis, made reference to a financial industry report which was partially prepared by an analyst named Vinnie.

This became particularly interesting because all week I was dealing with exactly the issue of homes being worth half or less than the debt, usually from a refi during the run-up in appraisals, and my statement to each homeowner was, "You already sold the house to the bank, and you have been renting ever since". It is no consolation that exactly this theory was proposed in 2001, after a cumulative 30% run up in home values the previous 5 years and 8% just in the previous year. How the 2001 report can forecast exactly what happened 7 years later is brilliant, and shows how some people could and did "bet against the market" by shorting the stock of the high flying financing companies and those that invested in collateral backed mortgage securities.

The 2001 report was written by the analysts of Graham Fisher & Co, a New York investment firm. Some of the notable suggestions in the report -

  1. The trend toward easier refinancing put consumers into a "more debt" situation than in the past. This was because each refinancing pushed off the time when the consumer would have paid off the older debt. Thus as the consumer got on in years, instead of less debt, they were accumulating more debt.

  2. Refinancing began creating the sustenance for a lifestyle. The report says, "Rising real estate prices have increased the equity value of the home (the denominator of the LTV ratio), providing consumers with what appeared to be a bottomless reserve of consumable equity. With the continuous decline in interest rates, homeowners, in increasing and unprecedented numbers, "cashed out" equity from their homes. According to a study by Dirken and Ellihousen, by 1999 47% of homeowners had refinanced their homes at least once. This is in stark contrast to the 8% who had refinanced at least once by 1977. According to data provided by the Mortgage Banker's Association and Federal Housing Finance Board, the dollar volume of mortgage refinancing in the 1990's ($3.37 trillion) exceeded the dollar volume of ALL mortgage originations in the 1980's ($2.93 trillion)."

  3. The ratio of debt to income was already in the year 2000, almost double what it was 40 years earlier. This table from the report is shocking:

Analysis of Consumer Debt- By Decade End (In Billions)






Non-Mortgage Debt






Mortgage Debt






Total Consumer Debt






Income per Household






Debt Per Household






Debt to Income






  1. The cost of debt theories of consumers changed from "total debt" to "monthly cost". With "teaser rates" and adjustable to fixed and other hybrid interest schemes, monthly cost became lower in the short term, but seemingly endless in the long term. According to the report, "While mortgage refinancing allows consumers to take advantage of lower rates and reduce monthly payments, there are negative consequences of mortgage refinancing. More often than not, refi's extend the duration of mortgage debt. When homeowners extract equity from their homes, the absolute amount of debt they owe to creditors increases, as does the LTV of their mortgage debt".

  2. What happens if real estate values decline? The report says that there is a real risk of this happening. "If real estate prices begin to decline, or unemployment rises, the ability to tap into the home for additional equity will be substantially reduced. According to 1999 Census data, of the 38.8 million owners with one or more regular mortgages, over 5% had no equity or negative equity. Another 7% had less than 10% equity. In other words, declining real estate valuations would reduce the ability of the Federal Reserve to stimulate the economy with lower interest rates. Not surprisingly, mortgage delinquencies peaked in the early 1980's, right after a period of recession and a surge in low down payment (LTV's greater than 90%) loans."

The report concludes (it makes so many poignant points that I simply cannot include them all - you have to read it for yourself and then be reminded you are reading a decade old report!), "... if there is an economic disruption that causes a marked rise in unemployment, the negative impact on the housing market could be quite large. Policy changes that encourage the recasting or modification of troubled loans may for a time distort the relevancy of delinquency and foreclosure statistics. However, a protracted housing slowdown could eventually cause modifications to become uneconomic and, thus, credit quality statistics would likely become relevant once again. The virtuous circle of increasing homeownership through greater leverage has the potential to become a vicious cycle of lower home prices due to an accelerating rate of foreclosures caused by lower savings".


Copyright 2011 by Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 [email protected] -FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! [email protected] New Website


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