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Posts Tagged ‘mortgage crisis’

The chatter has has been for years that the rise of the Internet would have real estate agents suffer the same plight as that of travel agents and stock brokers and be passed over in favor of discount, do it yourself websites. If people can find a home on the Internet, the reasoning was, why would they need an agent? Certainly, non-traditional brokerage, for sale by owner websites and discount models have become prominent, but they have not supplanted brokers. In an efficient market, if the efficacy of those models were so strong, one would expect brokerage to suffer a mortal wound.

And yet real estate brokerage has not declined. One can even make a case that brokers themselves have harnessed the net enthusiastically, with blogs and  personal websites with home search functions. With apologies to Mikey and Life Cereal, they like it.  How can this be? I’ll offer my observations here.

  • You can’t click on a house and buy it. You have to see it, walk through it, smell it, and sit in it. And few do that without a licensee present.
  • Few do that without a licensee present because most buyers don’t want the seller around when they look.
  • Even when the seller is present, most of the time they are deplorable salespeople. I have an interest in a non-traditional company. Believe me, commission “savings” is more than counterbalanced by ineptitude, lack of objectivity, and absence of professional advice. Many a seller has lost tens of thousands in sales price in order to save a few thousand in fees. Penny wise, pound foolish.
  • A trip or a security can be purchased online in 5 minutes. Real estate takes weeks and sometimes months.
  • Travel and securities don’t require an appraisal, title search, certificates of occupancy or engineer inspections.
  • Travel and securities are cash transactions that can be done with a click; real estate is seldom a cash transaction and even when it is, it requires far more due diligence. See prior bullet point.
  • At the risk of sounding Darwinist, overall real estate professionals are a tough and resourceful sort. This is a hard business. Brokers and agents the world over embraced the new technology and made it an advantage. They adapted, survived, and many thrive, even in this down market.  
  • In the same vein, good agents sell more property than mediocre agents. Good agents won’t take a pay cut to work for a discounter. Better agents work where they’ll earn more.
  • Brokerage is more than bird-dogging for a house. Who saw the house first is immaterial, and handling the shifting landscape of the transaction requires representation. People know that a few percentage points is a bargain for what they get in return, anecdotal horror stories aside.

    Interestingly, some of the non-traditional enterprises such as Foxton’s and Iggy’s House that endeavored to harness the net and gain market share via discounting failed spectacularly. The market is efficient; these concerns should have thrived if the models were viable. They weren’t. If the Internet were going to kill our business, it would have years ago. Until people can buy real estate for $500 immediately without seeing it, consumers will need our services. And that is a good thing.

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    Lenders are promising a “quick response” to distressed borrowers’ applications for assistance: 45 days. 45 days is fast?  45 days is glacial. What is slow?

    45 days is long enough to get 2 additional 30-day late payments on your credit report. It takes two days to underwrite a loan; a hardship package is virtually the same material, so what they need the other 43 days for is a bigger mystery than Transubstantiation.

    Just exactly what help they qualify for is unclear in the article. Politicians and consumer groups are less than enthusiastic about the pledge, and I share their skepticism. 45 days for a response, exactly what response qualified applicants will get, what contingencies are available for those who do not qualify, and what the criteria is for aid are all questions that loom large. If the decision makers are the same birds who came up with these exotic, irresponsible loans, no thanks.

    Here is what lenders and borrowers need to understand: re-structuring loans, adding back payments to the end of the loan, and other bandages only delay the inevitable. The best way for all involved going forward is for more distressed borrowers to sell the home they can no longer afford and get into housing they can handle. If that means going from an over-leveraged house to a rented apartment, so be it. Better to rent and have a positive cash flow than to “own” at the expense of an already beleaguered credit system. If the only way to sell is via a short sale, the lenders should eat the difference and staple the quarterly loss to the forehead of their executives so this fiasco never happens again.

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    This comment on this blog post at ActiveRain resonates. My question is more succinct, but needed to be asked. Activerain, by the way, has a fair amount of good content.

    There is plenty of blame to go around, from brokers to agents to appraisers to Wall Street, and, of course, borrowers themselves. However, the large lenders who invented the Sub-Prime ponzi scheme betrayed the public trust in the most insipid way. Just creating the supply of candyland money was the catalyst for the demand. They should never have been so shortsighted.

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    I make no secret that I stand quite a bit to the right of the NY Times editorial board on most fiscal matters. In today’s editorialon the presidential candidates, the Times portrays McCain as a Whig and Obama as a Caped Avenger. Both portrayals are problematic. Most government solutions are window dressing at best and have terrible unintended consequences; the last thing we need is feel good political maneuvering for hard core problems. We already know the solution, and the president who will make the most difference is actually Roosevelt. The FHA made a difference in the 30’s. It will help just as much now.

    The government has already expanded the FHA to both cover for the gaps in the credit crunch and ensure that future systemic problems will be avoided. Just yesterday they waived the 90 day waiting period on rehabbed resales (“flips”). I propose that the bulk of government aid be to lenders who responsibly allow for defaulting borrowers to exit via a short sale. That would allow a more organic return to a normal market and minimize the unintended consequences of many government panaceas.

    The editors of the Times either don’t know or don’t care that less is more. The damage has been done, and while we need more from Uncle Sam, the focus should be more on the preventative than the curative.

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    262

    …mortgage companies have “imploded” since late 2006.

    The resulting credit crunch has made the pool of buyers even smaller. This, coupled with the rising inventory of distress sales, short sales and bank owned foreclosures has suppressed prices enormously.

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    Appraisals

    Two articles of note on the role of appraisals in the mortgage crisis. The first articlefeatures clients of mine who, sadly,  lost their home. The lender, Ameriquest, is now out of business. Good riddance.

    This article appeared in the NY Times (printable version here) this past March and covers some steps taken by NY Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac to address the mess.

    I am cynical about steps the government takes to address problems in Industry; I view Uncle Sam’s cures to be too often symbolic and meddlesome. In this case however, Coumo deserves credit in my view.

    Mortgages are, essentially, collateralized loans. The valuation of the collateral (the home) is utterly crucial, especially when the loans are highly leveraged, made to the credit-challenged, or both. Since bad appraisals contributed to the current crisis and the industry has proved twice in 20 years that it cannot regulate itself, I have to grudgingly admit that the government has to step in. What a shame!

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    This is a commentary that I submitted to the Journal News recently that they have not (yet) published.

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    With the problems facing the real estate and mortgage industries, I look to the Oval Office to be the catalyst in the recovery of the nation going forward. I am not referring to President Bush, nor am I referring to the hypothetical Presidents McCain, Obama, or Clinton.

     

    The president who will make the biggest difference in solving the current crisis is Franklin Delano Roosevelt.

     

    It is hard to conceive that a free market, right leaning capitalist who abhors government bureaucracy like myself would invoke FDR. However, a realist with a rudimentary understanding of what makes our industry work will understand.

     

    It can be argued that the National Housing Act of 1934, which gave birth to the FHA mortgage program was the single most important piece of FDR’s New Deal legislation outside of the Social Security program. FHA made millions of previously unqualified Americans eligible for home ownership by significantly lowering the barriers to entry. A 3% down payment replaced the typical a 20% previously required. Conventional credit restrictions were relaxed. Uncle Sam would insure the loans, which was unheard of at that time. It was an innovative expansion of the home buyer base, put people back to work, and stimulated the economy.

     

    Some conservatives at the time saw the Program as a naïve and risky ploy to buy votes from the democratic blue-collar base. Yet 62 years later in 1996 when I started my career in real estate, the program’s efficacy was firmly established. Its foreclosure rate was low. The interest rates were competitive. The red tape one expected of a government program was surprisingly manageable. Appraisals were more stringent than those of other loans, but understandably so, given the increased importance of collateral in highly leveraged, often credit-challenged scenario. It had been the go-to home purchase program for the citizenry for decades because it worked for borrower and lender alike.

     

    Pragmatic management kept the Program in step with the times, from GI’s returning from overseas in the 40’s to single women in the 90’s.  Loan amount limits varied by market area and were raised when needed. Racist underwriting guidelines were expunged in the 60’s when fair housing laws were passed. When tweaking was needed, it was done regardless of administration or what party was in the majority.

     

    Unfortunately, in the post 9/11 spike in home values, the Program stopped changing with the times. Ignoring market trends, the ceiling for an FHA loan on a single-family home in Westchester County was a paltry $290,319 in 2005. This was unrealistically low for a county where the median home price was $700,000. In 1997, FHA loans accounted for 9.1% of all new originations. That number dropped below 2% in 2007. The Program gathered dust and was supplanted in market share by sub-prime products, which had higher loan limits and lax underwriting guidelines.

     

    Industry professionals should have seen sub prime paper for the fool’s gold that it was. B and C loans zigged where the FHA zagged. Appraisals, which were strict under FHA, were far too lenient with sub prime. Income and asset documentation, another cornerstone of FHA, was de-emphasized by sub prime lenders, and in the case of stated income loans, thrown out the window. Judgments and charge-offs on credit reports were ignored (FHA required them to be satisfied before closing). The only thing the programs had in common was that they targeted cash-poor, riskier borrowers. There was no mortgage insurance. To compensate, or more accurately, to hedge their bet, B/C lenders charged higher rates.

     

    They had it backwards. Poorly qualified people are even less qualified at higher rates, and the whole house of cards fell last summer in the worst rash of bank failures since the Great Depression, which brings me back to FDR.

     

    Earlier this year, in a move that eerily resembled erecting a stop sign at a dangerous intersection only after a fatality occurs, the government finally dusted off Mr. Roosevelt’s FHA program. Better late than never. Congress acted, and the loan threshold for a single-family home was tethered to the conventional limit of $417,000 (more in “high cost” locales like Westchester County, where it is $729,750). Other adjustments were made, but the important thing is that the vacuum left by the sub prime implosion was filled and the Program was relevant again.

     

    Other political solutions to the housing crisis in 2008 are tone deaf and ill advised. Maryland has outlawed “stated income” mortgages, which will hurt that state’s economy more than it will help. Stated mortgages themselves aren’t bad; for decades, self-employed professionals with excellent credit who had to put 20% or more down used them. Often 1099 professionals, doctors and small business owners, they had a tougher time verifying their income than the typical w-2 employee. The problem was that these loans were expanded to wage earners with shakier credit and smaller down payments who often misrepresented their income. The prohibition will prevent the well-qualified people from buying at a time when the pool of borrowers needs to be prudently expanded, not obtusely contracted through knee-jerk legislation.  After the savings and loan crisis of the late 80’s and the current sub prime meltdown, we really ought to know what works and what doesn’t. We don’t need politicians in 2008 reinventing the wheel. I’ll take 1934’s remedy any day.

     

    Given the current credit crunch, if anything saves our collective bacon in this market, it will be the rejuvenated FHA mortgage bringing a larger pool of buyers into responsible home ownership. Credit challenged borrowers will have fixed lower rates instead of higher interest, riskier ARM products. Unqualified borrowers will no longer sneak into a home they cannot pay for because there is no stated income or asset allowed by FHA underwriting. Appraisals will once again ensure that the collateral matches the loan amount, minimizing the all-too-common instances of negative equity and short sales. History will repeat itself and the new crop of FHA borrowers will be a solid performer. In this case, we would be wise to never again marginalize the FHA program and stability will return to a recovering market.

     

    When that happens, this laissez-faire fiscal conservative will tip his hat to Mr. Roosevelt.

     

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