Restoring the housing market
Perspective: The real estate rule of law
By Bradley Inman, Monday, July 14, 2008.Bookmarking Sites
At the peak of the housing boom in 2005, my pal Mitch asked me, "Does someone truly own a house when they put nothing down?"
His question gets at the core problem with the U.S. housing market: a disregard for the rule of law. Fundamental rules of real estate have been dismissed, such as requirements around good credit, full disclosure, transparency, a meaningful down payment, rational fees, common-sense loans and personal responsibility.
And at the extreme, consider the number of falsified loan applications in the last five years, sometimes making ordinary homeowners criminals and real estate professionals their enablers.
Short-term responses such as assigning blame, prosecuting the bad guys, shoring up Fannie Mae, and helping homeowners in foreclosure are necessary to stop the bleeding.
But to fix the housing market long term, bigger changes must be applied up and down the value chain, from individual accountability and enacting laws to tougher regulators who better police institutions and professionals. This is about bringing back trust in home ownership.
Outside of real estate, a classic case of the failed rule of law is urban lawlessness. If the mayor is known to be corrupt and the police are beating up its citizens, then it should not be a surprise that people double park without considering the consequences for others. There is no trust.
The same breakdown occurred when some financial institutions and Realtors encouraged borrowers to put nothing down and take out whacky mortgages because housing values "will always go up." Walking away from a mortgage because home prices are declining just continues this pattern of irresponsibility.
This behavior is part of a systemic problem in our culture in which entitlement, greed, overconsumption and blame drive economic habits. This was manifested in the housing market with monster homes, real estate flipping and homeowners tapping home equity as bank accounts.
In 1950 the average household size was 3.4 persons -- today it is 2.59. In 1950, the average new house was less than 1,000 square feet and today it is more than 2,500 square feet.
When every child has a master-bedroom suite, does a little boy miss out on learning patience, waiting for his sister to get out of the bathroom?
Instant gratification is also a characteristic of these times.
In 2001, a junior employee of a company run by a friend of mine said he was leaving the firm because he expected to be a millionaire by then. The company was two years old.
Sensible aspirations turned into irrational expectations, a trend that started in the early 1960s when the United States began to prosper.
In the Emmy award-winning television series "Mad Men," advertising guru Don Draper is pitching an ad campaign and says "less is more" no longer applies. The show depicts the advertising industry in 1960.
Indeed, frugality became known as cheap, savings became prudish, and indebtedness was the ticket to happiness -- a state of mind driven by careless consumption.
What economic wisdom could there be in using home equity as a bankroll to purchase depreciating assets such as home theaters, oversized grills, RVs and other things that lose value the day you walk them out of the store.
Conversely, tapping home equity for education, home improvements or starting a business represent wise economic choices as people leverage home equity into greater, not lesser, value.
Historian Correlli Barnett in his book "The Collapse of the British Empire" describes how the British moved away from being a reason-based society. Lack of reason characterizes the recent U.S. housing boom.
Fixing the housing market does not require anything fancy, but instead returning to fundamentals such as teaching people how to maintain good credit instead of showing them how to get a loan with bad credit.
Leadership is also important. President Bush should not implore the public to spend their tax rebates; instead he should encourage them to put it in savings accounts or to pay off high-interest credit-card debt.
A story in yesterday's Parade magazine has the right idea -- the headline reads: "How America's Thriftiest Families Save Money (and still have fun)!"
Large down payments and therefore higher savings rates are a prerequisite for a housing market recovery. And more rigorous laws are necessary on the disclosure front, regulatory licensing and transaction fees.
But other steps should be taken. For example, lawmakers should consider requiring Realtors and mortgage brokers to be regulated like stockbrokers. A stockbroker has an obligation to disclose the various risks and level of risk of an investment recommendation.
Transparency is the solution. In an industry in which secrets still abound, market recovery depends on a new openness about loan terms, transaction fees, borrower qualifications and the risks associated with buying and borrowing.
Until steps like these are taken and the underlying asset is treated with more respect, liquidity will be slow to return to the housing market.
Seven years ago when the tech sector collapsed, venture capitalists stopped investing in consumer-driven Internet companies. With Google's success, that changed. But the powerful search-engine company also set a new standard: Companies should have a clear business model, revenue and profits.
Restoration of the housing market will take years as well.
Quick political financial solutions will not fix the problem. Old-fashioned values about home ownership are required. It cannot be treated like a short-term asset, because it is not. Home ownership is an achievement that takes work, earnestness, savings and responsibility. And consumers should work only with responsible institutions and professionals who treat home ownership as something sacred that deserves protecting.
Brad Inman is founder and publisher of Inman News.
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Submitted by David Tanner on July 14, 2008 - 2:45pm.
Brad,
I am surprised that someone as knowlegeable as you would be using the term Realtor to refer to a generic group of real estate licensees. I am sure you know the difference but how are others going to learn if you use the term incorrectly?
Submitted by Maurice Stewart on July 14, 2008 - 2:49pm.
Brad, You are right on the money.
I am a broker myself and when I take a retrospective view of how we did business, we all have to feel a sense of responsible for the mess that we are currently living through.
In any event, the short-term fix is what we need to focus on at this time because the long term protocols will fall in place.
The key to a fast stabilization is to have the lenders (investors) realize that they are up to their eyeballs in the mess and the sooner they take action the quicker they can escape the fate of the "bigMac".
The Feds just handed out $130,Million to non profits throughout the country to be used to train and help in the home-retention initiative.
With 1,500,000 foreclosures on the table and an estimated 2,000,000 by the end of the year, it will that money will not go very far. As a matter of fact using the national average cost of processing a file ($550.00) this money will only process about 236,363 files. This is a far cry from the number of delinquencies that will need to be addressed.
There is a new website that is launching on Friday the 18th. and it will process a file in 30 minutes and provide a solution within that time.Using this system is expected to cost $45.00 per file in man hours so it will be the next big thing to hit the market. The site is www.lossmitigationexpress. Check it out and the nice thing is that anyone can use it and get out of a foreclosure bind. This site seems to be the "housing "silver Bullet".
Submitted by Jessica Swesey on July 14, 2008 - 2:50pm.
You're right in pointing out the trust issue, Brad. In pouring through personal finance blogs these last few weeks, it's clear the consumer-to-consumer messages on the housing front are 1) never trust your agent; 2) never trust your mortgage broker; and 3) repeat 1 and 2. People are looking around and seeing the foreclosure wasteland as evidence that no one was looking out for them (including themselves). It's clear the biggest hurdle for the industry in climbing out of this mess is to figure out how to win consumer trust.
Jessica Swesey
Submitted by Maurice Stewart on July 14, 2008 - 2:59pm.
Just a correction to my comment above;
The web address is:
www.lossmitigationexpress.com
What a difference a "com" makes.
Submitted by Joseph Ballarino on July 14, 2008 - 3:01pm.
In some areas of the country, people would still be walking away from their homes if they had cash in it, as there are who did and still let it go.
That is the consequence of a bad market. If lenders were willing to take that risk, then that is their decision and they are paying the price.
It is the lenders/investors that need reform. Their aggressive business models have cost them. Buyers who walked away without cash down didn't need to be disclosed anything, nothing ventured nothing gained.
Real estate brokers and agents simply bring buyers and sellers together. They don't decide who to approve or at what loan to value. Their responsibility is bringing buyers and sellers together utilizing the tools available in the marketplace.
Regards,
Joe Ballarino
www.AmerivestRealty.com
President & Founder
Submitted by Mike Watson on July 14, 2008 - 3:02pm.
Brad-
Great article. I think a lot of work needs to be done in educating the public when it comes to their mortgages, equity, and real estate decisions. A lot of the bad decisions could have been averted with proper education.
Take home equity for example. It is scary to see how irresponsibly many people in our country have used their home equity. If used correctly, equity can be a great tool to actually create financial stability.
The sad thing is that most people don't spend the extremely small amount of time it takes to learn about their financial future.
Thanks for bringing light to this issue!
Submitted by Regina L Geissler on July 14, 2008 - 3:15pm.
This very day, the day Miss Fannie and Mr. Freddy are getting bailed out by the taxpayers, I had a banker suggest to me that I would have better luck as a self-employed individual getting financing by LYING and saying that the home I would like to purchase would be a second home rather than a first home to bypass the two year residency restriction. I am sure there will be a bank willing to do business with me if I tell the TRUTH about all the details of our proposed trans-state transaction. If not then I just wait until a legal and honorable transaction is possible. Our country must be taken back one honest transaction at a time. That particular banker will not hear from me again.
Submitted by Peter Contostavlos on July 14, 2008 - 3:21pm.
Personally, the full blame for this mess lies with the lenders and the buyers, and maybe a small number of bad real estate agents/Realtors. Look, the bottome line is that at the height of the market you had ready, willing and able buyers who were qualified by reputable lenders, Countrywide, Bank of America, Wells Fargo, etc. The real estate agents helped them buy the house they wanted and their lender said they could afford. In that situation it is not my role to convince a buyer not to buy their dream house or to buy something less because I don't believe they can afford it. I leave the loan terms as a subject between the lender and the buyer and only get involved if the buyer indicates a need for help.
While you are right the house buying process has been commoditized like everything else in America. A home is not a stock, a bond, a car, a shirt, an investment commodity. A house is an illiquid asset, if you can't afford it, don't like it, you can't just trade it in, throw it away or ignore it.
You are right we do need to get back to basic, common sense money management and financing methods. Where is it written that everyone is entitled to own a home? Owning a home is something you should have to work hard to attain and are not entitled to. Downpayments must be re-instituted, even as little as 5% would be a help but 10% would be better except for FHA and VA. All this and good credit scores must be a pre-requisite if we are to keep this from happening again.
Submitted by Sean OToole on July 14, 2008 - 3:22pm.
Couldn't agree more, especially with regard to leadership.
I believe the Taxpayer Relief Act of 1997 which allowed homeowners to exempt up to $500k in capital gains on the sale of a primary residence was a key contributor to the current situation, and a clear failure of leadership. It was a quick fix which helped close the last foreclosure cycle, but it encouraged every homeowner to become a speculator and trade tomorrow for today.
While I find it hard to imagine that our leaders won't look again for quick fixes, I sincerely hope your call for a return to transparency, savings and responsibility comes to be.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Jon Strum on July 14, 2008 - 3:30pm.
Brad, your insights and proposed solutions are spot on. But the job ahead of us is, at best, a difficult one.
You correctly state that, "President Bush should not implore the public to spend their tax rebates." But he does.
You remind us that, "Large down payments and therefore higher savings rates are a prerequisite for a housing market recovery." But getting from "here" to "there" will be a painful transition. Even as we are in the midst of all of this market chaos, consumers still hear the radio and TV spots for "zero down" offers.
You point out that, "This behavior is part of a systemic problem in our culture in which entitlement, greed, overconsumption and blame drive economic habits." And you're right. Once we get past playing the blame game, it should occur to everyone that anytime someone in a position of power talks about the benefits of unregulated markets, entire industries end up getting taken apart and sold for parts and consumers are left to bare the pain. We've seen it happen in the airline industry and now it's happening throughout the housing market.
As public policy experts look back at the past 5 years, they shouldn't spend time focusing on a real estate agent or a loan agent who ended up "not doing the right thing". They really need to focus instead on the institutional "encouragement" for such activity. There wouldn't be any "no-doc" loans (so-called liar loans) if lenders didn't have a market to unload them. And that market wouldn't have been there if the credit-rating agencies had reminded us what the value of a "no-doc" transaction really was. And the credit-rating agencies wouldn't have anyone to issue their "ratings" to if the hedge funds had fallen under SEC regulation. Until someone stands up and starts talking about bringing transparency to all of the financial institutions that our tax money is now bailing out and keeping afloat, we're just going to face the same monster a bit further down the road.
I don't know that I've ever read anything that I've agreed with so completely, and yet felt so pained to have read it.
Jon Strum
President
homsho
Blog: www.LARealEstateBlog.com
Submitted by Jeff Manson on July 14, 2008 - 3:32pm.
Brad,
I am glad to see that somebody finally gets it, calls it like it really is and is not affraid of offending a certain group!! Your article is right on.
Jeff Manson
American Dream Realty
46 Hoolai St.
Kailua, Hawaii 96734
808-792-7040
Personal: Hawaii real estate agent
Company: Hawaii real estate search
Submitted by mke bohena on July 14, 2008 - 4:36pm.
After reading some of these posts, I see several Realtors pointing fingers at mortgage brokers, lenders and the buyers. At least they included the buyers. I am a mortgage banker, and I had to add my opinion.
Were all mortgage brokers sleazy? No, believe it or not, many of the brokers still in the business are those that have been around since Carter's Presidency.
Some have implied that Realtors were unaware of what went on.. I beg to differ. I had a borrower apply with our bank ( we are a direct lender) 2 years ago. This borrower was referred to us by their daughter whom we had refinanced and saved them $1500.00. The borrower was a married woman, who was not employed, and had not been employed for many years, she was 71. Her second husband was retired and they were living on his pension ( pretty decent).
This couple did not own a home, but rather rented an apartment in California. Actually although seniors and living on a fixed income, had never owned a home.
The wife thought it might be neat to live close to her daughter in Florida. She had been visiting and for one reason or other had looked at some Real Estate, and had put down a significant amount, without consulting her husband.
She then proceeded to contact me and wanted financing. She was very cheery! She told me the price of the home, and when they wanted to close. She applied for the mortgage, but when I asked her about her income, her answer was " oh I am not working .. yet.. I just graduated and have a degree in interior design. When I told her that she needed to have a job and income history , she assured me that when she found a job, she would have no problem paying the mortgage. I told her that she was not qualified to purchase a home.. explained that we based her ability to repay the loan on her present earnings, not what she " thought" she would make in the future.
The next day her husband in California had contaced me. He wasn't thrilled about applying for a mortgage. He explained that he and the little lady just got married and well yes he did have a decent pension, but he didn't think he could afford a house.
I ran his credit which turned out to be not " bad" but he had alot of consumer debt and his dti were over 65%. I told him that finding a loan for him would be difficult.
Enter the Realtor.. this realtor was not the buyers agent, but the seller's agent, and don't you know .. he scheduled the closing before he even had a pre-approval or commitment letter.
I explained that well, gee that was nice, and asked if he scheduled all closings without being absolutely sure that the buyer was qualified?
Then it began, I got threats of being sued for NOT putting these seniors that lived on a fixed income into a no doc or no ratio loan. My reputation was dragged all over the state of Florida.. I was a loser in the Realtor's book, and of course the wife of the borrower as she couldn't get the house that she so wanted. The Realtor promised me that he would make sure I never did business again in the state of Florida and would suggest that the buyer sue me.
He told me that his rep at Well's Fargo would close the loan in a day.. and so it was.. I was no longer able to protect this couple from not a predatory lender, but a Predatory Realtor, who happened to be in one of those one stop shops.
I found out later, that well the couple never did get that house... no one could approve them.. I am sure that the borrower saw the light at the end, but never called and said thanks.. the Realtor? I am sure is suffering today, as his strong arm threats of lawsuits because his seller didn't sell the house are over.
So, when talking about the crisis, do not put the blame just the lenders, the mortgage brokers and the buyers.. there are many stories I can share about Realtors promising buyers the ability to buy these "bigger better home, and I have a lender that will do it for you."
Actually the time has come, when Realtors and Mortgage brokers actually need each other. Some are too stubborn to agree, and that is fine.. However, without a Realtor, less homes are sold, without the mortgage broker/lenders, there is no money to close the deal.
Submitted by chis eliopoulos on July 14, 2008 - 9:00pm.
This is a good article falling way sort of addressing the core of the problem.
The real truth is THERE IS NO HOMEOWNERSHIP IF THERE IS A LOAN ON THE PROPERTY.What every one is talking is an oxymoron.There is a form of a partnership and the majority partner is the bank.PERIOD.
One is a HOME OWNER when he has FREE AND CLEAR TITLE.
Now regardless if one accepts the above the movements of the market depends in the amount of money available.If there are loans available the market moves up.As such the MOST RESPONSIBLE PARTY IS THE BANK.The last three real estate cycles proved that.
If one wants to solve the problem has to change the BANK REGULATIONS.They are the majority "partners".
They have to change practices from lending to disposing "real estate owned" to tax advances and brakes.As is now the banks have no reason to care as they make out very well.
Also there is such thing as a Realtor,it is a bought title SOLD BY A PRIVATE PROFESSIONAL ORGANIZATION TO IT'S MEMBERS,ONE CAN NOT PRACTICE REAL ESTATE with it.It does not define the profession.
There are BROKERS AND AGENTS WHO ARE LICENSED BY THE STATE TO REPRESENT INDIVIDUALS AND CORPORATIONS, IN THE PURCHASE, SALE AND LEASE OF REAL ESTATE.PERIOD
It is time for all to get real and call things for what they are.
Submitted by Harrison K. Long on July 14, 2008 - 11:26pm.
Brad:
Thanks for the blog article. I agree with your statement that the bad behavior of folks looking to get rich quick in real estate "is part of a systemic problem in our culture in which entitlement, greed, overconsumption and blame drive economic habits."
Correct. Let's educate young people, Realtors, agents, brokers, loan brokers, bankers, businessmen, about the ethics of encouraging folks to be honest and modest in their business dealings and to take responsibility for their actions.
Harrison K. Long
Realtor & broker
Explore Properties Group
Coldwell Banker Previews
Irvine, CA
949-854-7747
949-701-2515 cell
www.ExploreRealEstate.net
Submitted by Richard Dale-Mesaros on July 15, 2008 - 3:50am.
HAH!
FINALLY Harrison Long just brought up the issue of educating young people about building wealth and learning financial responsibility. Somehow, we need to develop a culture of highlighting the importance of this early on... school should include real life skills like managing your money, sales, negotiating, networking, staying in shape, treating people with respect and leading a life with integrity and ethics.
We have a much larger issue at stake here, beyond simply running the real estate professionals through the wringer; I'm certainly no expert, but we seem to have a national mindset that needs adjusting and that's a huge undertaking that should start early on....
BTW, don't forget to include the appraisers in this mess, too!
Richard :)
Chief Deal Weaver
www.BlackWidowNetwork.com - STRIKE FAST!
Submitted by Maxine Golden on July 15, 2008 - 8:06am.
Buyers need to be personally involved with their home ownership, otherwise they are "renters", prepared to quickly move at any time.
This involvement could be financial (down payment from savings), sweat equity(help build or fix up the home), relationships within their community, equity participation, etc.
When there is commitment and personal involvement, the home owner is more apt to try various solutions to keep their home rather than leave when there is a bump in the financial or job road.
One of the benefits of a home purchase agreement is that it is not instantaneous...it is a process of at least several weeks. Thus, the potential buyer has an "engagement period" where they can evaluate the home, their commitment and their future obligations. The real estate broker and the lender should be helping the buyer through this process on a personal level(OTHER than email and telephone ) as well as financial evaluation.
A Modest Proposal, http://www.momtalksrealestate.com/?s=modest+proposal discusses some approaches to community and personal involvement.
Submitted by Scott Niles on July 15, 2008 - 12:10pm.
Brad you are off a little by suggesting that the Realtor and lender should give financial advice to their clients under the guise of disclosure. In today's world most people want to run their own finances with things like day trading no less because it is cheap to do. Look at the commercials from Schwaab, and Price Waterhouse (T. Row Price) I get them confused, all talking about "experience of over 100 years "Blah Blah Blah and then at the end of this commercial they hammer home "no more than 10 dolars a transaction no matter what your blance". This is what consumers in todays world look for. These companaies know this but put out all the "disclosure" up front. The ad is then followed by the lawyer statement about do your research as we cannot guarantee you will make a dime speal like at the end of a car commercial. Anyway, I do not pretend to know my clients business model of investing and therefore they should consult with their finacial planner and if he tells them to buy property for their protfolio and I am the agent then it is my job to find that property that fits the criteria of what the financial planner has told him to buy. My job is to protect my client within the confines of the purchase contract during the purchase. On the other hand the lender has no responsibility at all during this process and that, I think is where the client fails to get financial advice from his planner as to the type of loan product to shop for. Again, I cannot pretent to know what my clients model is but he should be getting this advice on loan products from his financial planner. These lenders are being mirrored right now in their prcatices like the credit card companies are in front of congress. Teaser rates that you can qualify for and when they adjust 6 months later you cant make the payment and then you walk.But the lender made his/her money so Oh well. That is where the mess lies. If the client is qualifeid by a lender it is my job to find the home. So I blame this on lending greed that has taken advantage of good old american greed and ignorance to make a quick buck. If loan products that we see today (no stated, no 100%, but 5% down for conventional and 25 for investment) were the ones availblale during the housing boom we would not be in this mess today. And for congress to bail everybody out will just give people more incentive to do it again.
Submitted by Steve M on July 16, 2008 - 2:46pm.
It seems to me that part of this problem is that the real estate business and the mortgage brokerage business was flooded with people whose previous jobs had been outsourced to another country. They needed work and the only things available were these commission only positions. Because the careers were flooded, there just wasn't enough pie to feed everyone. Some got hungry. Very hungry and had to resort to lying, cheating, and stealing inorder to produce money to support themselves.
Combine that the loss of Pride and Integrity that is pervasive in our Country today and we all become cannibals. Animals feeding off each other to support our own life style. . .homes that are too big, second homes, cars that are ridiculously expensive and that destroy the environment and the world our children will inherit, boats that we don't use etc. etc.
Submitted by Miss L.S. on July 17, 2008 - 4:02pm.
Brad, great article. There are many people that contributed to the current mess of the housing market. Fiduciary responsibility is simply not there for many real estate licensees. Quite a few brokers took advantage of the fast and easy market by leveraging the number of salespeople in their offices, without taking the responsibility to keep their agents in check (literally and figuratively). Without oversight, many licensees feel free to “do whatever it takes” to get the sale completed. True, this does not excuse the buyers who lied on their no doc loans, but they hired “professionals” to explain this information to them so they would understand what they were purchasing. When studying for my real estate license testing, I couldn’t believe there was so much information and legality involved in a home purchase, and personally there is no way I would buy a home without a real estate license.
Harrison and Dale, I completely agree with you about the education factor. I am 26 and in talking with friends and colleagues my age, we have all bemoaned the fact that we didn’t learn about money issues in school, we learned about them in the “school of hard knocks”. Credit cards - when and how to use/not use them, balancing a checkbook, learning how to utilize (and sticking to) a budget…all of these are things that were and are still - for many of us - being learned the hard way, through much financial pain. Ethics is another issue that people in my generation *as a whole* need to understand and use more often. Ethics, honesty, responsibility…things that are not really in vogue nowadays, sadly…
Submitted by Ginny McGonigle on July 21, 2008 - 2:14pm.
Very good Article Brad. It raises some very good points and it is thought provoking. Thanks for posting.
Ginny McGonigle
Buyer's Agent
Santa Monica, California
http://westsidehomefinders.com
Submitted by Jodi Summers on July 23, 2008 - 8:51am.
An excellent perspective. Great information.
Quoted you @ http://www.santamonicapropertyblog.com/?p=342
Sensible Expectations.
Jodi Summers
Sotheby’s International Realty
jodi@jodisummers.com
www.SoCalInvestmentRealEstate.com
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You rea what you sew + you sew what you ip.