While we debate Zillow, more Big Shorts loom

For the umpteenth time, someone in a Facebook group recently asked if buying leads from Zillow was worth it. The answers varied from ominous condemnations to enthusiastic support, with a few tin foil hat aficionados drawing parallels between chem-trails and a certain building in downtown Seattle.

The question itself can’t be answered objectively because some possess the skill set to convert random anonymous strangers into a committed business relationship and others are better-suited to working other spheres, no matter the source of the inquiry.

The cold war between Zillow and the “resistance” clouds our collective vision about issues that could cause tectonic shifts in the industry beyond how we advertise or generate leads.

But I digress. While we wring our hands about the change in our marketing dollar from print to online, the only forces that can truly undermine real estate brokers, large financial institutions, are making their play on at least two different fronts. Here is what you need to know.

Non-QM loans may become the new sub prime

Renaming conforming loans “qualified mortgages” was a way to make non-conforming loans, or non-QM, a more benign parlance.

Non-conforming loans could be fine in the long run depending on the underwriting guidelines, but don’t be fooled: many non-QM loans are essentially new language invented by the lenders to market subprime mortgages without the hair on the back of your neck standing up.

Perhaps what we should really call them is alt-subprime.

Without the backing of the government sponsored entities (GSEs) Fannie and Freddie to back these loans up, mortgage-backed securities will come back to the forefront. That in and of itself isn’t bad, but as we have learned, if you can’t sustain a recovery robustly, just artificially extend it with garbage paper.

If enough non-QM loans are made less than responsibly, there will be a double whammy of foreclosures increasing and institutional investment instruments that back them taking it on the chin as a result. Since they like to rename everything let’s call that a super short.

But wait. There’s more.

Institutional homebuyers won’t make enough of a margin to sustain profitability

Firms like OfferPad and Opendoor are making headlines and even getting market share in some isolated, unique markets, but the math doesn’t add up.

To really make money buying and reselling real estate, you need a 30 percent acquisition margin to account for the fees related to purchase, carrying and reselling the asset to make a profit.

There might be a razor thin profit with a 10 percent to 15 percent discount in some red-hot markets, but in middle America, paying 85 cents to 90 cents on the dollar doesn’t make money no matter how much volume you do.

These firms are using venture capital now, but if they create enough buzz to attract more institutional investors or go public, their inevitable reckoning with arithmetic will be ugly for their backers.

Here’s the bonus.

The big banks are dying to get into the real estate business

The same folks who brought you the sub-prime crisis and housing crash leading to the Great Recession want to be real estate brokers. I’ll repeat that: While you are arguing over Zillow becoming a broker (which will never happen), Chase, Wells, Citi and BOA are waiting for their opportunity to replace you.

Here’s how it will look:

1. Large financial institutions cause another housing and financial crisis
2. After another massive transfer of taxpayer dollars to bail them out, the government holds hearings because that’s what government does
3. The big banks lobby the lawmakers as they scramble to make yet another set of “never again” new laws
4. The banks successfully argue that real estate commissions place an undue burden on the consumer
5. Real estate brokerages then get legislated into obscurity by having their source of income handcuffed

If you think that is far-fetched, banks already decimated mortgage brokers by convincing lawmakers the fiction that yield-spread premiums helped cause the meltdown.

Laws were enacted to have the practice of YSP outlawed, and 90 percent of the mortgage brokers disappeared from my market. They weren’t shut down; they just lost how they were paid.

Meanwhile the big banks ate their competitors and became a four-headed cartel with only stationary letterhead distinguishing them from each other.

If you can’t beat them in the market, kill them in Congress. Taxpayers had a $124 billion haircut in the after the 1987 savings and loan crash.

Big banks were bailed out again eight years ago to the tune of $ 1 trillion. They have an unlimited amount of money to draw on — that is, your taxes.

The next time you want to argue about Zillow, Netflix The Big Short one more time, and watch it with this article handy. No one is going to make a movie about how Zillow annoys you.

J. Philip Faranda is broker and owner of J Philip Real Estate in Westchester County, New York. He is a member of Inman’s Real Estate Influencers of 2017, Zillow’s Agent Advisory Board and the 2014 HGMLS president. Follow him on Twitter @JPhilipFaranda.