Housing Market 2011: A Spirited Dialogue
Dealing with the problems that we have raised began with brute force in late 2008 when the ultimate shell game could no longer be perpetuated. The creation of mortgage-backed securities that were designed to fail fueled every one of these industry's with illegitimate and temporary liquidity, ergo economic implosion.
Asking what they can do to deal with the problems we've raised is slightly backwards. The better question is asking what we can do to deal with the problems they've raised, and the core of the answer resides in better consumer education, greater transparency and a bit of patience.
Litigation is a slippery slope that need be approached with great caution. Prosecuting banks and servicers for fraud based on the hyperbole called robo-sign is a highly misdirected use of resources and will end up costing the American consumer and economy far more than it would ever reconcile. Attorneys see this as a case of breaking black-letter law, and, technically, they are right. But this calls for more evolved thinking by people other than those who are simply paid to find reasons to litigate. Attorneys, for the most part, don't understand sophisticated financial instruments and the markets they make. Putting people behind bars in this instance without a clear remedy going forward is like putting a band-aid on someone who suffers from a cancer.
Having said all that, it makes great sense to recruit some of the same people who engineered this mess that we all willingly participated in to help navigate our way out of it. Otherwise, it is the blind leading the blind, as you've mentioned.
So let me get down to answering the core of your question and then I have to call it a year.
What can banks do?
At the investment level, a more homogenous architecture with transparent representations between mortgage-backed securities and the actual mortgages contained within. No more of this sprinkling toxic mortgages with well-qualified versions and rating the entire package AAA, establishing a false sense of security.
At the retail level, adhere to the same disclosure standards as mortgage brokers. Everyone likes to pin the blame on the dirty old mortgage broker, but what most people don't understand is that brokers are held to higher standards of disclosure when it comes to their compensation. Further, most people don't know that this undisclosed form of
What can real estate brokers do?
Increase accountability and get away from their current business model of 'pay fees, will license/ will employ.' I've recently read a rash of stories where real estate brokers and agents with serious criminal histories were either approved for or allowed to keep their real estate licenses.
Real estate educational curricula need to include far more material about how the mortgage industry works to act as a system of checks and balances. It's almost embarrassing how little real estate professionals know about the critical financial component to most property transactions.
Offering access to brokers or agents sales history and other performance metrics in relation to local averages would go a long way in establishing credibility and value for their services. Well experienced brokers and agents who perform above their local averages could finally change the almost prohibitively expensive '6 percent of the properties sales price' commission only model, in favor of a compensation model more in line with other professional industries where retainers ahead of and in addition to performance are the norm.
The title industry is pretty well regulated and effectively solved their robo-sign issues by requiring (and receiving) additional warranties from lenders before they would insure titles in question going forward.
Appraisers experienced a period of borderline insanity when New York governor Andrew Cuomo enacted the Home Value Code of Conduct, intended as a way to keep them insulated from third party influence that may yield erroneous values. Great in theory, however, in reality it caused a degradation of overall quality, efficiency and a logjam of complaints from real estate agents, mortgage professionals and consumers alike. HVCC was eliminated and replaced with the Appraisal Independence Requirements as part of the Dodd-Frank Act but specific aspects like the prohibition of bribery and other conflicts of interest remain, sufficiently addressing the issues that added to the financial debauchery.
Rob, I believe we are heading down the path to a proper recovery, but I predict it will take years. I don't think we're going to completely implode as a society and we can expect the typical cyclical conditions like inflation as quantitative easing is eased out of the Fed's economic strategy and the cost of printing trillions of new greenbacks is realized. Equilibrium is an ideal but fictitious economic state. If we're worrying about an improving equity market we're worried about rising rates at the same time and vice-versa. If everyone would take a deep breath, a step back and thoughtfully work together we can get through this.
After all: "God has a special providence for fools, drunks, and the United States of America." -Otto van Bismarck
Thoughtful stuff, but you're dead wrong on at least one point: Prosecution is not only necessary, but I can't think of a situation where prosecution of white-collar crime is more warranted.
I'm not suggesting we jail the Wall Street geniuses who came up with enormously complicated products, or hedge fund managers who made stupid decisions on complex instruments like synthetic CDOs. I'm suggesting we jail the guy who hired Burger King kids and hair stylists to sign thousands of affidavits as "assistant vice presidents" of the company. I'm suggesting we find out who engaged in warehouse fraud, where the same note was sold to multiple buyers, and jail them. I'm suggesting we find out who authorized the creation of false promissory notes and mortgage documents, and jail them.
I agree we need evolved thinking on modern finance, but robo-signing is not a technicality. It isn't hyperbole. It's straight-up deception of our courts that are supposed to guarantee our rights as property owners. Those responsible need to be prosecuted, pure and simple.
On your recommendations to the industry, I tend to agree.
Let me turn, then, to what I think consumers can do – and all of us are consumers after all – to help solve the problems.
First, I refuse to buy into the myth that American adults are some kind of kindergarteners who need government and industry to drag them screaming and yelling into classrooms to educate them on mortgages. Yes, there needs to be more transparency; yes, industry could do more to inform and educate consumers. But consumers themselves have the responsibility to be informed, to get educated, and to make smart decisions.
Second, what I can't forget is that at the core of our problems with the housing market were millions of individual consumers who thought they could and should take on huge mortgages they couldn't possibly afford. Sure, unscrupulous brokers and appraisers took advantage of them; but many of those in foreclosure are there for a very good reason: They're not paying their debts.
Consumers can blame banks and realtors and mortgage brokers all they want. If they've been defrauded and misled, I hope they get appropriate compensation. But if not, they need to move on, not fight the rightful foreclosure, and let the rest of us move on as well.
Third, those buyers and sellers who aren't involved with foreclosure at all, but just buying and selling normally need to get realistic. Especially sellers. Yes, it sucks that the housing market isn't what you'd want. Yes, we're all sure your home is unique in the world in how valuable it is. But when honest, professional real estate agents tell me their number one challenge is getting sellers to a price where buyers might be interested... there's a problem.
Fourth, I like your idea of providing information on performance metrics of real estate and mortgage professionals. But that isn't going to matter one bit if consumers keep hiring their cousin Sally or their brother-in-law to represent them in the most important financial transaction of their lives. Consumers need to demand more from real estate service providers, and hold them accountable, they way they might their accountants or attorneys.
Finally, I think it's high time that consumers stop thinking of housing as an investment. Yes, it's a lot of money. Yes, ownership means equity that you can later tap for retirement or the kids' college or whatever. But first and foremost, a house is shelter; it's where you go to bed, cook for the family, raise kids, entertain friends, and live your life. Always struck me as funny that people have no problems buying a car, despite the fact that the car loses a ton of value the minute they drive it off the dealer lot, but can't look at houses as just a place where they live first and foremost.
Ultimately, the housing market is so complex and so localized that it's impossible to say what will happen for sure. I happen to share your optimism about America in the long run. Yes, we'll have to go through some painful years, but with some luck, some smart decisions, and hard work, we'll get past this crisis and out the other end stronger than before.
But man, it'll be a wild ride until we do.
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