Ed Rybczynski Photography

Was President Clinton the cause of the housing meltdown?

Ed Rybczynski — Mon, 03 Mar 2008 08:35:51 -0800

This isn't intended as an opinion post, nor is it intended to inform. It's intended only to provoke thought and to draw attention to Gene Wunderlich's new group: Mortgage, Foreclosure & Elder Abuse Housing Fraud.

I plan on contributing a significant number of short posts featuring links to facts and opinions about mortgage fraud, foreclosure statistics, the housing meltdown, etc. that you won't find aggregated in any other place.

BusinessWeek had an article last week that bashed the Clinton administration for abusing public policy, visa vie HUD, to intentionally inflate domestic housing statistics.

It's an interesting perspective when you think about it. We know that the housing mess had it ugly origins in the mid 1990's. It's also safe to assume that failed public policy somehow initiated the mad rush to make every American a homeowner regardless of qualification or sustainability.

The article offers a plausible explanation that's not easy to discredit.

Checking in with my AR friends

Ed Rybczynski — Sun, 02 Mar 2008 09:25:50 -0800

The photos on the sideboard were taken at Loews Ventana Canyon Resort, located north of Tucson, where I spent several wonderful days this past week.

I was invited by my new friends at TitleServ National to give a presentation on leveraging the power of relationships. It was a great opportunity and a great time.

The use of photos in my blogging efforts is a new direction for me. I've noticed that Tom Peters does it and decided to experiment with the concept on Title-opoly. I'm thinking that photos from my travels might personalize the site making it more interesting for readers. We shall see!

I heard from Lola Audu, my friend from Grand Rapids, Michigan, who shared the link to her exciting new Squidoo Lens. Great job Lola! I hope that everyone is taking advantage of the tremendous opportunities offered by Squidoo. I'm assuming that Seth's newest project Mayor of your zip code is common knowledge to all of you. It's a powerful tool designed specifically for real estate agents.

Last week, I posted about title theft, an obviously growing category of crime that often targets the elderly. Long story short, fraudsters take title to vacant properties using forged deeds. The properties are then quickly resold or stripped of equity visa vie mortgages originated using falsified identity documents.

The reported cases are becoming to numerous to list, but a scenario presented in NapaValleyRegister.com serves as a representative example.

John and Anita Greerty used stolen identification documents to, in turn, steal the title to an 11 acre tract in California's lush and pricey wine country.

After entering into three separate sales agreements with legitimate buyers, the criminally motivated duo was able to successfully close on two of the deals before the scheme was revealed. Their take was roughly $745,000.

Scott Perry has been doing a tremendous job explaining the nexus between automated land records and the startling rise in crime statistics relating to real estate fraud that requires identity theft. Pay close attention to his message. Scott knows what he's talking about.

I've received and accepted a kind invitation from Gene Wunderlich to join a new group with an emphasis on mortgage fraud and real estate crimes that prey upon the elderly. I hope you'll consider joining Mortgage, Foreclosure & Elder Abuse Housing Fraud as well.

I have access to a lot of information that will be made available to the group as time permits.

Finally, this week will find me poking around Active Rain quite a bit. I'll be hosting the Mortgage Week in Review which is of course the brain-child of our very own FHA expert, Jeff Belonger.

Until next time ...

Fraudulent deed transfers: something to think about!

Ed Rybczynski — Sat, 23 Feb 2008 17:32:26 -0800

I spent the day fine tuning my talking points for a presentation that I'm giving in Tuscon next week. For the first time, I've decided to include fraudulent deed transfers to the ever growing categories of real estate fraud that I discuss with audiences.

The decision was based on information gathered from three different sources that I encountered this past week.

First, I received an e-mail from Dave Wirsching containing a link to a Philadelphia Daily News article portraying title theft as a minor epidemic in the City of Brotherly Love.

An alarming "122 stolen properties" were reported in Philly in 2006 and it's believed that many cases go unreported. Local authorities are concerned about having adequate staffing to handle the investigations and convictions.

Then, I noticed that Rachel Dollar touched upon the topic while testifying before a Senate Committee on behalf of the Mortgage Bankers Association.

Finally, my research uncovered an online service launched by McHenry County, Illinois to alert homeowners if documents containing their names are submitted to county clerks for recordation. Subscriptions are available for $12.99 for one year or $29.99 for three years.

The elderly are particularly vulnerable to this heinous form of fraud when their homes sit vacant. Using quitclaim deeds and forged signatures, fraudsters transfer title to properties into another name. The stolen properties are then quickly resold (flipped) or mortgaged to strip the rightful owner of any equity.

It's interesting to note that a number of accused offenders in Philadelphia were stupid enough to use their own names.

Fraudulent deed transfers are something to think about if you have elderly parents or loved ones whose homes are sitting vacant for any reason. You might consider asking your title company to periodically verify title or do it yourself using online records.

All in all, it's a frightening and sophisticated type of criminal activity that's best prevented by legislation that promises tough prosecution and lengthy prison sentences for offenders and accomplices. Think about it: a notary has to be part of the scheme.

A glimpse of Americana

Ed Rybczynski — Tue, 19 Feb 2008 18:00:05 -0800

The Library of Congress has generously made a collection of 3,100 photos available on Flickr. Photos were selected that "have long been popular with visitors to the Library." Best of all, the photos have no known copyright restrictions and can be copied and distributed at will.

Click here to view.

I spent several enjoyable hours viewing this remarkable photographic trek through history. My father, who died when I was a high school freshman, served on a Coast Guard transport during World War II. Some of my favorite childhood memories are of my father sharing his wartime experiences in the South Pacific. A fair number of the photos in the collection are from those ominous times during the 1940's when brave Americans risked their lives to preserve the freedoms that we cherish. Others represent the face of rugged determination. Others are simple representations of everyday life like the one below of a car leaving Romney, WV.

Hopefully, some aspect of this priceless historical compilation will spark a memory of something special from your past. Enjoy!

The credit for the link provided in this post belongs to Joe Ferrara of the Sellsius blog.

A follow up to Lenn's post

Ed Rybczynski — Fri, 08 Feb 2008 11:58:27 -0800

A special thank you to Lenn Harley for writing a stellar post about the offshoring of title searches. Check out Lenn's diagram. I love it! Thanks are also due to all of you who commented and showed concern. Offshored title searches are a particularly complicated matter that have become something of a personal cause for me and a rapidly growing number of others.

I've prepared a slide presentation highlighting the spirit of Lenn's post for Title-opoly and decided to give friends on Active Rain a sneak preview. Following Jeff's advise, I'm experimenting with eyejot and hope to embed a meaningful message in the Title-opoly post.

As a title company owner, I had two first hand experiences with costly litigation stemming from title claims. As an expert witness, I was retained once by a title insurer and another time by the insured's attorney who had filed suit against the title insurer. Homeowners involved in title claims often feel that they haven't been properly represented by title insurers and hire their own attorneys.

Claims council working for title insurers have a duty to protect the interests of corporate shareholders. I don't know of a singe instance where a homeowner was painlessly compensated for losses after notifying their title insurer of a pending claim. The terms of title policies, which are rarely explained or understood, give title insurers a significant number of advantageous rights including the latitude to thoroughly investigate any and all allegations, possible relationships, prior knowledge, etc. It's standard practice for insurers to conduct lengthy investigations to eliminate any possibility that parties to a claim might be in collusion. I once had a client who, as the defendant named in a title related cause and the seller of a Maryland property, was unable to consummate a contract of sale for well over year while a title insurer investigated the joint ownership of a boat in Florida. Sad but true: a pending sale means nothing to claims council who pursue their own agenda.

Title claims equate to litigation, depositions, court dates, piles of legal documents, subrogation of rights, etc. Consumers subjected to title claims couldn't possibly be compensated for the sleepless nights and emotional trauma they're forced to endure, nor do title policies allow for the payment of punitive damages.

I'm often asked why the offshoring of title searches remains an increasingly prevalent practice in light of the elevated claim's ratios reported by title insures. I don't have an answer.

I do know from experience that a thoroughly (locally) searched and examined title rarely results in a claim.

It's a matter of trust when you really think about it. Title companies are expected to act in the best interest of consumers. Offshored title searches raise serious questions about the integrity of companies that use them.

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An abstractor has been sighted on Active Rain

Ed Rybczynski — Tue, 05 Feb 2008 11:27:26 -0800

A Pennsylvania title abstractor named Scott Perry has launched an Active Rain blog named Bossman's Blog. The addition of an abstractor to our eclectic collection of professionals is an exciting development. I happen to be an abstractor by training even though circumstances kept me behind a desk more than I liked. Sadly, the public knows very little about the important work done by these intelligent, hardworking colleagues of ours who quietly spend the bulk of their time in local courthouses.

It needs to be said: an abstractors work-product is the solid foundation of a positive closing experience for buyers! Hopefully, we'll be able to convince Scott to share with us what he does and why it's so important. Personally, I'm of the opinion that a title insurance policy is only as good as the abstract that was used in its preparation.

In a recent post, Scott wrote about the plight of title insurers whose financial statements are suffering due to the cumulative effects of elevated claim's ratios and decreased business levels. Scott and I share a serious concern that land record integrity could potentially fail because underwriters are purposefully lowering abstracting standards to increase their bottom lines. The major players in the title insurance game have invested heavily in offshore abstracting plants located in India, the Philippines, Panama, Israel, etc. Aggregated ownership records are being acquired from local jurisdictions and resold overseas.

It's a complicated matter that raises any number of critical questions. Foreign abstractors lack the training and experiential judgment to properly search titles. It could be argued that foreign title plants aren't as complete as local land records and therefor shouldn't be used to produce title policies. Title searches prepared overseas aren't the technical equivalent of the searches prepared domestically and are therefor problematic.

Fran Gaspari, our resident title guru, would agree.

Unquestionably, underwriters are experiencing a significant increase in claims due to a short-sighted approach to title searching. Regrettably, a title claim, even one that's resolved quickly, is a nightmarish experience for consumers who often retain council to protect their perceived interests vs their legal interests as defined by their owner's title policy. Consider the emotional wear and tear of dealing with any litigation involving your home. A title claim could reflect poorly on you as a real estate professional, if you actively refer buyers to preferred title companies.

What do you really know about the internal practices employed by your title company?

Additionally, important security risks come into play. Some years back, the Feds required that social security numbers be included beneath borrower's signatures on certain mortgages (substitute deed of trust for mortgage as applicable). At the time, before we even heard of the internet, all records pertaining to homeownership were maintained by local clerks at local courthouses. An unscrupulous character could access this sensitive information which became public record when the mortgages were filed, but it required a certain amount of effort which is not the case any longer. If you signed a mortgage during the late 1980's or early 1990's, it's entirely possible that your legal name and associated SSN has been digitally transmitted to unsecured, questionable destinations around the globe.

It's not a good situation!

The debate over the appropriateness of bigness in real estate model design is far from resolved. Bill Roberts, my friend and AR nemeses, would argue that consumers benefit from the reduction of costs associated with economies of scale. I can't disagree in theory. At the same time, I strongly feel that certain aspects of the homeownership process are best left localized. You need to know that Bill and I have privately agreed that his home state of California lends itself to business models that wouldn't work in other parts of the country.

At best, the upside of an offshored title search is the savings of roughly $150.

The downside is an increased risk of involvement in litigation for homeowners.

If I were to become a real estate agent, my buyers would use only title companies that relied solely upon local abstractors.

Seriously, how could anyone argue otherwise?

Related post by Lenn Harley: Offshore Abstracts? Is That Anything Like Vicarious Sex??

Social innovation in housing markets

Ed Rybczynski — Mon, 28 Jan 2008 21:26:11 -0800

Blogger Carlos Gasca Yanez has proposed an innovative solution to this nation’s looming social blight: housing markets in crises. The idea championed in a post titled Subprime Crises calling for Social Entrepreneurs is to partner nonprofit initiative with corporate enterprise. Carlos envisions a real estate model that embraces a marriage of compassionate sensitivity to the profit motive. Essentially, cooperative education would occur at every level beginning with professional development and the implementation of best practices. Businesses and nonprofits would then endeavor to protect and inform borrowers likely to be victimized by predatory lenders.

A ridiculous proposition? I think not.

Years ago, I participated in a social experiment with a nonprofit named People’s Homesteading Group. To make a long story short: homes were awarded to participants based on an equation that favored need over financial qualifications. My company facilitated thirty or more closings and the quasi-governmental funding that served as the financial mantle of the project. While it might be said that corporate resources could have been used more profitably from the perspective of balance sheets, it could also be said that my horizons grew in ways that transcended dollars and cents. The homesteading project was successful overall.

Don’t miss the comment thread on Carlos’ post. Chris describes personal experiences with a radical and remarkable housing initiative unfolding in Scotland and Norway. Cheryl gives an incredible dissertation on the importance of teaching credit fundamentals.

I left the post with a realization that housing is possibly the paramount global issue.

Relevant quotes to ponder:

James P. Danky - It is ironic that virtually every Martin Luther King Jr. Boulevard in America is a street of abandoned buildings, abandoned businesses, abandoned people, abandoned dreams. Those who honor King's name need to think about fulfilling the promise of his dream to those who have been forsaken in our inner cities.

Carlos Gasca Yanez - Capital is mobile and has no heart; communities on the other hand are not mobile and are on their own when it comes to determining their future.

Myrlie Evers-Williams - It is you - if you will summon the courage - who will forge new initiatives in finance, technology, medicine, and management that will put all Americans back to work and the the same time give America a better shot at feeding the hungry, sheltering the homeless, healing the sick, and caring for the children.

Affiliated Business: What I should have said

Ed Rybczynski — Wed, 23 Jan 2008 11:49:27 -0800

Sometimes it's easier for me to write on my outside blog than on Active Rain. There are so many different personalities and diverse groups on this site now that I find myself holding back at times. While politeness is always a good thing, guarded restraint definitely is not.

Hopefully, none of us set out to intentionally harm other members of the community. I certainly do not.

A couple of days ago, I shared some of my thoughts about affiliated business. A fair number of you had asked me to so. One of my favorite outside blogs even boasted that the post had been made. There's a problem, though, that you need to know about. I confess to having altered the draft of the post by watering it down and shortening it considerably because I feared my words might inflame, or offend, some of you. I cheated you and I cheated myself. It won't happen again.

With that being said, the broad and general tone of my post obviously offended someone who was kind enough to read it. It wasn't my intent. In an email, I was accused of seeking approval rather than promoting dialog. The word "egotistical" was used to describe not only myself, but the community at large. Blogging, it seems to me, is inherently egotistical; as is all marketing; as is all selling. It's the nature of the beast; it is what it is! At the age of forty six, I've come to the realization that I'm more heretic than saint and that personal vices are part of the deal.

With tens of thousands of potential readers on this site, a blogger can no longer worry about what others might think. Those days are gone. It's detrimental to the creative process to try to cater to the whims of so many. Do me one favor: if you don't like what I have to say, move along without attacking me personally. I don't need it, or desire it, and you don't either. Life is too damn short, and too damn precious, to have to contend with the toxins spewed by others.

The truth about affiliated business: I despise it because it encourages bigness in an industry that's best left localized. Think of me as the greatest advocate of the Community Choice in Real Estate Act. While I fully embrace the spirit of the proposed federal bill, I wish that it would offer protection to mortgage brokers, title companies, abstractors, and appraisers, and well as real estate brokers. The NAR deserves credit for its lobbying efforts; the trade associations for the related industries should be ashamed of themselves.

I fully understand the importance of economies of scale in any industry. But, selling real estate is more closely related to a professional endeavor than it is a manufacturing operation. To be accomplished successfully, it requires a significant degree of skill, judgment, experience, compassion, and the time honored personal touch. Efficiency and effectiveness are best attained through training individuals not by outsourcing to centralized processing centers. Call me provincial, I don't care.

At some level, I don't blame real estate brokers for trying to improve profitability by offering "bundled services" as an ostensible convenience to consumers. It's important, however, to contemplate the long-term implications of opening that particular door. It represents the sunset of the reign of local real estate brokerages. Keep in mind: federally chartered banks are perfect candidates for affiliated business and it's a simple matter of congressional funding that keeps you from having to compete with them. Big banks have the ability to decimate your business in the same way that Wal-mart has virtually eliminated local merchants. They have an existing relationship with every consumer and a "point of contact" opportunity unlike any other.

I'm bothered by bigness in real estate because it "dehumanizes" a process that should remain fundamentally humane. Purchasing a home is innately different than buying a flannel shirt or a hammer. I really don't care that I have to spend a couple of extra dollars for proper representation when making the most important purchase of my life. Yes, homeownership is that important and that unique. It transcends the ordinary to touch the heart and the soul of those who embrace it.

I often tell audiences that acting as a fiduciary in a real estate transaction is tantamount to being a clergy person. Matters that inherently involve fiduciary responsibilities are best left in neighborhoods and communities. I rue the thought of a consumer having to call a customer service representative in India to find out how their home purchase is coming along. Can you image? But, affiliated business will follow that trajectory if left to its own volition.

Support the spirit of the Community Choice in Real Estate Act by supporting locally and independently owned mortgage brokers and title companies. Make certain that your title company is using only local abstractors. Ultimately, it's your chosen profession, and consumers' interests, that you're protecting.

Affiliated Business: The Nemesis of Reason

Ed Rybczynski — Mon, 21 Jan 2008 14:26:47 -0800

Normally, I have no problem sharing my thoughts about affiliated business, yet for some reason found it difficult to do in an Active Rain post. I have, in fact, relentlessly denounced affiliated business in the same manner as a preacher condemning sinful acts from the pulpit.

The concept of affiliated business in real estate transactions was born of the Reagan Bush brain-trust during the late 1980's. The federal mood and agenda at the time was one that encouraged bigness of business. It was thought that "deep pockets" paired with technology could create an environment that reduced costs and enhanced services for consumers who were purchasing or refinancing a home.

It all appears to be simple and reasonable enough. An affiliated business arrangement exists when a real estate brokerage and a title company share the ownership of a title company. By partnering in this way, real estate companies and agents are entitled to share in the profits of a captive operation.

Keep in mind, there are any number of possible variations to the theme including joint ventures with mortgage brokers. I'm trying to keep this post as straightforward as possible by dealing with only the title industry's perspective.

To be legal, and RESPA compliant, a lengthy laundry list of requirements must be strictly adhered to. The agent has to contribute capital to the venture in an amount equal to the agent's proportionate ownership interest. Any monies dispersed have to take the form of a legitimate distribution of profits. Also, the new company can't share space, staffing, or management with an existing title company. It has to be a free-standing business that supports itself by offering core title services. Establishing a legitimate affiliated business is an expensive and risky proposition that requires a great deal of planning, capital, and the involvement of an attorney familiar with RESPA implications.

It's patently illegal for a real estate agent to receive benefits, on a per deal basis, for doing nothing more than placing an order in an in-house pipeline. By benefits, I'm referring to checks, sometimes called "hard dollars," or "soft dollar" inducements that offset desk or advertising fees.

The experiment that is affiliated business has been successful only in limited parts of the country where ownership records are available in the form of highly automated title plants. Keep in mind: success is measured only in terms of benefits to consumers, not real estate professionals. For the most part, the project has proven a dismal failure due to the very nature of abstracting and examining titles. It's a process that's more closely akin to a professional practice, not a manufacturing operation that experiences economies of scale through increased volume.

In many instances, consumers are horribly overcharged and subjected to inferior service because the title company in a directed business situation has no incentive to be anything other than mediocre and has to share profitability. Restrained competition, never a good thing, inevitably results in complacency and exploitation. It also has a tendency to attract those who aren't the best or the brightest. Affiliated business doesn't have to produce stellar results or be the least expensive alternative, it just has to be good enough to pass for a close facsimile of the real thing.

Surely everyone acknowledges the benefits of competition:

Do we not encourage our children to engage in healthy competition to learn the value of superior performance?
Can you imaging sending your children to school with the expectation of being average academically, socially, or athletically?

Of most concern to real estate agents should be the contradiction between affiliated business and fiduciary obligation. Is it possible to remain completely impartial when referring service providers while the promise of additional income rests in one particular provider?

I highly recommend a blog hosted by Minnesota attorney Doug Miller. Ethical Practices in Real Estate offers practical advise that can't be found elsewhere.

In a recent post, Doug issued a relevant and timely warning:

Has your manager given you advice on how to address “objections” if your clients want to select their own title company?
When it's time to negotiate your commission split, does your manager or broker first look at how many files you’ve sent to the in-house title company?
Do you find that there is an unusual absence of marketing materials or presentations from outside title firms?

Doug suggests that you "find another broker to hold your license" and a "class action attorney" if you "answered yes to any of the questions."

I happen to fully agree with Doug. As attractive as affiliated business might appear at first blush, the business model offers numerous perils for real estate agents from a legal perspective and as a practical matter.

My other new favorite blog

Ed Rybczynski — Fri, 18 Jan 2008 07:17:59 -0800

Yesterday, I wrote that Presentation Zen is one of two blogs that I presently enjoy reading. The other is named Leading Blog - Building A Community of Leaders. Keep in mind that my taste in business blogs is constantly evolving.

While Presentation Zen inspires the unleashed creativity within, Leading Blog offers grounded advice on relating to others. Michael McKinney constructs a lofty monument to the importance of teamwork by convincing readers to elevate their own games and to bring others along for the mutual benefit of all.

The drive to improve personally coupled with a clear and defined goal of inspiring others is the undercurrent of stellar performance in business ... and in every aspect of life. It's clearly the foundation upon which the Active Rain community has been built.

In a recent post titled Are You Mature?, McKinney presents the following list of characteristics of mature decision makers:

They are able to keep long-term commitments.
They are unshaken by flattery or criticism.
The possess a spirit of humility.
Their decisions are based on character not feelings.
They express gratitude consistently.
They prioritize others before themselves.
They seek wisdom before acting.

Get my point? It's good stuff. I've only shared bullet-points, but in the actual post, the information is presented extremely well with a great deal of insight and direction.

Here's an excerpt from Leading Blog that really spoke to me:

"When we find ourselves merely trying to survive the pressures created by limited time, money, and people resources, we tend to take as much as we can. This survival mentality eventually isolates us from a community that could otherwise provide us with everything we want."

I'm sometimes guilty of gathering as much as possible in the now, instead of taking only that which is truly needed to sustain. The survival mentality is possibly core to the human condition, but nevertheless contrary to functioning within a community like Active Rain. The key is to give more than you take and to take only that which you need.

Communities, in a physical sense, have provided for the needs of man since the dawn of humanity.

Virtual communities have the potential of nourishing the human drive to excel, in a personal sense, while motivating others to soar to heights that were once unthinkable.

The ability to unlock the potential within ourselves, and within others, is the benchmark of leadership.

See: My new favorite blog.

My new favorite blog

Ed Rybczynski — Thu, 17 Jan 2008 15:26:22 -0800

Actually, I have two new favorite blogs, but I'm sharing only one of them today. It could be said that I've learned more from a blog named Presentation Zen than any other site. I've probably learned more from the blog than I did while in business school.

It's that good ... and informative ... and cool.

My presentation style is very important to me. So is the effectiveness of my PowerPoint presentations. They happen to be the tools that I use to craft a living.

I would think that real estate agents, particularly listing agents, are equally concerned about making powerful statements to prospective clients. After all, communication is everything.

Garr Reynolds, the host of Presentation Zen has recently published a book by the same name. Hopefully, my copy will arrive soon.

Seth Godin called the guy a guru and published a Squidoo Lens as a tribute to the new book. Click here to visit Seth's Lens.

Check out Garr's blog and let me know your thoughts.

See: My other new favorite blog.

Who's Watching the Watchers?

Ed Rybczynski — Wed, 16 Jan 2008 12:20:47 -0800

Last week, I suggested that real estate agents check up on title companies after closing to make sure that mortgages were paid off. Why? Title company executives have been known to "help themselves" to money held in escrow, particularly when business is bad.

See: Is Your Title Company Misbehaving?

Most people don't realize that the title industry is basically unregulated in most states. Unregulated as well, are the massive escrow accounts administered by the title companies. A preliminary federal study released in 2006 revealed a laundry list of startling truths about a misunderstood industry and its primary product, title insurance. Most startling: title agents are primarily responsible for auditing their own escrow accounts. It's tantamount to asking the fox to guard the hen house. The study also found that ridiculously relaxed licensing standards have possibly resulted in an industry of unqualified practitioners.

The truth about the title industry is frightening: licensing requirements are non-existent in 3 states plus the District of Columbia; 18 states and the District of Columbia do not require a title agent to pass a test to become licenses; only 20 states have an educational requirement as a pre-requisite to licensing.

For the preliminary federal study on the status of the title industry, click here. For the final report, click here.

An article published in the Springfield Business Journal paints a horrific tale of consumer suffering at the expense of title company malfeasance. Click here to read article. Guaranty Title conducted business in Missouri before being shut down last June by its underwriter, LandAmerica. The problem: there's more than $5,000,000 missing from escrow accounts. While LandAmerica is clearly on the hook for some of the missing funds, it's disputing liability for buyer's deposits held by Guaranty Title for a local developer named Branson Hills Development.

Based on an anonymous tip, Branson's attorney subpoenaed audit reports proving very harmful to LandAmerica.

The report indicates that a routine audit conducted by LandAmerica in April, 2006 found that $600,000 was missing from Guaranty Title escrow accounts at that time. Several months later, promissory notes were issued by Guaranty Title to LandAmerica to cover part of the missing money.

Why didn't LandAmerica close Guaranty Title's doors upon discovering that escrow funds were missing?

Because Guaranty Title was an enormous company that made a lot of money for its underwriter, LandAmerica, in the form of title insurance premiums.

Why didn't LandAmerica report Guaranty Title's criminal activity to the proper authorities?

That's the seminal question that casts a shadow of doubt on the integrity of LandAmerica, and possibly the title industry, in 2008.

It could be said that LandAmerica drove the getaway car used by Guaranty Title to rob a bank.

In defense of LandAmerica: the company has a good reputation overall and isn't normally associated with this type of reprehensible behavior. I hope the company has the courage to step to the plate and publicly dismiss every executive who was involved in the reckless decision making that permitted a rogue title company to continue raping the public.

I want to go a step farther and share my concerns about those of you who collect fees, or soft-dollar perks, for shipping title orders to affiliated title companies. Don't do it! It's a business model that's marginally legal, at best, when constructed correctly, but perilous all the same for real estate agents. In time, your affiliated title company will screw up, overcharge consumers, or steal money and you'll find yourself mortgaging your house to pay for expensive legal representation. You heard it here!

A special thanks to Diane Cipa for bringing the Springfield Business Journal article to my attention.

When Deals Go Bad: Baltimore's Foreclosure Debacle

Ed Rybczynski — Sun, 13 Jan 2008 16:07:22 -0800

Baltimore, sometimes called "Charm City," isn't all that charming beyond the inner harbor complex that's featured by media when the Ravens or Orioles are playing at home. Sheila Dixon, Baltimore's newly elected mayor, along with the city's council have filed suit against Wells Fargo Bank to recover alleged losses caused by a wave a foreclosures ravaging the city's neighborhoods. The complaint, filed in federal court, seeks damages for municipal expenditures, including fire and police protection and the loss of tax revenue, correlated to a stark escalation in the number of vacant homes.

The New York Times, in a related article written by Gretchen Morgenson, cites a study commissioned by a Minneapolis housing foundation that attributes a cost of $34,199 to local governments for each foreclosure. The long-term, societal costs occasioned by the current foreclosure crises will prove daunting before all is said and done.

The suit reveals disturbing patterns illuminated by Wells Fargo's modus operandi in subprime markets. Predominantly black communities are experiencing the statistical brunt of the onslaught of foreclosures. The bank allegedly charged higher commissions and interest rates than reasonably justified by borrowers' profiles. There's that damn yield spread premium again. The city also maintains that Wells Fargo intentionally relied on relaxed underwriting standards that positioned borrowers for inevitable failure. Between August 2006 and August 2007, the state of Maryland's foreclosure rate increased by 758 percent. That's not a typo. Since 2004, Wells Fargo was one of the most prolific mortgage lenders in Baltimore.

As an aside, a number of studies indicate that predatory lending is not only biased towards races, but gender as well. A study released in 2006 indicates that woman with above average incomes and credit scores almost always paid more for mortgage money than men with with less favorable credit profiles. Households headed by woman, particularly women of color, are unable to realize financial security through the traditional path of homeownership.

Baltimore's case against Wells Fargo is constructed on a slippery mantle of statistical innuendo. While I believe the allegations to be factually accurate, I don't think that they'll stand in a cause brought by a financially beleaguered municipality against a lending behemoth that most likely employed practices that were both legal and generally accepted by the mortgage industry, as disturbing as the truth is. Wells Fargo's attorneys will argue that Baltimore's government was at fault for failing to promulgate ordinances to better advocate the rights of consumers and lobbying, at the same time, for similar statutes at the state level. If Wells Fargo even hints that it might stop making mortgage loans in Baltimore City, the city will dismiss its claims amidst cries of righteous indignation. The case will spark briefly and fade into certain obscurity in spite of any media attention that it might receive.

Some of you might remember the highly publicized massacre of consumer advocacy that transpired during the spring of 2006 in Montgomery County, MD. Lawmakers in the upper scale suburb of DC passed an ordinance requiring mortgage lenders to act only in the best of interest of borrowers. Can you imagine such a scandalous thought? Ideology gave way to practicality when some forty odd subprime lenders threatened to stop funding the gorged pipeline of easy money spilling into the state's most affluent neighborhoods.

The Mayor of Baltimore along with the members of the City Council, past and present, are guilty of convenient blindness for political gain and therefor share culpability with Wells Fargo's executives. Three short years ago, it would have been career suicide for a politician, any politician, to predict the current crises that looms nationally. The tsunami of tax revenue, based on overinflated property values, fueled the rhetorical programs and projects of most, if not all, aspiring elected officials of the past decade. Two short years ago, the average stater home in Baltimore City sold for roughly $290,000. Give me a break! Someone needs to show me the local jobs that supported the incomes needed to purchase these overpriced row homes. The jobs didn't exist; neither did the incomes. Anyone sporting two functional brain cells and a fairly intact cranial cavity could have guessed that the orgasmic subprime frenzy would have to end sometime.

The real story lies in the class action litigation that's certain to follow in the wake of Baltimore's frontal attack on the mortgage industry. I predict that a broader cause will be brought by consumers against Wells Fargo, and other lenders, along with real estate brokers, real estate agents, title companies, and appraisers.

Could it be that a little publicized and seeming innocuous case filed last week in Baltimore's federal courthouse marks the beginning of a generation of seminal cases that will, in time, redefine the landscape of this nation's real estate industry?

You heard it here: the word "fiduciary" will echo in the hallowed halls of jurisprudence as crusading litigators "test the waters" of judicial interpretation in a perverted quest for deep pockets and social righteousness.

There's no question that subprime mortgages fueled the boom, the question: who ultimately will pay the price for the bust?

Closer to Home

Ed Rybczynski — Fri, 11 Jan 2008 19:23:02 -0800

I've been an avid reader my entire life. One of my resolutions for the new year is to devote at least an hour each day to reading as a recreational pursuit. Boring stuff I know, but humor me anyway. I've gone so far, this week, to put aside whatever I happened to be working on during the business day to open a book at my desk.

Presently, I'm about two thirds through Walter Isaacson's voluminous study of the life of Benjamin Franklin. The book, which shares the name of it's biographical character, is one that I highly recommend to everyone. Franklin was made of an energetic fiber that has fueled the imaginations of generations of Americans and mankind in general. His spirit, it seems to me, is destined to motivate eternally.

I didn't realize that Franklin was responsible for constructing the monument to democracy that is "Federalism." Because of him we enjoy a unique system of government that clearly defines the authority of the federal government versus that of individual states. It's a shinning tribute to our nation's ingenuity that's portrayed beautifully in Isaacson's book.

Most surprising to me was the revelation of Franklin's humanness. During the course of his lifetime, Franklin sparked unusual bonds of affection with any number of young woman, girls really, still in their teens. While the book clearly rejects any notion of physical impropriety, the scenario in general seems highly inappropriate to me. Let me put it this way: if Franklin were alive today, and I had a teenage daughter, she wouldn't be sitting on Uncle Benny's lap ... if you get my drift.

When finally finished with this book, I'm thinking about moving onto David McCullough's highly acclaimed Truman. I picked it up this summer at one of two used bookstores in Havre de Grace after it was suggested by Carole Cohen.

Until next time ....

Is Your Title Company Misbehaving?

Ed Rybczynski — Wed, 09 Jan 2008 19:02:42 -0800

Have you ever wondered about the integrity, or competency, of a title company after leaving the table? To say that an enormous amount of money is blindly entrusted for proper dispersement is a serious understatement. On a monthly basis, we could be talking about tens of millions of dollars gushing through the escrow accounts of average sized title companies. Who's keeping track of all the money? You'd be surprised to know the answer.

A question recently asked on Mortgage101.com, click here to read, describes the consequences of a title company screwup. A week after closing, a buyer was informed that his loan hadn't funded even though his title company had transmitted good funds to the seller. Oooops! While I disagree with the answer and explanation given by the industry expert on the site, I will say this: there's no possibility of a happy ending in such a case.

Even worse than instances highlighting stupidity are those involving outright theft. Title company executives have been known to dip into escrow funds to cover corporate loses. Defalcation, as it's commonly referred to, is more likely to happen when times are rough and business hard to come by.

Defalcation is a simple concept to understand. It occurs when money held in escrow accounts is spent inappropriately. Escrow accounts exist only to temporarily hold funds belonging to others. The money is intended to payoff mortgages and other liens. It’s used for seller’s proceeds and to pay taxes or fees when recording documents. Escrow money should never be used to benefit a title company or anyone working for a title company. Defalcation takes place when escrow funds are diverted for any unintended use.

There are a staggering number of cases involving mortgages remaining open after closing as someone within the title company continues to make payments ... and helps themselves to the payoff funds. The crime is typically called layering because the funds from new closings are used to cover the missing funds from earlier closings like a quilt used to hide stains on a bed sheet. You can guess the outcome when incoming orders slow down.

Many in the title industry established lavish life styles over the past decade due to the lure of an explosive real estate market. Everyone knew that it had to end, but few would admit it to themselves or others. There’s always someone with a need to maintain, at any cost, the payments on expensive homes, sport cars, vacation homes, plush office space, country clubs, and the other prestigious appendages of the not so distant past.

I personally know a title guy from Baltimore who helped himself to millions from an escrow account to flip a multi-site Dunkin' Donuts' franchise. He was caught, prosecuted, and incarcerated, but the infinitely wise state of Maryland opted to restore his title insurance license a few short years after his release.

These fools are always caught and the money almost always replaced by underwriters, but innocent consumers often suffer in the interim.

Some states regulate title company escrow accounts more stringently than others, but audit responsibility most often falls upon the shoulders of title underwriters. Long story short: title underwriters haven't done all that great a job policing their agents, particularly those remitting sizable premium checks. It's a patent case of "who's watching the watchers." Title companies typically police their own trust accounts with an occasional review by an outsider. It's a dysfunctional system in need of study and reformation

I hate to suggest expanded duties to your already prolific workloads, but I think it prudent for real estate agents to check up on title companies after closing.

As a seller's agent, I would request proof of payoff from the title company two or three days after closing. You could ask sellers to confirm mortgage payoffs on-line. As is often said: it's better to be safe than sorry.

As a buyer's agent, I would calender a phone call to the title company about six weeks after closing to make sure that mortgage releases have been recorded. The key word is "recorded." Your buyers could find themselves unable to refinance or sell their home should a reconveyance document not make it to the local courthouse.

Uncooperative title companies should be reported to state insurance commissioners.

A special thanks to Dave Wirsching for sharing the Mortgage101.com article referred to herein on his blog, Clearing Title.

Scandal, Corruption, and a "Click-Through"

Ed Rybczynski — Wed, 02 Jan 2008 18:46:56 -0800

Those of you who follow my posts know that I've yet to employ the ill regarded "click-through" to lure trusting souls to a remote site. While this particular post is intended only to divert your attention elsewhere, I don't intend to duplicate the tactic anytime soon. Allow me to explain my motives.

OpEdNews.com is a site that I hadn't even heard of three weeks ago. A couple of friends noticed that a writer for OpEdNews.com had quoted a number of my talking points from Title-opoly and brought the fact to my attention. The edgy, political tone of the written word on the site immediately appealed to me. I admire writers who stand their ground while tackling tough, timely issues. After a bit of soul searching, the average post on OpEdNews is extraordinarily well written, I decided to create a profile and submit a post to the editor.

My first article on OpEdNews, The Cult of Plausible Deniability, isn't for everyone. It's intended to spark contentious debate by dealing with the public policy implications of destabilized housing markets.

The article could be summarized in this way:

The current housing crises was precipitated by a breakdown in protocol by licensed real estate professionals nationally. The ostensible correction of housing markets as characterized by pundits isn't a correction at all. It's the collapse of an enormous business model that once served as the foundation of the social institution that is homeownership. Industry wide complacency is the crux of the problem.

Click here to read: The Cult of Plausible Deniability. Your thoughts are appreciated.

More Mortgage Industry Punditry ... and a loaded question

Ed Rybczynski — Sat, 15 Dec 2007 18:04:31 -0800

It was about eighteen months ago that a friend of a friend called to ask if I would glance at a settlement sheet. Chris, a busy woman executive, was scheduled to close a refinance loan the next day and sensed that something wasn't quite right after learning the amount of her new (proposed) monthly payment.

Chris, I later learned, had responded to a letter sent to her house by an industrious mortgage broker. Her intentions were to lower her interest rate while pulling out a little cash. It sounded reasonable enough considering Chris' lending profile. She is highly educated and a successful executive for an international spice company. I'd been to her waterfront home once, or twice, for parties and knew that it had to be worth more than a million dollars. A loan amount of $450,000 certainly seemed non-problematic to me. Also, Chris struck me as the type of person who would maintain an impeccable credit rating. As it turned out, I was right!

At first blush, the HUD-1 appeared heavily laden with fees. There were a couple of points showing along with a generous display of junk fees. Most disturbingly, the broker was walking away with a yield spread premium (YSP) that totaled $19,000. I asked Chris for permission to discuss her loan with the loan originator.

Initially, the woman was congenial and talkative. She became defensive only after I questioned the YSP. I suggested to Chris that she post phone closing until someone could explain why she was paying a premium spread. The next day, I heard from the loan originator's manager who accused me of trying to steal the deal. It was, of course, a ridiculous and unfounded accusation. I am nothing more than an unlicensed industry observer these days.

But, make no mistake, I've been around this business long enough to know when someone is being screwed.

A long story short, Chris settled about two weeks later with a different mortgage broker. The fees and charges came to $4,000 or so. The interest rate was much lower than that proposed by the original broker. There was no YSP charged.

Do I believe that mortgage professionals are deserving of their fees?

I do, but there are limitations to reason.

Repeated studies have concluded that women with above average incomes and credit scores are likely to pay more for mortgage money than men with less favorable lending profiles. Women of color are most likely to suffer lending abuses and least likely to realize financial security through the traditional path of homeownership.

The YSP is almost always a factor when predatory lending practices are at play.

I reluctantly accept the need for the YSP in residential transactions. It is of considerable value to homeowners when employed by honest, well-intended loan professionals. We know, regrettably, that this is not always the case and that the YSP is all too often used to victimize trusting consumers.

I'd like to make this post a bit more interesting by asking a hypothetical question!

Let's assume that I was still a title company owner and didn't know Chris personally.

Let's also assume that the loan was referred to my title company by the original mortgage broker that attempted to charge a $19,000 YSP.

As a licensed title professional: Did I have an obligation to the consumer to question the obviously exorbitant fees being charged?

Would it have been inappropriate for me to question the fees?

What's your professional opinion?

Note:

The original post read: Do I believe that real estate professionals are deserving of their fee?

I decided to make the question more specific by revising "real estate professionals" to read "mortgage professionals" because the generic nature of the phrase was questioned by a number of readers.

CE Courses Sponsored by Title Companies: We Need to Talk

Ed Rybczynski — Mon, 10 Dec 2007 21:43:40 -0800

I've noticed quite a bit of dialog concerning continuing education courses being sponsored by title companies. I'm talking about CE credits for real estate agents. Sound familiar? At first I thought it sounded like a great marketing idea for title companies, but then I got to thinking: are these courses provided for free?

I've asked a couple of friends if they thought it was a RESPA violation and they see a real problem with the practice. A RESPA exception for educational purposes would make sense, but I don't know of one.

RESPA offers a very limited window of opportunity for service providers to market real estate agents for their business. It's equal to $25 per year for each source of business. That's it, there is no more. Anything else is illegal and CE credits cost a great deal more than that.

Unless you know something that I don't know, it's a problem when title companies provide CE courses for free.
The problem exacerbates itself if lunch, valuable presents, etc. are provided. The same rule would apply to lenders providing classes.

I don't claim to be a RESPA expert. I'm just asking a question.

If you're attending CE classes provided by title companies and not paying for the credits: Are you violating RESPA?

I'd like to know your thoughts! Am I wrong?

Note made on December 11, 2007.

I apologize for not participating in this important discussion last night. I logged off after the initial flurry of interest had ended. While I'm glad this post was featured, I didn't expect it to be the case.

Five Years : A Desparately Long Time Indeed!

Ed Rybczynski — Fri, 07 Dec 2007 14:18:51 -0800

You've heard the news by now, the Bush Administration has revealed its plan to rescue housing markets. The idea is to save certain consumers from themselves and to save the economy at large from the grips of ruination. While I dislike everything about the proposal, it's the length of time that introductory rates would be frozen that disturbs me the most. Five years is a very long time!

The American Civil War lasted only four years, yet the epic struggle redefined the fabric of our society.

John F. Kennedy was in office less than three years before being assassinated, still his vibrant presidency changed forever the way an entire nation perceives itself.

It took five years, from 1929 to 1933, for the collective economies of an industrialized planet to collapse into a Great Depression.

It's hard to get excited about a proposal that does little more than create a "welfare state" for the benefit of a select few. We know that sub-prime lending is but a single factor in the foreclosure crises overall. Why then did President Bush choose to isolate and extract such a limited subcategory of borrowers for financial favoritism? Some would say that the plan rewards a limited number of borrowers who made bad choices. It could be said that the new plan effectively punishes those who didn't make bad choices. It could be said that other groups of borrowers who are equally at risk to lose their homes should have been included.

Yes, the Bush initiative appears uninformed and misguided overall. But, it's the five year aspect of the plan that confuses me the most. That's a very long time to artificially restrain anything in a supposedly free market. Then again, it could be argued that federal intervention in the form of a decades worth of reckless monetary policy was the primary cause of the problem. Federal intrusion in capitalist endeavors is rarely a good thing for consumers or investors.

The Associated Press reports that the five year freeze represents a compromise between banking regulators and the lending industry. The regulators wanted a stay of seven years. Seven years? The deadliest conflict in history, World War II, barely lasted that long.

All of this is just a little hard to digest in one sitting. Never did I expect a bailout to last longer than eighteen months.

I'm starting to suspect that the president's economic advisers have access to data that we have yet to hear about. I'm starting to suspect that the problem runs deeper than we've been led to believe.

Five years is a very long time indeed!

Don't you agree?

Worrying Rationally

Ed Rybczynski — Tue, 04 Dec 2007 12:26:20 -0800

This is probably my final word on the housing crises. That is, unless a prophetically new issue with devastating implications rears its ugly head.

Let's temporarily remove conjecture from the mix to deal directly with facts.

It's a generally accepted fact that 1 in every 196 U.S. households is currently in foreclosure. Notice I said households.

The U.S. Census Bureau estimates that there were 116,011,000 households in this country in 2006.

Using that number as the basis, simple math tells us that 591,893 U.S. households face the distinct possibility of losing their homes at this time.

A recently released study commissioned by the The United States Conference of Mayors estimates that an additional 1,400,000 residential foreclosures, at least, will occur in 2008 representing a market value of $316,000,000,000. You read it correctly, I said 316 billion dollars.

What's all this mean in practical terms? In the absence of intervention in one form or another, roughly 5,178,922 men, women, and children could lose their homes between now and the end of next year, or sometime soon thereafter.

That's a bitter pill to swallow. It's a lot of displaced people for society to somehow assimilate. A dramatic increase in rental activity doesn't seem a viable option to me. First of all, there couldn't possibly be a sufficient number of rental units available. Secondly, people who have lost their homes to foreclosure have also had their credit destroyed. Often, there are judgments obtained by creditors other than the foreclosing mortgagee.

We can't assume that nearly 5.2 million displaced people would be able to live with family and friends.

Let's break it down a little further.

The numbers above represent a situation where every person living in the Washington Metropolitan Area were to almost simultaneously lose their homes. The densely populated area includes the District of Columbia, 5 Maryland counties, 9 Virginia counties, and 1 county in West Virginia.

Let's look at it another way. It's as though every person living in the Tampa - St. Petersburg Clearwater Area and the Denver - Aurora Area combined were to lose their homes.

It's the numerical equivalent to every person residing in the state of Minnesota finding themselves without a place to live.

In 2008, a citizen of this country will be 9.25 times more likely to lose their home to foreclosure than to die of cancer in any form.

I could say more, but do I really need to?

Research links used to compile statistical data for this post:

Currents of Change: Title Industry Blogs

Ed Rybczynski — Sun, 02 Dec 2007 11:14:00 -0800

The mere mention of the title industry in the caption of this post dooms it to inevitable ambiguity obscurity. The topic, perceived as draconian, clearly lacks sex-appeal. As a title company owner, I was often dismayed by the audacious remarks of real estate agents who thought they knew my job better than I did. Trust me, they didn't. Only those who have worked in the notoriously "behind the scenes" industry could begin to comprehend the risk and transactional complexities faced daily by title professionals in 2007.

It was one year ago today that I first commented on Diane Cipa's edgy and sometimes irreverent blog, Radical Title Talk. Diane had written a post accusing Affiliated Business Arrangements (AfBAs) of polluting the integrity of all who participated in them. I concurred with a lengthy, toxic response of my own. The AfBA, from the perspective of the independent title agent, is analogous to a noose at a lynching. Radical Title Talk has distinguished itself as the origin of title industry blogging such as it is. Thanks to Diane's relentless devotion to real world issues, I realized that blogging could be much more than a vehicle of self-promotion; it could be employed as a legitimate communication platform. That single comment blossomed into a realization that a hungry audience existed nationally and that I indeed had a voice.

After several failed attempts, my own blog, Title-opoly, was born.

To my way of thinking, bloggers have a responsibility to explore fresh avenues. We have an obligation to provocatively incite change. There’s a faint rumble in the distance thats audible to all who choose to relinquish thoughts to matters of conscience. Listen closely to hear the repressed voice of the consumer metaphorically flowing over the brim. For too long, an arcane system that shrouds consumers in darkness during the one authentic purchase of a lifetime has evaded scrutiny.

Blogging provides the desperately needed transparency that in turn describes the business model of the new millennium.

Regrettably, cyber-chatter hasn't been well received by title folks who tend to be somewhat reserved and withdrawn by nature. I say regrettably, because the industry sorely needs the cohesion that shared dialog could provide as it transitions from something that it was in the past to something that it's expected to be in the present. The interactive effect of blogging, if harnessed effectively, could be the awaited messiah of a beleaguered profession that's complacently following the evolutionary path of the horse drawn carriage.

I've decided to share the active title industry blogs, outside of Active Rain, of which I'm aware. Sadly the headcount is startling low.

All are well written and highly informative.

I encourage you to take the time to support the efforts of these brave pioneers and encourage your title professional of choice to join in the adventure.

Title Industry Blogs:

A Technological Conundrum

Ed Rybczynski — Fri, 30 Nov 2007 19:36:36 -0800

I spoke to a good friend of mine the other day. Mike and I each started in the business more than two decades ago. Mike pursued a career as a loan originator while I always preferred the research oriented work found within title companies. Mike has an extraordinary knowledge of lending guidelines and practices. He's been around long enough to know everything and everyone. During the course of our catch up session, I decided to ask Mike to join Active Rain. The guy would make a wonderful addition to the community.

His answer was startling.

Mike, who like me is in his mid-forties, doesn't feel that internet marketing is a worthwhile activity. In fact, he's using the same strategies to develop new business that we both used in 1985. Now ... I'm extremely happy that my friend is successful, but I was unable to conceal my shock at his response. Like you, I'm a great believer in social networking as a glimpse of the future. I see a need to embrace the practices that worked in the past, but ... hey ... it's a new day and a new age.

I sent Mike an invitation to join this network and I guess we'll just have to wait and see what happens.

The conversation with my old friend got me to thinking about the interaction between technology and the housing crises that we now face. Keep in mind that I consider foreclosure statistics to be an accurate benchmark of fraudulent activity within housing markets. Mortgage fraud, to my way of thinking, is the diabolical and cynical cousin of predatory lending. The two forms of fraud share more practical attributes than not. I've seen graphs representing foreclosure activity from the 1950's through the mid 1990's. The line is essentially flat with occasional spikes corresponding to negative economic factors. In other words, prior to 1995, or so, the foreclosure rate in this country was a statistical anomaly. From that time forward, foreclosure numbers have accelerated rapidly and steadily.

The application of technology to the loan origination process has obviously increased efficiencies, but there have been unintended consequences as well. We typically think of the mid-1990's as the advent of sub-prime lending and its associated problems, but it also marks the introduction of extreme automation by the lending industry. Processing activities, in many cases, have since been removed to regional or national centers where the consumer is reduced to a faceless, ambiguous name on a computer screen. In the past, loan originators conducted business in the same communities in which they lived. There was an organic relationship between lender and borrower. There was a first hand familiarity with the condition and value of the homes being sold or refinanced. The success of a lending institution was, in large part, decided by referrals from past customers who were essentially neighbors. We cannot negate the fact that fraud flourishes when business is transacted from a distance. Many of the “tell-tale” indicators of mortgage fraud are extremely subtle and require direct observation. There is no substitute for human contact in matters of fraud prevention.

The title and mortgage lending industries are poised to suffer the greatest losses resulting from fraudulent activity in housing markets. Inexplicably, there’s been little initiative to solve the problem beyond the scope of technology that’s failed in the past. The two industries subscribe to a misguided belief that mortgage fraud is containable by profiling high risk individuals and properties based on information aggregated in databases. While the practice has an overall beneficial effect on loan quality, it ignores the broad reach of human cunning and is therefore counter intuitive as a stand alone approach. A mathematical algorithm is no match for the human intellect. The purely technological approach to mortgage fraud mitigation didn’t work in 2006, or 2007, and it won’t work in 2008. The scenario is remarkably reminiscent of the story of the proverbial fly crashing repeatedly into a pane of glass.

Again, I am the greatest advocate of technology, particularly in matters of marketing and transaction management. Still, I can't help but feel that automation has actively contributed to the convoluted mess confronted by our industry at this time.

What do you think?

The Metrics of a Market Correction

Ed Rybczynski — Mon, 26 Nov 2007 13:25:07 -0800

The housing crises, as many of you know, has been the topic of recent interest on Active Rain. I've weighed in with a couple of posts knowing full well that my opinions are far different than most who gravitate to this site. My perspective is unpopular here. Still, 2007 was a year of extensive travel that put me face to face with title agents and underwriter executives from many different states. In one prolific instance, my meeting was with elected officials from across the land. Unquestionably, the dubious creed of personal responsibility among borrowers is part of the problem. But, let's not forget the professional responsibility of real estate professionals!

A comment made yesterday by a consumer is emblematic, in my estimation, of the situation nationally. She works as a paralegal, her husband as an electrician. I'll speculate that this couple is representative of the demographic that most of you serve.

Gilda wrote:

"My husband and I were victimized by our mortgage broker, appraiser and lender. Our Good Faith Estimate showed a fixed rate loan; when we got to closing on a Friday at 4 p.m., we received an adjustable rate, interest only mortgage and a second mortgage/equity line of credit! We were past the closing date due to the lender, and the seller said if we did not sign then they would keep our $11,000.00 deposit ... and recently we found out that the appraisal was inflated by approximately $25,000!"

While it's obviously a complicated situation with any number of moving parts, there's no reason to distrust the woman. Why would she lie? Why would she make blatant accusations of appraiser fraud that weren't true? Why would she paint a broad canvas of predatory lending practices if they didn't occur? Are all buyers liars? It's doubtful!

For 20 years I conducted closings referred by real estate agents and loan originators.   More than once I was compelled to seek a legal opinion after hours to determine my own liability because a deal turned ugly at the table. More than once I had buyers accept unfavorable loan terms, angrily and reluctantly, because their possessions were stowed on a moving van and they had nowhere to go. More than once I heard licensed professionals lie like hell to earn a commission or a fee.

It's undeniably convenient to blame irresponsible borrowers for the woes of the industry such as they are.   It implies that someone else, anyone else, is at fault. Gilda's narrative doesn't suggest the presence of real estate agents in her transaction. Perhaps, if good agents were involved the abuse wouldn't have occurred. But, what about all those times appraisers were asked, or threatened, by industry insiders to be a bit lenient by inching a value upwards by $1,500 or $2,500 to make a deal work. It's a far cry from $25,000, but we can't ignore the cumulative reality. Is it possible that a little cheat here and a little cheat there contributed in a big way to the problem we now face? Could it be that the same mentality of cheating a little to make life easier found its way into every aspect of real estate protocol?

At times the truth is painful!

As a "card carrying" capitalist, I embrace the wisdom of free markets while denouncing government intervention in all its hideous forms. Like most of you, my formative education leads me to believe that imbalanced markets need time to correct themselves. How much time, though? My heart and intuition lead me in an entirely different direction. I recognize the need for intrusive medical treatment when a patient's health is in immediate and eminent danger. Our neighbors, family members, and friends are suffering horribly. Once the bleeding has stopped, we can look for solutions.

Our domestic housing crises stands center stage in the theater of international opinion. Even the likes of Osama bin Laden recognized its potent psychological affects by mentioning the crises in a stream of anti-American rhetoric. Public officials will hear the cries of consumers in Gilda's predicament because it's their mandate. The free market itself will incorporate Gilda's plight into its corrective gyrations because it has to.

Yes, everyone holds a degree of culpability. But the fact remains: Once a business model fails to protect the interests of vast numbers of consumers, it's no longer viable!

It would be exceedingly naive to expect that in three years the real estate industry will look the way it does today.

Why you ask?

Because ... even if the crises miraculously resolved itself today, the catalysts that caused it are still alive and well!

For a well written and provocative post see Obtaining Housing Meltdown Absolution with a Holiday Round of the "Caveat Emptor Chorus." Rosemarie Hicks explores the paradigm of esoteric dishonesty that miserably failed trusting consumers and real estate markets in general.

A Coin Has Only Two Sides

Ed Rybczynski — Sat, 24 Nov 2007 13:11:06 -0800

There's a story that I've wanted to tell for some time.   I've avoided it only because family members are involved. The recent commentary thread to Lenn's post California Subprime Borrowers May Get Relief? - More Questions Than Answers convinced me that it was time to share and delve even deeper into the mess that's now referred to as a national credit crunch. While a credit crunch most certainly exists, it's a mere symptom of a complex series of broad and interacting issues. It's not the problem. Unlike a coin that has only two sides, our industry faces a problem with a root cause that seemingly spreads in an infinite number of directions.

My sister, Liz, and her husband, Rob, have two adult daughters and lived, until two years ago, in a sprawling tangle of communities known as Bel Air, Md. The city located just north of Baltimore is properly described as a prosperous place comprised mostly of commuters. Liz and Rob were homesteaders of sorts when they built a new home 25 years ago when Bel Air's cow population far exceeded its count of taxpaying denizens. Like other families, they wanted a pool, a huge deck, a finished basement. Then, there were the traditional cash outlays for college tuitions, weddings, vacations, etc. that confront us all.

In no time, the homes in Liz's community were selling for $125,000 (her and her husband paid $90,000 for theirs) and then $180,000, and then $250,000 ... etc. etc. etc. You know the story! By the summer of 2005, identical homes were readily fetching $500,000 or more.   Like I said, there were bills to pay and my sister refinanced any number of times and took out equity loans. While not mortgaged to the hilt, a fair share of the equity in the home was encumbered.

Back to the summer of 2005. Rob received the promotion he had dreamed of during the tenure of his career. All of a sudden there were more cars than could fit in the garage and a need for a house that would lend itself to cocktail parties and entertaining. As fate would have it, there was a new community nearby with one particular colonial, all brick, of course, selling for $950,000. You know where I'm going so why bother mincing words. My sister and her husband sold their comfortable residence to acquire the true measure of American success that is the million dollar home. Saving accounts were tapped and stocks sold to come up with a suitable down payment. After all was said and done, a $700,000 mortgage was originated.

Maryland, in my humble opinion, first felt the effects of the housing downturn in October of 2005. That's the time that my abstracting business lost traction overnight. My sister has no fear of losing her home to foreclosure. That's not even a concern. She's still content where she is, but my sister is nearly 60 years old. There's talk of retirement and a smaller home someplace warm before too long. The problem is the price that her house would sell for in today's market. Like everyone else, Liz and Rob assumed that their investment in real estate would be safe. They assumed their house would appreciate or not-depreciate - at the very least. My sister didn't game the system or cheat in any way.   She wouldn't know how. I know she'd have to take money to closing if she decided to sell today and could somehow find a buyer.

The questions abound and are perfectly valid:

How much is the house really worth?
How could a house lose so much value so quickly?
What happened to the sizable down payment that seeming disappeared overnight?
How long will it take for the market to turn around?
Why hasn't the assessed value of the property been adjusted to lower property taxes? (my personal favorite)

A perfectly lovely house in the suburbs has become a nightmare of horrific proportion that will determine, to some degree, the financial future of a couple that worked a lifetime and made the right decisions.

What happened?

It's easy for consumers to blame real estate agents and loan originators when real estate markets become patently dysfunctional. As an industry, we find it convenient to blame borrowers for their guile, and Wall Street for its chicanery. I don't blame the real estate agent that sold the albatross to my sister, nor do I blame the builder nor the loan originator. They did nothing wrong. The issues we're confronting run exceedingly deep; the system we embrace so dear has collided with destiny. Like the credit crunch that's blamed for every woe, the unethical, often criminal, behavior demonstrated by some industry insiders is systemic of a still deeper problem.

Regrettably, we shun the inevitable conclusion that the crises in real estate markets is far from over. As a primary causation factor, we need to consider the paradigm of politics that is the federal reserve. In his book The Age of Turbulence, Alan Greenspan audaciously exculpates himself from any responsibility for the pending debacle in domestic housing markets and related financial appendages. He conveniently places blame on global factors while ignoring the devastating economic effects caused by restrained market forces. Yes, Greenspan is guilty of holding interest rates much lower than they should have been for nearly a decade. It was a political ploy by an appointee to a post that is ostensibly non-political. Markets should determine interest rates, not a politico that caters to the aspirations of the oval office and a thirst for public approval.

The artificially created perception of prosperity had become a reality for a nation that believes that bigger is better and every debt can be settled tomorrow. We felt so good for so long that we ignored the reality that all drunken stupors must end. We are now paying the price and suffering the consequences of a reckless monetary policy born of the glitz of the mid 1990's. The laws of physics dictate that every force is accompanied by an equal opposing force. Why would we assume a quick, painless correction for a problem that took a decade to create? The feds aren't going to allow untold numbers of homes to go to foreclosure. Consider the implications as a matter of public policy. Where would the countless families displaced by foreclosure live? As a society, will we tolerate the appearance of boarded-up properties in polite middle class communities? The stakes are high on this one. The world is watching. Foreign investors are already questioning the integrity of mortgage backed securities.

The problem was caused by the feds and its solution will require federal intervention. Yes, you can expect governmental intrusion in your business affairs before long. Regardless of the powerful lobbies that exist, public officials will side with consumers at the expense of an industry with fees and commissions that are chronically characterized as excessive.

The real problem: How do we get the feds to leave once they've entered the house?

Related posts:

What's The Solution To The Stagnant Market ... The Pent House Sweet - Fran "The Title Man" Gaspari reveals his 3 point plan to rid the real estate world of its current woes.

California Foreclosures ... Stupidity or Greed - Kaye Thomas aptly and honestly confronts the realities of markets in California.

Here's A Concept: Let's Just Do Nothing About the Mortgage Crises - Janet Guilbault pro-actively espouses a philosophy of passiveness towards the looming crises that's clamping down on our industry.

ActiveRain Mortgage/Housing Crises Resource - Bryant has generously compiled an anthology of all related posts.

The Typical Metro Detroit Foreclosure Family - Chris Wales explores the "human factor" that's so often ignored when discussing foreclosures. She offers a glimpse of reality with an important message at the close of this holiday weekend.

Massive Foreclosures Coming? The Market Is Speaking Loud And Clear - A painful dose of honesty and realism from Lenn Harley.

Update 11/25/07

There are so many related posts being written that I'll simply defer to Bryant's compilation as the definitive referral source.

Lola Audo summarized the matter nicely:

"There must have been something about that Thanksgiving Turkey...The past 48 hours have spawned one of the most far reaching discussions that I've ever read on Activerain about the foreclosure crisis in different parts of the country. The value of this discussion is enormous...both from an educational perspective and the ability for a professional forum to hash out some much needed analysis."

All are a must read!

A Recipe for Unmitigated Disaster

Ed Rybczynski — Fri, 23 Nov 2007 18:13:49 -0800

Earlier today, Lenn Harley posted California Subprime Borrowers May Get Relief? - More Questions Than Answers. It's Lenn's insightful commentary to posts written by Bryant Tutas and Gena Riede concerning the frightful number of looming foreclosures in certain markets. Specifically, Gena emphasized the concerned efforts of California's governor to offer some relief to borrowers in serious financial distress. The governor of Massachusetts was the first to offer a plan of sorts earlier this year.

While the initiative shown by state governments to confront the foreclosure epidemic is laudable, I doubt that localized efforts can pack the punch needed to make an appreciable difference. Federal intervention is the sole option that makes sense at this very late date. Some pundits are quick to blame Wall Street for the debacle while others point to lenders and an unmistakable affinity for product design that most assuredly spells disaster for borrowers. Others want to place all the blame on borrowers for a lack of prudence and a fever-like desire to own palatial residences at any cost. In reality, the protocol in real estate markets started to deteriorate during the mid-1990's as evidenced by the first sustained spike in foreclosure rates in the history of this country. Previous eruptions in default numbers were relatively short lived and linked to economic, micro or macro, downturns. In our current scenario, foreclosure statistics escalated a decade ago and have continued to climb since. Most disturbing is the apparent lack of corresponding economic factors to explain the phenomena. Like it or not, foreclosure activity is a solid benchmark of mortgage fraud and predatory lending. Mortgage fraud and predatory lending are often characterized as distinctly different forms of abuse. In reality, the disparities between them are academic at best. Coincidently, it was during this same period that sub-prime lending gained traction. While sub-prime lending is one of many causation factors, it is not the root of the problem.

I feel that a study conducted by October Research in 2006 sheds light on the crux of the matter. Of 1,200 professional appraisers surveyed nationwide, 90 percent admitted feeling pressured by real estate agents, mortgage brokers and others to inflate values to levels needed to make deals work. Threats of negative business consequences for lack of cooperation were reported by 75 percent of the appraisers who participated in the study. It was an inflated appraisal here and falsified verification there - ad infinitum - that laid the groundwork for the nightmare that's about to reveal itself. Lending practices and Wall Street's malaise, or possibly its unfettered greed, added fuel for the fire. It's no laughing matter that a generation of mortgages with ridiculously low teaser rates, used to qualify borrowers, are about to adjust ... upwardly of course. The cost of gasoline is another factor, as is the appearance of inflation, and don't forget the devaluation of the U.S. dollar in foreign markets. We stand at the brink of a perfect storm that will forever change the nature of homeownership in this country. We'll talk about it for decades the way our parents, or grandparents, spoke of the great depression. Real estate will no longer be a path to financial security as it was for past generations. And, once the feds are forced to regulate real estate markets, the intrusion will have lasting effects and leave permanent scars.

I often joke that I'm the only one in my local circle of friends that doesn't live in a million dollar home. Of course, their homes aren't worth what they were worth only a year ago while the escalating property taxes are analogous to a noose at a lynching. Two years ago the average selling price for a starter home in Baltimore was a tad under $300,000. For anyone that follows average incomes: that dog don't hunt.

A bill introduced in the house by Rep. Brad Miller and Rep. Linda Sanchez exemplifies a governmental response with positive, short-term possibilities. H.R. 3609: Emergency Home Ownership and Mortgage Equity Protection Act of 2007 would bestow upon bankruptcy courts the authority to reform defaulted mortgages. Borrowers filing under Chapter 13 could ask the court to change loan terms ( principal reduction, lowering of interest rate, etc. ) to allow for sustainable payments. H.R. 3609 is a band aid and nothing more. But does anyone else have a better idea? Currently, 1 out of every 196 U.S. households is in foreclosure. Foreclosure is no longer something that happens to those people living in those neighborhoods. The problem has legitimately reached the status of an epidemic that's poised to attack middle class America on a broad and wide scale.

For an interesting read, I strongly recommend The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando De Soto. Published in 2000, the book effectively predicted current market conditions. Was the problem precipitated by a credit crunch or was it precipitated by an expectation that home equity would increase forever? Consider the differences and implications. Families radically changed their lifestyles and spending habits due to the perceived presence of equity. The perception of wealth that didn't exist created by perceived equity that didn't exist sums up the situation honestly. Consider the lasting effects on a family when mortgages exceed a property's value. In a real sense, many have frivolously mortgaged their futures and their hopes for retirement. Nowhere else on the planet can homeowners access equity as we do in this country. The devaluation of housing markets has revealed the folly of our ways.

Lenn suggested that we continue the dialog by first posting and then forming a group to aggregate our thoughts and opinions. I feel that it's a great idea.