Real Estate Blog - SKIN IN THE GAME? WHO? HOME BUYERS or WALL STREET?

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SKIN IN THE GAME? WHO? HOME BUYERS or WALL STREET?

FINANCIAL NEWS TODAY. If one of the things that happened today was listening to the business news and hearing that the President's new plan to help stabilize the financial markets is to require that when Wall Street designs an investment product to sell to the public that they will have to keep "some skin in the game". Interesting because the public probably didn't know that when Wall Street designed complicated financial instruments such as MBSs, CDOs, and plain vanilla CDSs were sold and traded by Wall Street investment houses who had "no skin in the game". The securities sold by the Wall Street Gangs were often insured against default (credit swaps) by AIG who did not require that there be any "skin in the game" from anyone or any entity.

SHOULD HOME BUYERS HAVE SOME SKIN IN THE GAME WHEN OBTAINING A MORTGAGE LOAN? We often hear that home buyers should have "some skin in the game" when they finance a home purchase. Of course the mortgage on the property is secured by the real property. However, with no equity there is no "skin in the game" if the home owner defaults.

WHICH IS THE BETTER RISK? The American Home Owner or the Wall Street Securities Broker?

If the home owner defaults on their mortgage, they lose their home, their equity and their credit.

If the Wall Street investment banker sells securities that become worthless, they lose nothing. In fact, the government may lend them money at zero interest or pump several $Billion Dollars into their bank to "tide them over".

Wouldn't it be nice if the government treated the American Home Owner as well as they treat the Wall Street Gangs?

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, E-mail.

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 06/17/2009 03:47 PM

Comments (45)

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45 Comments on SKIN IN THE GAME? WHO? HOME BUYERS or WALL STREET?

JUN

It sure would! It would take a much shorter time to get us out of this mess.

3.5% is not much skin. I would rather see them have that in reserves. Cash in the bank is much better than skin in the game.

Lenn - "Wouldn't it be nice if the government treated the American Home Owner as well as they treat the Wall Street Gangs?" Yes, it would be certainly be nice if the government acted responsibly, but if we base our expectations upon past behavior, we're out of touch with reality. Quite honestly, I don't know what it will take for our "leaders" to behave with fiscal responsibility. They certainly don't have any inclination to do so at this time.

Hey Lenn!

I would say it's a good step in the right direction. Instead of just taking other peoples money, having something invested in a project yourself, makes you more prone to doing it properly. I also wanted to thank you on your input you had on my blog yesterday. You helped me save %40 commision, and I appreciate your well thought out comment. You Rock! :)

-Lisa

Lisa. I believe that the home owner has a lot in the project of owning a home. They pay the taxes, pay interest on their loan, maintain the property, etc.

My pleasure with the relocation vultures.

John. We know exactly what they will do. They will do what the heaviest campaign contributors will tell them to do.

Michael. I agree completely. They are going to need it.

Bill. I believe so too.

Lenn, That is a very important point of view and I'm glad you aired it. I really hate being a stock holder by proxy to these hijinks...

Paul. Thanks.

The governments distain for the American home owner is disgusting.

You sure have a way of putting things into perspective. Real estate was supposed to be the "safer investment". But that is certainly not the case anymore.

It certainly would be nice to see the buyers who run on hard times being treated like the Wall Street gangs. What are the chances?

Right on the money, Lenn. Heck - I know plenty people that had plenty skin in the game - but when you're upside down by half or more, most people simply don't have that much skin. It took some serious money hi-jinks to get us there by people who truly had no skin anywhere close to the game.

Some of the buyers did get skinned and the bankers just took the bonuses and moved on.

Lenn, home owners are generally a good risk. No home owner wants to lose their house and will usually do every thing they can to keep it, they have lots of "skin in the game" as you so well put itl

Hi Lenn

Wouldn't it be nice if the government treated the American Home Owner as well as they treat the Wall Street Gangs?

This is the million dollar question. If makes us all question if the leaders know what the heck is going on.

or what the heck there thinking ..... . It doesn't make much sense..

Unfortunately, they don't know how to treat the American Home Owner and never will. They will however, know how to treat their cronies at Fannie Mae and Freddie Mac...keep the golden boys rich with their bonuses at the expense of the homeowners and taxpayers.

The American Home Owner, I feel, is the better risk.

That'll be the day-a-ay that I die.

JUN

Lenn... right on with this post and your last sentence. And Michael, the second comment, in my opinion, is right on. I always argue this part, that I would rather keep the money in the borrowers pocket or bank.... and as some have stated, is 3.5% really skin in the game? I agree, if the gov't would treat us just as they do the big companies when bailing them out, actually giving them money... but when helping out the borrower, just giving them false hope with programs that will help the few, not the many... you really wonder who is helping who... sad, very sad. Great blog that could spark some good conversation. I'll be adding this to my other blog. thanks

jeff belonger

Lenn,

Iy would be nice but there are two sets of rules ne'st pas?

Terry. Indeed. The insiders and us, the ones who pay for every damned thing.

Jeff. Thanks. The disparity in how the government is working to clean up the financial mess is appalling.

Fran. It may not be fixed by that time.

Chris. You are absolutely right.

June. It makes perfect sense when you look at the campaign contributions to the power structure on the Hill and the parties.

George. You bet they do. Our government has changed into a bunch of prostitures for Wall Street and we pay the John.

Terry. That's just about it.

Gene. You're right. What the Wall Street Gangs and their enablers don't know is what they wrought in the financial structure of this country's economy. For a few stinking bucks under cover of "off balance sheet" and "unregulated instruments", they brought down the economy of the United States of America.

Barb. Zilch.

Lisa. Sad isn't it?

Lenn, If the American Government treated the American Home Owner as well as the Wall Street Gangs then that would be called EQUALITY wouldn't it?

Don.

Something like that. Problem is, when the government gives to the Wall Street Gangs, it's the American Home Owners' money they're giving.

The government officials that designed the give aways to the Wall Street Gangs were simply feathering their own nests. They don't give a fig about the American Home Owner.

The American Home Owners' taxes are ususally withheld. The government knows they're going to get their money. We're simply cash cows to the government officials.

Good post Lenn. I con't understand why we keep bailing out the very people who have used our money to excess and not given us what we thought we were paying for. It is frustrating.

The government receives special interest money from Wall Street, so of course the government is going to protect them. I say the government receives money from the American Home Owner and it's called taxes. That should be enough!

Paddy. Aw, come on. You know why!

Integrity. "Special Interest money". Interesting concept.

Lenn, it's just so true. Now some of the banks are trying to repay some TERP money because they don't like being restricted on executive pay and bonuses.

Lenn, you're right.

But it so easy to distract from the root causes of the melt down by blaming those who played a minor role, were the least informed and in many cases the most to lose. Governments role should be to protect the little guy (homer-owner) not the criminals.

Bailouts are cancer and bankruptcy is the cure. They should have been allowed to be cured not create more burden on the taxpayers (homeowners).

Insanity RULES....

Great post and I concur....even in the Great Depression the home buyers had 50% money in the game. That is why foreclosures did not free fall like they have now.

Jim. During the Great Depression we didn't have MIP, PMI, VA guarantees, mortgage insurance, title insurance etc., etc.,

Mark. I agree completely. If the government doesn't look out for the little guy, the little guy is apt to put in a new government.

Gabe. Indeed. The executive pay, which is often obscene, is sacrosanct.

What does the Government care, they have no skin in the game either. The billions they are pumping into broken down businesses comes from the skin scrapped off the tax payers. Help out lowly homeowners the way they do Wall Street, I think not. The last time I checked, Government didn't have the ability to use tax payer money to buy majority holdings in an individual. But, they can use our skin to buy the majority of a company.

JL. It doesn't matter anymore anyway.

They spend all they could get their grubby deficit hands on and could print.

Like it or not we all have Skin in the Game, but the average man is the street is not getting anything even though it is coming out of his hide. It is called TARP, The Auto Bankruptcies, and every other dim witted bail out. Get Americans in Homes and Get them Working. Cut taxes and cut government. At this point some looser lending will work for everyone, but it is the one thing they cannot seem to manage.

Lenn - Thank you so much for writing this blog. I think you may be one of the few real estate professionals that understand the bearing that the derivatives and especially the murky "credit-default swap" markets had on the rapid fall of the housing sector in this country.

Because Wall Street didn't have "skin in the game" as you say, they essentially brewed a toxic slurry of mortgage products and sold them to investors - making commission on those products each and every time they were packaged up and distributed. If we don't get a handle on regulating or implementing oversight, we will be having deja-vu all over again in a few years.

Lenn-

You've got one of the best blogs on ActiveRain but I have to say this is the subject you are the weakest on. A casual reading of the news over the last 2 years shows that Wall Street did in fact have "skin in the game". That's why firms like Bear Sterns and Lehman don't exist anymore.

As for bailing out finance companies (banks like Citi and BofA are two of the biggest recipients), it's necessary because of FDIC insurance. You, I, and everyone else who has commented in rage above could care less what these banks do with the money in our checking accounts because we know all our money is backed by the full faith of the federal government. In essence, the government has assumed the liabilities of the banking system. Therefore they are the ones that are supposed to be monitoring the asset side fo the banks balance sheets. They didn't.

Assets (loans) = Liabilities (Deposits) + Equity (Already Gone). You don't want to show up tomorrow to your bank and find out half of the money in your checking account has been lost, and this is why the bailout took place.

And please spare me the anger you agents in CA, FL, AZ, and NV. With proper oversight the massive amounts of 100% financing and Option-ARMs would not have existed in places like Florida, California, Nevada, and Arizona. Those states would not have had the run up in prices, and the rest of the country wouldn't be bailing out the lenders whose loans have now gone bad. (You're point is well taken Lenn that 100% financing for VA loans has a strong record... but when 100% financing becomes the norm as it did in these states it is a recipie for disaster).

We should look in the mirror as many agents reaped the benefits of the bubble fueled by these loans. Commissions remained the same at 6%. We rode the bubble up, now many are heading for the exits as it deflates. While blaming "Wall Street" lets us pass the blame off on others, all they did was finance our clients purchases and allowed many Realtors to live well the last 8 years. We're they overly optimistic? Yes. Should we let them absorb all the loses? It's tempting to say yes, but just realize that could mean the $ in your checking account disappearing.

All in all we're in for at least another 5 years of home price declines. The sooner we wake up to that fact the better.

JUN

Gene. Thanks. When tax money is in the hands of the consumers, we all win. When tax money is spent by government to manipulate the economy, it never bodes well for the citizens.

Myrl. Thanks for stopping by. You are absolutely right. They made big money every step along the way and when their house of cards came tumbling down, the government bailed them out with our money. What did they do with that money? HA!

John. No one has argued against the FDIC. That's the one shining exception to the perfidy of government financial market manipulation and power grab. Agents didn't lower rates to a point where almost anyone could qualify for a mortgage loan, Greenspan did. Agents didn't approve buyers with 75 debt ratios, lenders designed instruments that permitted it. Agents didn't sell off balance sheet instruments to investors at obscene profits backed by mortgages that were destined to fail.

One of my banks didn't have to take $7.5Billion of TARP money to buy another bank. If a bank becomes insolvent, they should go out of business. If a home owner is insolvent, they lose theri home. FDIC will protect depositors. We don't prop up home owners who can't pay resetting ARMs, why should we prop up banks when they make bad investments.

We'll be lucky if the mess is over in 5 years.

"No one has argued against the FDIC."

Well your readers should at least realize that because of FDIC insurance, bailing out Wall Street = bailing out bank depositors (i.e. you, me, and everyone else above who has a checking account).

Again, for a simplified version of a bank's balance sheet: Assets (Loans) = Liabilities (Deposits) + Equity (What the govt is stepping in and providing). If the assets/loans have lost value than either your checking account is going to be worth less or the govt needs to step up with some equity. There is no way around that basic math.

"Agents didn't..."

I agree. But most reaped the benefits of higher home prices during the boom. And how many examples can you find of agents advocating TIGHTER lending standards on ActiveRain? As such the rage against bailouts seems disingenuous.

"We'll be lucky if the mess is over in 5 years."

Agreed.

John.

Many of us advocate for tighter lender standards regularly. For myself and many others with good experience, we make sure our buyers are sensible about price ranges and examine loan types recommended by lenders.

We don't design the loan, we sell homes. My buyers aren't going to be suckered by bad loan instruments and I know many other agents who are the same.

Agents can't police the ethics of loan officers and mortgage companies. That's something they've got to do themselves.

Attempts to "spread the blame around" won't help. If that's the route, then the Wall Street Gangs and the regulators that failed us will simply start all over with another round of investment vehicles that will fail to be identified as happened this time. Get to the bottom of this mess, identify the failed institutions and regulartors and clean the mess up. This mess was Wall Street driven and that can't be denied. That's where the clean-up has to start because they still have the ability to do the same thing again. These are very smart guys and they won't be easy to control. If we dilute what they did by spreading the blame around, they'll just slip through with more ways to make money off the backs others who don't understand what they do.

Ignoring agents who hyped the market and pushed for lower lending standards is also a mistake .

Remember, it was Chief Economist of NAR who pubilshed this book in early 2005, right before the bubble burst:

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them

http://www.amazon.com/gp/product/0385514344/

Lenn,

Well put. These exotic investment products Wall Street was peddling actually had reverse skin in the game by the truckload, and like you say, now the taxpayer is making them whole again.

Esko. Indeed. Without the perfidy of the Wall Street Gangs, I don't believe that the mortgage or banking crisis would ever have happened.

Sure, the market would have slowed, prices may have fallen. The BOOM had to come to an end, but without the Wall Street Gangs peddling their worthless securities to the world and the pressure to design more exotic loans, buyers wouldn't have been sucked into the mess and the mortgage failures wouldn't have happened.

"We can see clearly now!"

JUN

Lenn - Last Autumn, one of the things we heard Wall Street scream for when the house of cards began to tumble, was for "insurance" from the federal government. They knew what they had built, they knew how their toxic crap had become systemically entrenched in the global marketplace. They were literally screaming for the federal government to "insure" their outrageous risky behavior and debts.

It galls me that the taxpayer is paying for all this. Yet, the problem was so systemic, that doing nothing would have sent this country and much of the globe into a economic dark ages. We stand to possiblyy get some of our money back - perhaps with a little interest. But, I think a great deal of the bailout money is in the sewer, and will never see the light of day. AIG upsets me most.

"Yet, the problem was so systemic, that doing nothing would have sent this country and much of the globe into a economic dark ages."

I disagree Myrl. About 15,000,000 of our citizens with upside mortgages are in economic dark ages. The Wall Street gangs used the American housing industry and the underlying mortgages as collateral for their securities, they knew that the securities were under secured. There is evidence that the risky mortgages that were sold to unqualified buyers, were encouraged to be sold by Fannie/Freddie, who knew that the failure rate would be high. Further, they knew that the securities were backed by risky paper. The head of Fannie was a crook who was milking the very entity that was designed to protect the American mortgage borrower. The Wall Street gangs demanded more and more MBS to sell around the world with the full knowledge that they were backed by worthless paper.

AIG insured the worthless credit default swaps through their shadow divisions that were hidden from public view.

What has happened has already crippled the American economy a lot worse than folks know and the government is willing to admit. Many judge the American economy by the stock market. The stock market is not the American economy. The American citizens are and they have not profited from the mortgage mess, nor have they any control over the government playing favorites in which entity to save.

What the government did was elect to save their Wall Street Gangs, banks, etc. with money they took from the American citizens.

IMO, it could not have been worse if the entities that designed and executed this rape of the American tax payer were permitted to shut their doors and the perps sent to jail. Justice is always better for the country than expediency. It would have been ugly, but no uglier than the picture of the American home owners moving into the homes of family or renting apartments after losing their homes.

I do not believe the politicians and their Wall Street gangs are honest when they give us a dooms day description of the chaos that would result if insolvent investment and commercial financial houses and banks closed their doors. FDIC would have protected depositors. The only ones who would have lost is the cabals that caused the mess. That course would also have shed some light on the corrupt practices of the securities markets who use "off balance sheet" instruments to sell worthless paper, insured by another "off balance sheet" division of a corrupt insurance company.

The regulatory arms of our government should have some light shed on them too. The SEC has become worthless when they ignore warnings of the Madoff catastrophe. Fannie Mae, Treasury, the Federal Reserve, HUD officials that strong armed banks to make worthless loans, and all of them should be turned out, put in jail or otherwise stripped of their ill gotten wealth and influence at the expense of the American home owners and tax payers that they used for their own personal gain. Things are so corrupt that a criminal enterprise funded by taxpayers are permitted to play a role in elections. There is sufficient evidence that ACORN is a criminal enterprise, yet it continues to receive tax payer money.

Of course, what I would like to see would require the perps prosecuriting themselves.

Not likely to happen, is it?

The double standard for Main St. when compared to Wall St. is alarming. Main St. is on its way towards a depression, but at least the banks have been fortified. ;)

Mark. The government saving banks and financial instutions is the ultimate in cronism. They saved their own and let the rest of us eat cake.

Lenn - I agree many homeowners are in the dark ages. And yes, Wall Street KNEW they were undersecured. I guess the difference in opinion about bailouts, comes from wondering if we are willing to accept folks losing 100% of their retirement funds, vs. the 40-50% they lost when everything began to unravel.

I would have loved to have seen AIG fail and not been bailed out. BUt, let me provide an example of the otherside of the coin. An elderly neighbor in my middle class neighborhood, had nearly her entire retirement nest egg, in AIG anuities. She is only one person, of millions in that predicament. As much as I loathe taxpayers having no retirement paying taxes to bailout AIG, had we not done so, it would have contributed to the global dark age that I am trying to illsutrate.

Currently, we have seen some recovery in folks 401ks/IRAs/Retirements. But alas, only time will tell how much recovery will actually be seen.

You and I are in agreement, that these bailouts have been a horribly bitter pill to swallow. I would have allowed far more companies to fail than have - but can understand those that tried to save us from seeing just how bad it could have actually gotten. I think we are damned because we did, but would have been far more damned had we not.

I share your position of thinking more heads need to roll regarding this - and like you, I don't think it is likely to happen! Right now, I don't think our markets have any credibility, and they are trying to blame everyone but themselves for what has happened. Theyrefuse to look at their own lack of responsibility. My understanding is that during the Great Depression we had 1 dollar covering 10. In this meltdown it was a mere $1 dollar for each 40. That's just how bad things were! The SEC needs to be lined up, and hung!

Myrl. You are right about the retirement funds. Everyone has lost there.

There is no way to pick and choose winners and losers in this debacle.

However, in the coming years I see more harm to families, the economy and the wealth of our citizens through the loss of home equity than through loss of retirement funds. I can't focus on an anecdote. There are just too many folks who would have lost if the Wall Street perps had been let to fail. There are also millions of home owners who have lost all of their wealth too.

There are not winners except the executives who perpetated this fraud on the American economy.

Myrl- Great comments. I've just bookmarked your blog.

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