The Metrics of a Market Correction

By
Real Estate Agent with Integrity Real Estate
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.
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Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate
janeAnne - Thank you!  Your kind words are greatly appreciated.  I hope your team finds the post useful.

Jesse -  Without a doubt, the media is irresponsible more often than not.  While, the media clearly had an effect in fueling the boom, I'm not sure it's been instrumental in initiating the recent negative frenzy.  I don't think that reporters understand the situation and shy away from it when possible.  I expected far more coverage than has actually occurred.  Thanks for commenting.

James - I agree that greed is unstoppable and will plague us to the end of time.  However, I believe that proper training would cure many of the ills confronting the industry.  I feel that consumers need to be enlightened as well.

Bob or Carolin
- You're very welcome!

Duane - I appreciate your kind words.

Doug - Thank you!
Nov 26, 2007 11:26 PM #53
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Brian

Thank you for such an insightful comment.  Like you, I suspect that we'll experience a devaluation to price levels as they were in the late 1990's.  The stock market downturn offers a worthwhile analogy, but the housing market is much different in many respects.  For one thing, a house can't be sold quickly when the market signals distress as is the case with stocks.  Astute investors in the stock market are able to mitigate losses.  Also, we need to factor in the new phenomena where mortgages exceed home values in many instances.  This is a problem that could conceivably take decades to resolve and could greatly impact wealth distribution.

Unquestionably, the aggregate behavior of baby boomers will significantly affect the potential recovery.  At the same time, we need to work with generation X and generation Y by educating them about the realistic benefits of homeownership.  We need to include the young people for this to work.

Nov 26, 2007 11:39 PM #54
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Neal

I understand what you're saying about a backlash when writing posts that are perceived as negative.  I think there's an expectation that all posts should be somewhat giddy and always portray a rosy, floral backdrop.  That's simply not real life and I won't participate.

Without a doubt we're watching a highly dysfunctional market attempt to diagnose its own symptoms and possibly try to correct itself.  A holistic approach to healing won't work in this case as there are too many dimensions to the problem that have managed somehow to collide right here, right now.  The effects will be devastating as I believe we're uniquely positioned to witness the death throws of an enormous and outdated business model.  

I'm very curious to see where we are in June of 2008.  I think we're going to see a glimpse of the future by then or shortly thereafter.  I think big is going to replace small.  I think commissions and fees will become something entirely different than they are at this time.  The key will be the control of information followed by the control of technology.

Nov 27, 2007 02:44 AM #55
Rainmaker
732,087
Chris Griffith
Downing-Frye Realty, Bonita Springs, FL - Bonita Springs, FL
Bonita Springs Listing Agent
Don't forget to integrate the "know it all" and "blow hard" factor, too Ed.  Some people just like to argue for the sake of arguing.    
Nov 27, 2007 02:49 AM #56
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Chris

That would be me : ) 

Nov 27, 2007 02:52 AM #57
Rainmaker
732,087
Chris Griffith
Downing-Frye Realty, Bonita Springs, FL - Bonita Springs, FL
Bonita Springs Listing Agent
You're going to wreck my illusion that you're a sweet little cupcake!
Nov 27, 2007 02:54 AM #58
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate
I think a bitter, angry man is a more realistic characterization.
Nov 27, 2007 02:57 AM #59
Rainmaker
732,087
Chris Griffith
Downing-Frye Realty, Bonita Springs, FL - Bonita Springs, FL
Bonita Springs Listing Agent
I don't believe!         
Nov 27, 2007 03:03 AM #60
Ambassador
249,506
Jesse & Kathy Clifton
Jesse Clifton & Associates, REALTORS® - Fairbanks, AK
Retired

Hi, Ed

It's very easy to simply blame borrowers for this mess; both those that overreached in their purchase and those investors that drove the prices at a fevered pitch.  That's only part of the story.  Agents, lenders, buyers, appraisers... we all share culpalibility for this disaster in almost equal parts.  I think we have to add one name to the list of those responsible and that's a reckless FED chairman who held the purse strings open for far too long.  The relaxing in lending guidelines was predicated by an abundance of inexpensive money, the relaxing of underwriting led to more borrowers being steered toward loans they ultimately couldn't afford, more sales drove the market up, agents and appraisers did their part in hitting those inflated numbers to meet buyer demand... then one day in mid '06 someone sneezed and the house of cards began to topple.  Great post, btw.

Nov 27, 2007 08:00 AM #61
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Jesse or Kathy

I'm glad you stopped by.  Validation helps when you write a strongly opinionated post such as this.   Without a doubt, it was federal policy that opened the doors to loose lending criteria and cheap money.  Your comment is great.

Nov 27, 2007 08:08 AM #62
Rainmaker
87,238
Alan Barker
Boomerang Leads - Smithfield, UT

IF government does try to step in on our housing dilema, it will only postpone it. Most of the foreclosure people I talk to have made poor decisions and didn't have any savings to begin with. Yes the lenders never should have allowed them to get the loan, but the borrowers should have had some common sense to realize they couldn't afford it. It's tough to change behavior. People will continue to make mistakes.  If government bails them out they are only postponing their future failure.

Part of the housing dilema occured because Borrowing Interest rates were too low, suddenly a much more expensive house was now affordable in the terms of monthly payments. Demand increased, and home prices shot up. If the FED continues to lower interest rates just to help the housing market, they will continue to remain low and once they go up to a more healthy rate again people will panic and housing will become way to affordable then.

The natural market driven correction is really the only way the issue will be really resolved.

 

Nov 27, 2007 12:00 PM #63
Anonymous
Diane Cipa

The whole thing just makes me want to vomit.

It's like the teacher left the room and all the kids just went crazy.  Leaders in mortgage lending and title insurance are the culprits.  They tossed good practice OUT the window in a quest for volume and loads of cash.

Loan originators, consumers, and real estate agents have ALWAYS had to be controlled by management, underwriters, and settlement officers.  Management gagged underwriters and then hogtied settlement officers.  The entire self-policing mechanism was absent.

I actually have a hard time blaming the security dealers because they depended on the reps and warranties which included due diligence.  Due diligence has real meaning in investment banking circles.   I think they were clueless about the lack of quality control and the degradation of underwriting standards.  Fair Issac sold everyone on the techno FICO matrix and end of story - WE ARE HERE - PUKESVLLE MAN.

 

 

 

Nov 27, 2007 12:09 PM #64
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Alan

Within the context of a historical market correction, federal assistance would do nothing but delay the inevitable for many struggling borrowers if not all.  This isn't, in my opinion, a normal market shake-down.  I believe it's the collapse of a business model that no longer works. 

I also believe that a bail-out is a viable option to assist those caught up in the mess.  Sure people made the mistake of wanting larger homes because money was cheap, but is that reason enough to destroy their futures.  America's most important industry "blew a circuit" and now the devastation is untenable.

Thanks for the great comment.

Nov 27, 2007 08:56 PM #65
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Diane

It's like the policing mechanism that once existed had somehow vanished.   Lenders and title insurers are definitely to blame because lax standards where more than tolerated, they were rewarded and anticipated. 

Your thoughts concerning the role of due diligence by investment banks makes perfectly good sense.  Still, there were market signals of looming disaster that should have been detected by someone.   I first noticed them during the summer of 2000.  

The question: Where investment banks deceived or where they a part of the deceit?  I'm not all sure of the answer.  I'm thinking that like everyone else, investment bankers turned a blind eye and hoped for the best while raking in the bucks. 

Nov 27, 2007 09:13 PM #66
Rainer
40,346
Frank Verna
Frank Realty - Jupiter, FL
Broker / Owner
Super post Ed, the info you provide is morth than helpful, it's insightful. Thanks
Nov 27, 2007 10:46 PM #67
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Frank

Thanks.  I'm glad you find this stuff useful and I hope that others do as well. 

Nov 27, 2007 10:51 PM #68
Rainer
225,598
Diane Bell, Hilton Head Real Estate, Bluffton
Charter 1 Real Estate, Hilton Head, Bluffton, SC - Hilton Head Island, SC

Ed,

I was pleased to find one of your most enlightening posts here.  I haven't seen you posting lately but that may been my mistake.  Anyway, a great post--I totally agree.

Nov 27, 2007 10:53 PM #69
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Diane

Thank you!  I'm posting occasionally.  

Nov 28, 2007 01:15 AM #70
Rainmaker
76,198
Natalie Langford
Realty Negotiations - Winchester, VA
Winchester, VA Real Estate
Hey, Ed, thanks to Andrew Trevino's recent blog, I found yours.  What a wonderfully written post.  I have to say, you are bringing up some excellent posts.  We were almost in that situation in Dec 2005/Jan 2006.  Luckily, careful review of the updated GFE raised some red flags and we immediately switched lenders.  The first lender thought  that the 3 wk time-line to close would keep us with them.  I can't imagine going to closing and having a moving van waiting and accepting a raw deal.   That's rotten...
Nov 28, 2007 12:50 PM #71
Rainmaker
144,424
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Natilie

Thanks for the kind words.  I've been to Winchester on a number of occasions and love it there. 

Nov 28, 2007 10:53 PM #72
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