Financial Crisis Inquiry Commission

Real Estate Broker/Owner with Home Run Realty, LLC

All REO Brokers, for that matter all Real Estate Professionals should watch the panel questions to learn about the financial crisis. It is available for viewing at in the on-going blame game that has been in effect since the beginning of the crisis, this is the most fair and balanced of each party's viewpoint, without media bias one would find on politically motivated networks. Most people have an opinion on the root cause of the meltdown. Some think it rests on a residential real estate housing bubble. I have never been in agreement with that viewpoint. Real Estate is unlike a dot com, it cannot truly be a complete bubble. By definition when a bubble bursts, nothing is left, in real estate, the underlying asset remains, although at a reduced value, it still retains some value. Others believe that the cause is Wall Street greed. Many others believe it was the push for increased homeownership rates. These thoughts are over-simplication, although there is plenty of blame to go around, it is a combination of many factors that created the perfect storm. The purpose of learning where the system went wrong is to prevent repeating the behaviors that brought us here.

It's my opinion that there was a whole circle of responsibilty. An environment of appreciating real estate values, and low interest rates had Main St wanting to invest in stocks & real estate rather than put their cash in safe low return savings accounts, or T bills & the like. Wall St under pressure to out perform year over year, as the bar is set higher and compensation tied to investment returns to the firm looked for new investment vehicles to sell. Mortgage loan brokers. some of which didn't even need a license depending on which state they did business in were looking for new loans. Institutional investors looked to maximize returns on their portfolios and pension funds. Enter new products; mortgage backed securities and credit default swaps. CDS were basically a bet that a package of loans would fail, sort of like shorting a stock. In order to sell these new products they needed to be rated, so Credit Rating Agencies such as Moody's & Standard & Poors evaluated these new products. They developed sophisticated models based on extrapolating real estate appreciation. Real estate purchasers counted on rising values and incomes to sustain their mortgages. Relaxed qualifying opened the market to more borrowers, it was now possible to purchase with no money down, lower credit scores and low documentation of income. There was some mortgage fraud where borrowers or originators lied on applications. Some borrowers decided to cash in on their equity to purchase home improvements, vacations, toys or anything else they wanted now. Homeownership rates went up and helped to fuel the economy, so the circle went- until it broke down.

Here's why I think it broke-
1. Real Estate values are not constant, they fluctuate up and down.
2. New sub-prime loans were more profitable than conforming loans, so too many were written.
3. MBS & Credit Default Swaps needed an increased amount of loans to package, Wall St wanted more.
4. Mortgage applications were taken by inexperienced unlicensed people, including some real estate agents.
5. The riskier the loan, the higher the profit to the mortgage broker, and demand for the loans increased.
6. Mortgage Companies solicited home owners to refinance, and spend their equity now, rather than build it up.
7. Credit Rating Agencies formulas of taking B & C paper, repackaging and rating AAA, (which I liken to taking B & C student and putting them on the Honor Roll) led to global institutional investors purchasing the MBS & CDO's, thinking they were safe.
8. Government watch dogs that started to raise red flags were squashed.
9. Banking regulations did not apply to Investment Companies.
10. The Fed kept long term interest rates low.
11. The new financial products were complex, and some buyers did not understand them, and relied on their ratings.
12. No transparency in capital reserves and product mix at major lenders.
13. Consumers take loans which they don't understand have pre-payment penalties, balloon payments, negative amortization etc. This one gets alot of bad press, as in "they should have know better" but I know that I have signed documents to purchase a car without reading it, and have many times checked the box on a website that states I have read & understand the terms & conditions without reading them.- and I deal with legally binding contracts everyday.
14. Economic conditions weaken, Real Estate values decline, Foreclosure rates increase placing downward pressure on values, Market liquidity tightens, Panic starts. I am not sure which fueled which, but the combination led us here.


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