No Honor Among Thieves

In the past few days I've seen, heard and read interviews with various CEOs and industry advocates from the worlds of the home builders, realty agencies and mortgage brokers/lenders.  Three years ago you would have thought these groups constituted one giant, happy family.  All of them denying the existence or even the possibility of a bubble.  All of them congratulating themselves on achieving historically high home "ownership" levels.  All of them urging potential buyers to "buy buy buy".  Buy as much as you can, as fast as you can, as often as you can was the mantra.

Enter the Great Deleveraging, a historic credit crunch, and home prices dropping faster than ever in American history:  and the once happy family are stepping all over each other to point fingers and defer blame.

Most recently, I heard an interview on the radio with Margaret Kelly, CEO of Re/MAX.  She was overtly laying the entire blame for the irresponsible borrowing and home buying of the past few years at the feet of the mortgage brokers and loan originators.  She stated, essentially, that:

• The realtors had no culpability.
• The realtors' hands were tied because they have a "responsibility" only to get the best deal for their clients.
• Realtors were warning lenders all along that the real estate market would slow down and probably begin declining.
• Lenders need more regulations (though realtors need less).

Ok, you can stop laughing and/or grimacing now.  I wonder if Leslie Appleton Young, David Lereah, and Lawrence Yun would agree with Ms Kelly, given they were continuously banging the drum of no-bubble, never-a-bubble, buy-buy-buy.  In Yun's case, he inexplicably still is banging on that drum.

But it doesn't stop there.  In past days I've heard the CEOs of Toll Brothers and KB Homes blaming both realtors and lenders for the current situation.  And of course, the mortgage brokers association has been busy laying the blame at the feet of the banks and Wall Street in general.

I raise all this because

1. This was as predictable as the bubble popping itself.
2. This is entertaining as a source of Schadenfreude.
3. Most importantly, it presents an opportunity for geniune, honest, ethical professionals in the real estate industry to stand up, be contrarian leaders, and drive for a serious purging of the riff raff and scoundrels from your ranks.

I do agree with all of these folks in one regard:  you all need more regulation.  I really dislike unecessary regulations.  In your case, you've earned regulation.

Comments

[JimSulli]

We've agreed on this before, the industry needs more regulation throughout. The problem with a lot of this is that most of it is a case by case situation. There are Realtors, Lenders, and builders out there that had no clue what was going on. (Please don't take this as an excuse for people's actions). But with the minimal regulation, and an uneducated stance on "economics", people just went about their daily business. Culpable describes everyone, whether "blissfully ignorant", or "purposely deceiving", both have the same effecct. Don't forget the irresponsible borrowers in this either.

[randolfe]

I certainly don't forget about the irresponsible borrowers/home-buyers/flippers/speculators. I still believe that they'll get what's coming to them, however, regardless of any bailout.

I fully expect that any bailout provisions which cover home owners won't cover 2nd homes, investment properties, or flip jobs. I also believe they won't cover anyone who has a debt face value of more than some very low "median", say $250K. There will also be income limits that eliminate pretty much every bubble area, even midwestern and southern suburban/urban areas.

I have no pity for people losing their homes except for a very small group who were truly exploited, coerced or otherwise defrauded. But those are the exception, not the rule. Rather, I, like most of us who sat this insanity out, saw buyer after buyer after buyer make irresponsible decisions to purchase beyond their ability to service the debt -- all solely based upon the expectation that prices would rise forever. To them I say, "tough". Return your home to the foreclosure cycle and let a deserving family buy it on a supportable income.

Call it my small town, old fashioned, midwestern upbringing, but there is something about fairness, justice, and ultimatum. If you chose to take the risk, regardless of how many others were also, then you deserve to suffer the consequences. After all, you stood to reap the benefits had you been right.

I bristle at the notion that we should write-down home principle. That is utter crap. It creates a moral hazard beyond all rational defensibility. I can't, for the life of me, figure out why the hell no one of power or influence is seemingly able to noodle this through in their head. It's simple:

Pretty much everyone's ethics are relative. They think their ethics are absolute, but they aren't. They'd all steal to feed their children. They'd all kill to defend their family. Well, it also applies to less than black & white scenarios. They'd all purposefully drive themselves into "qualifying" for a loan write-down if they see their neighbor get it. It won't matter if their neighbor has hit harder times than them. They'll feel absolutely, entirely, completely, thoroughly justified in taking the entitlement if their neighborhood peer gets it. That's just how people think. End of story.

Now someone go tell the idiots pretending to run this country, will you?

Sorry, off my soap box now.

[astrid]

I have a bit more sympathy for people who bought out of fear or ignorance. Yes, they brought it upon themselves, but large proportion of the populace are just economically illiterate. Their culpability is somewhat akin to that of a teenage girl who gets knocked up because she thought she couldn't get pregnant on her first time, or a teenage boy who drives too fast and wrap himself upon a tree. They're idiots, but they just don't know any better and I'd just hate to live in a world where social darwinism takes all the home buying foolz 2002-2007 out of the gene pool.

[astrid]

Oh, meant 2002-2008, though 2008 foolz are their own deluded category of "now is a great time to buy" wishful thinkers.

[randolfe]

Yes, they are economically and financially ignorant. One can see that on a daily basis. Add general statistics to that list, which apparently only a tiny portion of the population understands (though most think they do).

But there is a huge problem with the teenager analogies. These aren't teenagers. Fine, maybe we can take age into account, though apparently we're only allowed in this country to help old people discriminatorily, not young people. I'll agree to excuse 18-22 year old's who bought, so long as they didn't use a single dollar of trust fund or mummy&daddy money. If they did, tough.

But for 30, 40, 50 year olds who bought? These are adults. They need to be treated as such. Same if a 35 year old woman gets knocked up or a 55 year old bald guy wraps his coupe around a tree -- tough. You aren't children. Grow the f- up and take ownership for your decisions. I don't want to bail out either of them. Nor do I want to bail out the millions of silently greedy, irresponsible Americans who happily bought into the whole real estate mania. They are just as culpable as everyone else. Such are the trappings of living in a free society.

[Brand]

Now is a great time to buy or sell a house! (grimaces)

[randolfe]

Depending upon where you live, there are some rational 2008 buyers. As for the Bay Area, there aren't many. But if you're buying REO out in the decimated portions of Contra Costa county, then you can easily find deals well below your cost of rent, and easily supportable by fundamentals. The problem is, prices are still falling, so you're overpaying from a pure market-timing perspective. But you're not crazy or stupid to buy. Just not maximizing your dollar.

[randolfe]

Before I run for a while, a couple incredibly stupid things I heard on television today during all these debates (paraphrased):

* CEO of RE/MAX -- We think the free market is the best way to solve problems like we have in the housing market toady. But the free market takes a while to work, and we don't have the luxury of time, so the government needs to fix the market now.

* Some spokesman for the association of homebuilders -- There has never, in the history of the world, been a better market for home buyers.

* Some spokeswoman for the NAR -- Lending standards were too loose. We were warning everyone about that for years, our leadership has been pushing hard for regulations of the mortgage industry. But now the pendulum has swung too far the other way, and borrowing for our clients is harder than it was during the Great Depression. (Note, borrowing today isn't even harder than it was in 1996, let alone 1936. And there were no fixed-rate mortgages as we know them during the Depression, those arose towards the end of the War.)

* Some freak on NPR -- If everyone just would quit thinking negatively about all this and expecting the worst, then the houses would start selling again, and people could pay their mortgages, and we could all get back to normal.

[NTETS]

would not 2002 have been a better time for home buyers? then they could have ridden the wave up to make double what they paid in cash back before jumping ship in '07

in my personal opinion:

if you are losing your house, you are not the victim. if you are holding your house and suffering the decline because other people are losing their houses, YOU are the victim in all this.

i cant excuse people for ignorance because at the end of the day the contract was in front of them. true, they may not have seen/forseen the housing bubble and in fact probably couldn't have been expected to. however they know their income and they see their monthly payment and they know that the teaser rate *WILL* adjust up and they still bought 800k on 100k/year. if you cant afford the house you should not buy the house.P-E-R-I-O-D. buy a house you can afford. those had to have existed too, and if they didn't well then i guess they were ignorant by choice. today i was offered "the opportunity of a lifetime" and i walked away. 5 mins on google and my trepidation it seems was justified

[astrid]

This is an area where we're just going to have agree to disagree due to our core beliefs, even if we end up reaching similar conclusions.

I think the intricacies of modern finance are just beyond most adults. Sure, I can say that they're liable because they're adults and should be capable of taking care of themselves. But I would argue that many of them are in their unfortunate situation not because they're greedy, but because they're too ignorant and trusting. I think most of the fault lies with poor regulation, stupid media, poor education, and the broadly fraudulent representation of industry insiders.

However, less culpability doesn't mean no culpability. I don't want the government to spend money bailing these ignorant and trusting people out. They still bear the blame and deserve their punishment far more than others. Even a low living standard in the US is usually quite tolerable and I don't feel bad that they, rather than I, will be feeling the consequences of their stupidity. I know I still have to pay in some form, both indirectly through a recession/depression/stagflation/??? and as bribe to keep them from bringing out the pitchforks, but I want that amount to be kept at a minimum.

I just won't enjoy the schadenfreude very much.

[randolfe]

Schadenfreude is a bittersweet pleasure, to be sure. Seldom is it a lasting contentment.

I agree with everything you said, especially the lack of education and the failing of regulations. I wouldn't say we don't have enough regs -- the financial industry is one of the most heavily regulated sectors of our economy. But those regs have not been managed or enforced properly by the Bushies.

And I've long called for a comprehensive regulatory regime with real teeth to oversee the real estate industry. That industry has such a deep culture of corruption that many of the honest participants don't even know their common business practices are unfair and unethical.

I would point out one thing about excusing adult, otherwise mentally competent home buyers on the grounds that they couldn't understand what they were getting into: it was not necessary that they understood what they were getting into to be financially responsible and avoid the catastrophe that faces many of them now.

Anyone who followed even the simplest of middle school home-economics, or inane Suze-style, oversimplified financial advice will have avoided ruin. It really is this simple: don't buy anything you can't pay for. Why should I take any pity on someone who ignored something as simple as that, listened to anyone selling them on easy wealth, and now finds themselves living in a home they can't pay for?

If you paid 3x your income for your home, even if you bought it in 2005 or 2006, then you're not likely facing ruin unless you're one of the "natural" victims of life, like divorce, sickness, death. But those things have ruined families all along, regardless of bubbles. Short of that, if you bought at 3x, then you've only lost an amount of money you can recover from. If you bought at 8x, or 12x, or 15x like many around here did, well...then you deserve your fate.

And I don't deserve to pay for you to keep your home on my dime. Why should you get to "rent back" your $1,000,000 home at $350,000 equivalent rental rates? Why should you get your $850,000 mortgage written down to $500,000, effectively achieving the same thing? All that does is spit in the face of everyone who has a $850,000 mortgage and is making payments on it.

It is pure confiscation of income and redistribution of wealth -- from the responsible and innocent to the greedy and ignorant.

[sunnyview]

I don't think that most people were tricked. They believed the "professionals" because they wanted to believe. The "professionals" were not professionals at all. They acted like a bunch of doctors do when a surgeon is drunk in the OR. They talk to each other about it, but do nothing to stop their fellow professionals from acting unethically. When the stuff hits the fan, they complain that they get painted with the same brush as the "bad" professionals. Crap.

Regulation was required, but the government was unwilling to act because their pocket were lined too heavily. I am furious as an ethical person, a taxpayer and as someone who was financially responsible. Now I am punished for other's greedy mistakes.

[craig jones]

I would suggest, like most here, that blame can be spread across the board. In my mind, the most important aspect of this, and other bubbles, is that these excesses invariably arise as a result of abundant liquidity, from whatever source. Unfortunately, in modern economics, liquidity is almost always supplied by the government either through interest rate policies, direct and indirect subsidies and tax law.

[REALTOR_GRI]

Most people observing what has occurred within the housing market can agree there is enough blame to spread around. So many things need to be fixed with the way we purchase real estate and borrow huge amounts of money. The “standards” to which us “professionals” are held should be far higher. It doesn’t appear that this will change anytime soon. Many of us in the industry thought that this would “shake out” the “bad” unfortunately plenty of ethical people will not make it over the coming years either.

Many consumers may not have known what they were doing but most of them had a pretty good idea.
So few wanted to believe (or admit) what the obvious outcome would be.

Now the government is going to step in and “help”

Some banks will fail and others will buy them out and grow larger.
Some of us may lose our homes and someone else will buy it for much less.

It is a challenging time in real estate right now. As it was 20yrs ago and will be again.

To say you were a fool to buy in 2002 is an easily made statement from the year 2008.

We bought and sold in 2003, refinanced in 2006. Yep we are upside-down and have not an inch of ground to stand and whine on (doesn’t mean I won’t catch myself doing it from time to time ;)
Do I think the government should bail us all out? No way.
Each bank it would seem should decide whether to modify (yes including a reduction of principle), short sale, foreclose or whatever to mitigate their own losses. Could the government provide incentives to the banks to negotiate? I may be on board for something of that nature.
JMO for whatever that is worth