Snake Oil & the Giant Sucking Sound
The mortgage industry is undergoing a purging not unlike the Salem witch hunt…the purge is underway; people are being burned at the stake for witchcraft lending practices. The high and mighty are falling like the statue of Sadam Hussein. Prison doors are opening and slamming…more coming…sadly.
The snake oil lending of 2001-2005 is now backfiring and the big losers will be consumers who are in over their proverbial heads and the real estate industry itself, the great facilitator of the frenzied market run-up once described by Alan Greenspan as “irrational exuberance.”
Enter the Giant Sucking Sound
None other than D.R. Horton’s CEO, Donald J. Tomnitz, recently stated, evidently without embarrassment,
I don’t want to be too sophisticated here, but ‘07 is going to suck, all 12 months of the calendar year.
Enter the “Giant Sucking Sound” of increasing inventory added to the Snake Oil mortgage lending schemes.
The real estate industry bought into the no-down, 100% financing schemes as fast as the ink could be put to the contracts. It is now estimated that upwards of 2,000,000 homeowners could lose their abodes, bringing another black eye to the industry’s professionals who aided and abetted the fiasco.
Snake oil salesmanship is precisely the cancer eating away at the real estate industry. We are an ego industry, top to bottom, which seems to lack the business acumen to “just say ‘no’.” A consumer whose admiration of we practioners is already akin to loving skunks will be further infuriated when the “do-do” strikes the whirling fan blades of an out-of-control housing market.
What will we do? When will we learn? Our industry needs to step back from the debacle and ask itself if this is the best we can do? Let’s hope that the ghost of the Jimmy Carter era with its disastrous consequences does not bring us a Deja Vu.
Let the Finger-Pointing Begin
REALonomics has a few questions…
- Did we fail the consumer in our fiduciary as financial advisors?
- Are the operating models we use held up to the highest standards?
- Have we employed and trained agents to protect their clients from risky schemes?
- Who is running Quality Control in this industry?
There will be the predictable finger-pointing, rest assured. The real estate industry will pretend it didn’t know, while 1+ million of us attend our obligatory agency and ethics renewal hours. We will shake our heads and say we didn’t see, didn’t understand, weren’t informed, couldn’t have helped, it’s not our fault…and more. While REALonomics has previously focused its spotlight on business modeling, perhaps it is time to probe deeper into the psyche of this industry and see why it still clings to the bottle of snake oil.
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Part of our problem was a huge influx of new agents who were then fighting for a finite number of buyers. In this fight the mantra was/is “that everyone should live the American dream and have a house”. These new agents would push these lenders to approve anyone with a pulse, the lenders of course, being that many mortgage brokers were often the buyers agent in the transaction, needed little pushing to force a financially shaky buyer into a high risk (snake oil) loan. Too many agents for a finite number and certain level of greed by our selves has lead to the problem we are in.
Or perhaps the promise/reality of 20% annual appreciation made the buyers ignore the warnings of the lenders who pointed out worst-case scenarios and who insisted that agents find a way to make the deal work. As in every boom, and I have experienced many, agents new to the business thought the boom would last forever and counselled their buyers accordingly. Those of us who recommended caution with respect to offering prices were abandonded by buyers who lost out to others willing to pay unprecedented prices. We can take some blame but in a market driven business the buyers have to take some blame as well
Michael, you are on target 100%. Nice comment. There is plenty of blame to go around…however, this shows us what the lure of a market run-up can create. REALonomics.
It will be interesting to see how this one plays out… For over 7 years, everyone talked about the “wealth effect” of rising property values and equity. Now what? We have never faced a whiplash of this magnitude before. In the past, foreclosures were a result of extreme circumstances like job losses, divorce, business failures, etc. So, for the lenders, to yank the title on an occasional failed loan, was no big deal. They had a 10 to 20% equity cushion to save them. Now, we have entire neighborhoods and developments under the gun. Good people, living their dreams. 1% start rate ARM loans? Why not? When lenders like WAMU our Countrywide put their seal of approval on this kind of product, the consumer can only assume that somehow it will all work out. Who is to blame? The lenders created these crazy loan products. How can you blame the mortgage brokers and loan officers for selling them? That was their job. How can you blame a realtor for closing a deal, the lender was willing to fund, and the buyer was willing to buy? That was their job. It was NOT just new loan agents and new realtors doing these deals. The reality is that to the banking system and the Feds, this is all just accounting. Lots of ZEROS. To John and Mary Doe, this is their home, their family, and their life. I have some dear friends standing in those shoes right now. They owe $300,000 more on their home than it is worth. They are current on payments, but are facing the reality of their situation. Should they keep paying? If they walk away the lender writes off $300,000 or more. Why not just face the fact, and write down the loan for the current owner. Regardless of what caused the situation, the value has dropped and the equity is gone. The loss to the lender is the same, but it saves a family. All the Feds have to do is make a few debit and credit entries, and move on. Can they do it fairly? Probably not. It will be interesting to see how they fix this one… KS