Escapism (I don’t even know if that is a word but if it isn’t it should be) ought to be a subset of study for those seeking a degree in Economics. Escapism should be a part of the syllabus with collateral reading required. It should be taught as a business discipline and be a demonstrated skill prior to graduation.

The real estate industry knows a lot about the subject of escapism without knowing much about sound economic business models. After all, the economy has always pulled Broker/Owners out of the tight corners of economic calamity into which they have been painted. Ours is a long history riddled with escapes from one economic threat to another.

Today’s shackles may be worse than the past as we find ourselves fettered with the chains and locks of slivered and temporal profitability, almost non-existent R&D, a disjointed, minimally trained, bloated and uncontrollable labor force, no product, service or brand differentiation and finally, last but not least, a less than stellar reputation with consumers, our primary source of survival.

As we enter a new decade on January 1, 2010, we find ourselves headed back into the water tank from which we have always, like Houdini himself, found a way out. We have escaped primarily because economic fundamentals were behind the real estate industry. These fundamentals are no longer the backbone of the industry.

Something is different this time around…many things are different this time around. We now face three situations never before seen or experienced.

The New Chains that Bind Us

The real estate industry encountered a fundamental operational shift when Congress mandated that lending institutions find a way to create loans for those who lacked the personal buying power for home ownership.

The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) was enacted in 1977 as Federal Law. Essentially, the law was a social experiment mandated and aimed at eliminating what many believed to be unfair lending practices by banks who that were refusing to execute mortgages with under qualified buyers for purchases in neighborhoods that were fundamentally poorer than those neighborhoods where banks preferred to lend.

Regulated financial institutions were suddenly required to meet the lending requests of traditionally unqualified parties as a part of their federal charter. Non-compliance with the edict and the eventual quotas of regulators could mean the loss of accreditation and various other penalties.

The survivability of Banks became subject to the guidelines set forth in the Community Reinvestment Act and therefore, lending requirements were modified as a pre-requisite to compliance.

Banks found themselves forced to approve mortgages that were less than prudent, at least from a sound economic standpoint.

Nonetheless, politicians reveled in the glory of the Community Reinvestment Act, heralding it as a giant leap forward in economic equality and something that could translate into new votes at reelection time.

This was the “New Chains” which created a false housing boom and investment debacle from which we still have not recovered. The primary guarantors were FANNIE MAE and FREDDIE MAC, now nearly bankrupt and in need of more capital infusion from tax payers.

We have not escaped these new chains that bind us. Our ability to break free is now out of our control as the appetite for government bailouts at tax payer expense increases unabated and now, surprisingly, supported by the National Association of Realtors.

In short, we have relinquished the powerful economic principle of self-reliance and home ownership principles that have guided the industry and home ownership for more than 100 years and this may prove to only paint us into a tight corner from which we cannot escape for many, many years.

Strange and Clever Padlocks

Our Houdini-like escapes are now fewer and more difficult as we abandon the sound “model-math” that created our prior and historical profitability. The sad truth is, we have not created “new model-math” congruent with the troubling times in which we find ourselves.

We continue to find ourselves locked-up with strange and clever padlocks the combinations and keys to which we have no apparent access.

On the one hand we are padlocked to our former selves and do not seem to have the will power to admit our addiction to transactions predicated upon easy money.

On the other hand, we are now plunging headlong into a plethora of new operating models, lending models and technology models, the rules of which are being written by those outside our industry.

Are we being written out of the New Real Estate Economy? Why is it that we cannot become the rule-makers and engage in assertively drafting our own charter for the future? Why do we seem reactionary rather than revolutionary with respect to our future? Why have we become so dependent on the creations and rules of those who know so little about our industry and how it must operate?

The keys to the padlocks of government intervention, property information management, technology and Internet tools, consumer-centric relationship models, mortgage lending rules and the direction of NAR have seemingly been placed in the hands of caretakers motivated by political power and personal greed.

Old Keys that are Now Missing or Ineffectual

The old line bricks-and-mortar retail keys that used to unlock markets for us and deliver economic escape from our heavy laden expenses no longer work as they once did.

Our ineffectual revenue management models in the form of commission and operating structures that once drove the cost-per-transaction formulas that guaranteed ROI will no longer unlock profitability.

The bloated labor force we call “agents” are simply too many and will continue to drain capital from Broker-Owners while only serving the interests of NAR’s bureaucratic control over the industry. The large labor force only favors those who collect the dues.

There are too many of us and unlike other industries that balance profit against labor force, our industry works exactly the opposite. The real estate industry is perhaps the only industry that increases its labor force while in economic decline. NAR’s membership still stands at over 1 million; a near complete contradiction of true economic sanity.

Instead of seeing our costs per transaction decline, it is actually increasing when we take into account the entire national organization operating costs.

While we should be moving north, we continue our trek southward almost blinded by our allegiance to who knows what. Broker-Owners no longer control the MLS and that lack of control will eventually render them irrelevant servants to an agent-centric culture.

Agents are no better off as they see their earning capacity at historic lows per capita and their cost of operating increasing with the delusion of technology and its pseudo advances.

There seems to be no easy Houdini-like escape for the industry unless it (we) are willing to recreate our industry by elevating its entry requirements, diminishing its fattened workforce, increasing its educational requirements and finally, bringing NAR into check as the servant of the industry.

There is no escape from the economic realities of the New Real Estate Economy and what it demands of us. However, for those who have a true sense of where we have been historically, where we are today and where we can ultimately take the real estate industry in the future, this is an exciting time.

Yes, in 2010 and beyond we will continue to face the peril of tight corners into which we have largely painted ourselves. The chains, padlocks and keys that have heretofore allowed us to escape no longer exist in forms we recognize.

For those of us who embrace the sound economic principles that guide any business endeavor and for those who choose to become the authors of the new economic rules rather than the readers of same, to these alone belong the keys that will yet provide an escape that will lead the real estate industry to self-reliance in the consumer-centric era.

Happy New Year to all.

Related posts:

1. REALonomical: an Economic Mentality
2. Scratch and Sniff: Stacking the Economic Deck in Favor of Us
3. The Third Economic Wave

President Obama flew into Arizona to announce his blueprint for a $75,000,000,000 mortgage bailout known as the “Homeowner Affordability and Stability Plan.”

REALonomics has digested the preliminary outline of this program which claims to “…offer assistance to as many as to 9 million homeowners…” through a combination of loan modifications and propping up of Fannie Mae and Freddie Mac, support for state housing authorities and financial incentives for lenders to re-tool existing loans for a predefined set of homeowners whose mortgages fall into specific qualifying categories.

How does it Work and who are the Beneficiaries?

Will the President’s plan make a difference and if so, to whom and when? And, is the plan a sound economic model that will actually help homeowners facing foreclosure, as claimed by the administration? Is this another step in the direction of creating a dependency upon the federal government for and on the part of some Americans and lending institutions?

Let’s take a look at the plan and ask some hard questions.

The plan, set to kick into gear on March 4, 2009, uses carefully calculated qualifying formulas based upon principal mortgage balance ceilings, rigid LTV ratios and market value reductions. The result is yes, some homeowners will be assisted. If you own property in California where 60% of the mortgages exceed $417,000, you will not qualify.

At this point, it looks as if those with higher end home values and jumbo or super jumbo loans are not going to be granted any relief. Only first position mortgages qualify. If you have a second, its only value is to help justify a reduction of the first based upon its contribution to your debt to income ratio.

DOWNLOAD THE EXAMPLE DOCUMENT HERE.

What’s the Financial Carrot for the Lenders?

The plan states that “Treasury will partner with the financial institutions to reduce homeowners’ monthly mortgage payments.” In effect, the taxpayer will be matching the reductions lenders approve on a “dollar-for-dollar” basis to a write down to a 31% debt-to-income ratio for borrowers and lenders will be required to keep the modifications in place for five years.

We will all be funding cash payments to the lenders to pull off the Obama plan. Lenders will receive up-front fees in the amount of $1,000 for each eligible modification. Lenders will also receive bonus payments monthly as long as the borrower stays current on the loan. Are you in favor of such support to lenders?

There’s more! Lenders will be given $1,500 for taking action with those homeowners who are NOT in default or behind in payments and an additional $500 for servicers for modification made while a borrower at risk of imminent default is still current. Is this something you like?

Still more! The government (taxpayers) will also pay up to $1,000 each year against principle balances on loans where the borrower is current on their mortgage payments. This takes place each year the borrower is current for up to 5 years. How does this sound to you?

Are we actually creating a new hybrid sub-prime mortgage product that is simply financed by taxpayers with newly printed money backed by loans from foreign banks?

DOWNLOAD THE PROGRAM FACT SHEET.

Are the Capital Market Supporting Obama’s Plan?

In short, the financial markets have already started to reject the plan with CitiGroup stock dropping to less than $2 and Bank of America plummeting on fears of nationalization of their enterprises and indeed the government control of the financial backbone of the American economy.

Since the federal government started tinkering with banks, throwing our TARP money, setting forth plans to retool mortgages and delivering so-called bailout plans, the stock market has plunged to pre 2002 levels with historic losses, indicating a continued lack of confidence on the part of investors in federal bailout programs.

Another interesting question those of us in the real estate industry should be asking is whether or not this plan will actually stop the reduction of home values, open the credit markets for new sales and stop foreclosures?

What would happen if we just left the market alone? We are already seeing banks stepping up to the plate to solve the problem without taxpayer support.

Do we want our industry’s future to be predicated on total control of the lending and qualifying process, government determination of property values and a segmentation of homeowners into various classes and categories based on home values? Or, do we have more confidence in the free market to work its way through this problem.

REALonomics believes we have only seen the beginning of the creation of a “Nanny State” that may result in more damage to the economy. To top it all off, the CEO of Bank of America has been subpoena in an attempt to force disclosure of bonuses paid to bank executives prior to BofA receiving TARP funds.

Are we thinking long term? Should we back off and let the markets self-correct? Are we willing to take on massive personal obligations for government backed mortgage solutions? How will the “Homeowner Affordability and Stability Plan” impact our children and grandchildren?

DOWNLOAD THE 14 QUESTION FAQ DOCUMENT.

Related posts:

1. The Federalization of our Financial System at your Expense
2. Home Price Declines Hit New Records: What Can the Industry Do?
3. Gekko was Wrong…Greed is Bad