Subprime Loans

Is the real estate industry to blame for the mortgage/housing meltdown?

In the comments section of a reputable housing blog, someone complained that the ‘real estate industry’ was to blame for the collapse in housing (2005-2010).   Along with some general complaints about agents costing too much and doing too little, one of this commenters main points was that sometimes buyers should not buy a house and agents and lenders only get paid when they do buy a house creating an inherent conflict that could legitimately undermine the advice offered to home buyers.

Bill Joyce 225175While I am a real estate Broker and my objectivity can fairly be called into question on the subject, I don’t believe either real estate agents or mortgage lenders (the ones doing the deals) were the heart of the problem during the meltdown.  More importantly, they really are not the source of a solution to prevent similar future industry scandal.  That said, his concern about commission only service providers as being objective financial advisors for people considering a home purchase is worthy of consideration.  Below is my response to this readers comment…

…I’m not sure I accept your conclusions that the ‘real estate industry’ deserves the blame for the housing/mortgage market collapse.  There were a lot of participants, real estate practitioners included, that did their part in the creation of that mess.  Practically speaking however, I don’t see anyone expecting or wanting a real estate agent to challenge and further scrutinize the wisdom of a client that 1) wants to buy a house and 2) has been properly qualified and approved by a legitimate financial institution.  A real estate agent’s job is to simply help a home buyer achieve their stated goal to find and buy a suitable house.  While I would like to see higher standards in the real estate profession, it is unrealistic to believe a real estate agent will ever have the qualifications of a financial planner to tell clients if they should buy a home and how much they should spend on it.

Further, I have not found home buyers willing to pay fees (non commission compensation) for advice and service from an agent on the purchase of a home.  I have actually proposed to clients they simply pay me for my time, but the idea of giving me some money for showing them several houses was simply inconceivable to anyone I have shared the idea with.  I have offered to rebate the entire commission back to the buyer in exchange for paying my time and costs as we go.  I believe it would be a very efficient home search and dramatically less expensive for a serious buyer, but I have had no takers.  And I can’t imagine a buyer allowing an agent to keep the fee (or portion) if the agent advised the client against buying a home. This leaves the only viable form of compensation (for the foreseeable future) as commissions (transaction fees). Perhaps involving fee only financial planners before a home purchase decision would be a good idea.

MoneyHousesmReal estate and mortgage is a business based on transaction fees as are many others.  The vast majority of financial planners and ‘investment advisors’ are also paid on transaction fees.  They are paid different commission/bonus amounts based on the investment they recommend a client buy.  The commission on a low cost index fund is far less than a more difficult to sell annuity.  Does this system produce objective advice in the clients’ best interest?  Capitalism is fueled by self interest and the potential for conflict.  I believe the solution is to educate the consumer to be cautious and prepare for their own financial decisions and spending.  Candidly, it is a very small circle of people that I would trust for objective advice on the use of my money.  You?

In an effort to prepare home buyers to make their own sound home purchase decision, I am developing a home buyer course intended to help buyers rethink the idea of ‘Dream Home’ and find the ‘right home’ for the life they want to live.  This may be to not buy a home now or to spend substantially less than a bank says you can ‘afford’.  Home Buyer Online Course

As for my thoughts (and many others) on the source of the housing/mortgage problem, investment banks were selling AAA investment products (as rated by Moody’s, Fitch, S&P) such as MBS’s, CDO’s along with AIG FP’s derivatives essentially taking a short position in these presumably ‘Ultra Safe’ investments to investors scrambling for an acceptable return (as treasuries were yielding well below the rate of inflation). Literally trillions of dollars were pumped in to the housing market inflating home values to unsustainable levels.  The investment bank creating the loan product determines the qualifying criteria and since they could get Bull250x175a garbage MBS a triple A rating, they deliberately required very little to qualify.  They could sell all mortgages, even low quality, so the more the better.  I don’t see real estate agents or mortgage lenders ever being in a position to police these products.  This would be a job for the SEC or Department of Justice (or other banking regulators) to monitor and enforce.

In the first 2 weeks of 2017 the DOJ has negotiated multi-billion dollar settlements with Credit Suisse ($5.2 billion) and Deutsche Bank ($7.2 billion) for their actions.  There have been many settlements over the past few years, but the Government is collecting pennies on the dollar for the harm done, fines are really getting paid by shareholders rather than responsible employees and no one is being prosecuted on criminal charges.  If I were a criminal, this is where I would concentrate my efforts.

Here is my lay persons guide to the mortgage meltdown…  How did this happen?

Sadly, I see no reason this kind of scandal won’t happen again, maybe not housing next time, but housing would be a good target for some future scandal. Give the public time to forget, change up the scheme to something unrecognizable and do it again.