A Great Summary of What Happened (and Why!) on the Way to the Bottom

Today's post is rather short since the link below is more important than what I type here. If you link to the New York Times site at http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html, you will find a fascinating series (albeit long - after all it is the New York Times) of articles. These articles make it clear just what what brought the economy down, when, and why. It tends to concentrate on the business of the collapse, but it mentions a lot of the people who either brought about the collapse or failed to do anything about it.

Pay especial attention to Jason Thomas and his rent-versus-ownership analytic model. What's interesting about it is that it was so simple; no calculus, to convoluted statistics, no black-box programs. Just straightforward analytics. Just analyses that real estate appraisers should have been engaged in. Though only 29 years old a the time, he basically foresaw the collapse and warned the powers that be in the Bush Administration of what was to happen. But, by then, it was basically too late to make any serious repairs to the economy's pending implosion.

Note that these articles do not hesitate to mention that so many of the big players in the collapse, Merrill Lynch, Lehman Brothers, Bear Sterns, et al, all had significant positions in mortgages. mortgage-backed-securities and mortgage-backed- derivatives. The one step all of these Wall Street firms failed to take was that of recognizing that real estate prices do not and cannot increase forever (see reference to Jason Thomas, above). As we all now know, they didn't.

Check out, too, all of the references to the pay of the traders and executives at the big banks and banking houses. Then check out the references to the pay of those folks who oversaw risk at those firms. There is a grand canyon of a difference. Guess who got paid more?!

The articles do not mention real estate appraisers. That's a shame, since somebody had to issue an opinion that a specific piece of property had a value of $X on a specific date. Problem was, it likely did not since the value of the real estate was inflated by non-real estate considerations.

Enjoy the articles! You will find it sobering reading!

Las Vegas - Real Estate Ethics Capital of the US

Have you seen the August 24th, 2009 edition of Time magazine? If you have not gotten it yet (http://www.time.com/time/nation/article/0,8599,1915962-1,00.html), you should! Its a must-read for real estate appraisers in the current market. And it says so much about ethics, too.

It seems that the Las Vegas residential real estate market has taken an Iron Mike-style beating with literally thousands of unsold houses (both new- and used-) currently on the market. In fact, the number in the video at www.time.com is 17,000.

So, what is the real estate brokerage community doing to sell these houses? Clearly the prices have dropped considerably from their highs in 2006, but that still has not moved all of the available inventory. So as not to take out of context anything Time reported, I'm going to quote from the published article extensively. I have edited some of Time's reportage here for brevity (as well as to protect the innocent).

[Time's reporter spent] "...the day with real estate agent Brooke Boemio, a bouncy, sweet, recently remarried 31-year-old... Boemio is doing great during this recession. In fact, she's never had a job that paid as well: she made more than $100,000 last year. Even better, she's willing to show me how messed up the real estate scene is.

"Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that's about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.

"...[L]ast year Boemio and her new husband [went the short-sale route] themselves, paying $279,000 for a house nicer than their old one, which cost nearly twice as much. They stopped making payments on the old one as soon as they signed their new mortgage. "I make people happy all day with foreclosures. Now I want to be happy too," she says. The new house, like so many she deals with, was trashed by the previous owners, who were angry at being foreclosed on. The doorknobs, hinges and copper wiring were stolen, as were the appliances and carpet. The owners even left their dogs behind. (Abandoned pets have become a huge problem for local shelters.) "You couldn't walk into that house without holding your nose to keep you from vomiting," Boemio says. She and her husband had to spend $7,000 on appliances and carpet to qualify for a Fannie Mae loan."

(Now the broker in the article is showing a condo unit that at one time sold from the developer to a retail buyer for $600,000, but now is on the market for $179,000. In the interim, it has been trashed by squatters, despite the fact there is a security guard present and this unit is on a high floor.) "The buyer's agent — a woman in a Gucci scarf and sunglasses — is a little more freaked out, trying to figure out how much this mess will cost to clean up. Which is strange, since she's offering $250,000 on behalf of her overseas client — $70,000 more than the asking price. There are no other buyers. Boemio goes over the offer three times with the Gucci lady to make sure she understands exactly what is going on. Gucci lady, she figures out, is just trying to score an extra $2,100 in commission and is screwing over her client for $70,000."

Time's article continues...

"It is lawless right now in the Wild West. There's even a real estate agent (and the figures and details are slightly changed here to protect him) whose out-of-town investor demanded that the agent find a way to cover some of the losses he was taking on the $60,000 down payment he'd sunk into a house. So the agent created a separate contract, never shown to the bank, that said the new buyer had to purchase a $60,000 Persian carpet from the seller — a check his mortgage company, which was sucking up hundreds of thousands of dollars in losses on the short sale, would never see. When the buyer — who was happy just to get a deal on the house — asked if the Persian carpet was really worth $60,000, the agent looked at him as if he were insane. "I bought it at Wal-Mart," the agent told him. Now all the friends of the investor who got his $60,000 back are asking the agent to pull the same scam for them. And he's doing it."

OK, we are going to ignore the issues of broker's ethics here. In the spirit of full disclosure, I've had a real estate broker's license here in Florida since 1978 or 1979, but I don't practice real estate brokerage anymore. I'm a real estate appraiser, primarily commercial. The issue here, however, is not only appraiser ethics, but appraiser competency, as well. Both of those topics are major USPAP issues.

Now, in the case of the Gucci lady, she is "screwing" her purchaser out of $70,000 in money he or she does not need to pay to buy that particular unit, plus earning another $2,100 in commissions because of her perfidy. I would hope that, if there is an appraiser involved anywhere in this transaction, that appraiser has the intellectual and ethical chops to show the cash-equivalent purchase price of the unit is really $179,000, not $250,000.

As to the $60,000 Wal-Mart rug the broker and the seller are cheating the foreclosing lender out of, one can only hope there are fiery circles infernally reserved for them which are even lower than those reserved for fallen angels.

What's interesting is that, in both of these cases, apperantly nobody can discern there is anything wrong about what the participants are doing!

The competency and USPAP issues here are whether a real estate appraiser could figure the scams out. Then, if the appraiser can, will the appraiser demonstrate backbone and tell his/her client that the deals stink? Will the appraiser tell his/her client the market values of the properties, or merely rubberstamp the purchase and sale contracts? If the appraiser merely rubberstamps the purchase and sales contracts, will s/he claim that s/he was merely reflecting the actions of the market?

Can we stem this tide? Do we need to? What do you think?

What is a CATALYST?

From various sources we constantly hear the statement that so-and-so or thus-and-so was a catalyst. But what is a catalyst? Is that a positive or a negative? Is that an attribute to emulate or avoid? Why does anybody need a catalyst?

According to the dictionary, a catalyst is something "...that causes acvtivity between two people or forces without itself being affected." In human terms, then, a catalyst is someone who makes things happen, but who is not part of what the started the thing happening, nor is used up when whatever happens has finally taken place. Again, in human terms, a catalyst is a mentor.

Since a catalyst is a mentor (therefore a mentor is a catalyst), let's start the reactions. Sometimes the easiest way to do that among real estate appraisers is simply to ask questions. These questions are not meant to condemn anybody or in anyway to make anybody feel inferior. They are here merely to catalyze thought. So here are the catalytic questions:

When was the last time you...

...took a college-level class on a topic directly related to real estate appraisal?

...took a college-level class on a topic that had nothing to with real estate appraisal?

...took a seminar (1- or 2-day) on a real estate appraisal topic, but that was not directly related to your CE requirements?

...attended a national real estate conference to see what the innovations are in this industry?

...read a technical appraisal journal?

...read anything by Babcock or Graaskamp?

...looked up the definition of the word opinion as it relates to a professional?

...started and maintained a blog or a website (on the subject of your choosing)?

...listened empathically to the opinion of someone with whom you viscerally disagree?

...wrote a thank-you note to a really outstanding instructor or teacher?

...looked up a totally new word in the dicationary and then used it properly and in context in a report? (Consider using the word oriel).

...written a paper and then submitted it to a professional journal for possible publication?

...read the complete defintion of market value, and then related it to USPAP SR 1-2(c)(i-iv)?

Now, you rightly may be asking yourself, "why to I need a catalyst?" What a great question! What's your answer?