Real Estate Focus

Dear friends and readers:

I will be bringing our blog to a close this month.  I have decided to embark on a new career.  I have been accepted into the Rabbinical Program of the Hebrew Union College- Jewish Institute of Religion.  This is quite a change in direction if I say so myself.  There are many out there thinking that now is a great time to be moving OUT of real estate.  But in reality this passion of mine has been something I have wanted to pursue for a long time.   

I have enjoyed real estate immensely and it has been a good career.  Although the market is certainly challenging, many opportunities exist in the marketplace.  It is essential to operate from a position of knowledge.  And it has been my hope that our website, blog and radio shows have provided the information and insight to assist both our readers and listeners in understanding real estate. I want to thank all of you for being able to provide this service to you.

Keep striving to acquire knowledge in order to make informed decisions.  Best of luck in all your endeavors! 


All the best,

David

The housing market is reeling.  Inventories are at all time highs and demand is very sluggish. Mortgage loans are exploding like land mines and foreclosures are at historic levels and increasing. Foreclosures further increase the housing stock helping to further depress markets.   Lenders are shell-shocked and new lending activity is being curtailed as borrowers and properties are ever more closely scrutinized. And yet, homelessness remains with the number of people living without adequate housing at extraordinarily high levels.  

There must be an opportunity to work together and alleviate some of these problems.    I am not advocating just giving people homes or curtailing foreclosures.  However, it seems somehow logical that providing housing to those in need is better than waiting for the market cycles to run their course and provide savvy investors opportunities pick up properties from the desperate or from the lenders.  Now is the time for innovative, creative and aggressive action.

I am not advocating government step in and bail out bad deals.  Rewarding bad behavior, the moral hazard issue, should be avoided.  But if those deals are bad deals anyway, might there be a way to use the housing stock, the financial resources, lenders and government agencies to create rental programs, or rent-to-own programs and keep some homeowners in their homes?  It is not easy, but there is an extraordinarily opportunity for social good and even market stabilization that can come of something that is currently a  huge problem with no end in sight.  

 

This is an extraordinary moment in history.  Let's not squander it. 

There is much comment and opinion as to whether the proposed principal reduction for distressed homeowners advocated as one fix to the housing mess is good.  This idea is currently working its way through the Congress and is endorsed by the Administration.  Critics claim that this effectively rewards the moral hazard and forces the lenders to take a hit (loss) they would otherwise not have to take. In point of fact this is not true and this idea, what I call an Insider Short Sale, actually has real merit.  

If the lender can expect that the borrower will not be able to sustain the mortgage payments, then there is a quantifiable cost based on a probability and risk assessment that can be calculated.   The bank needs to weigh the anticipated total costs associated with taking back the property and reselling it under the usual procedures against the cost of doing the deal now with the current borrower.  The lender also picks up an FHA guarantee of the remaining debt; a significant boost to the credit at a time the lender can use it.

Someone (maybe that fabled guy with a green eyeshade) sits down and calculates the probability of the house being taken back, the total cost of doing that (everything from legal fees, time, fix-up, agent sales fees, closing costs, etc.) and the anticipated sales price likely to be received when the house is actually sold back into the market.  If that loss is greater than or equal to the proposed “Insider Short Sale”, then the bank would be better off taking the hit now and accepting the “Insider Short Sale”.  

It is not charity, nor is it forcing the bank to take an unexpected loss.  The bank realistically is poised to take the loss regardless. The bank benefits by taking its “best first loss” immediately, freeing itself to move on to other issues. This Insider Short Sale has the added benefit of keeping a family in its house, sparing the painful dislocation that is part of the process.  

This is a desperate message to Lawrence Yun, Economist for the National Association of Realtors (NAR).  You, like your predecessors, have spun, twisted, contorted, colored, manipulated and fabricated data from the marketplace to created fictional interpretations of what is happening in the residential real estate markets.  For a while you were a source of amusement in the industry.  We all enjoyed the entertainment value of the absurd conclusions you would draw since the rest of us were getting pretty gloomy.  However,  you are no longer amusing, you are no longer funny.  Long ago your misdirection effectively discredited the NAR as a source of leadership.  And these consistent concoctions even make us suspect of the data you use, let alone their interpretation-even when you actually might be correct.  

The NAR should be providing its membership, the industry as a whole and the general public with honest assessments of the marketplace so we have effective tools to try to conduct business.  This consistent abuse of the NAR’s bully pulpit is not only pathetic, but it has marginalized the Association at the very time when the Association is needed more than ever.  Enough already; Please Just Shut Up.

When we decided to rebuild Western Europe after the end of World War II, we did something rather controversial:  We used former members of the Nazi party to help in the rebuilding process. We used them because they were the people who knew how things ran and how to get things done.  And despite their former affiliations they became critical to the extraordinary success that was the reconstruction of war-ravaged West Germany.  In Iraq, we tried a different tactic.  We purged everyone in the involved in the Baath Party, the group that ran Iraq under the former dictator.   De-Baathification as it was known is also known for its failure to bring working systems or reconstruction to a war-ravaged Iraq.  

Now here come the Mortgage Brokers.  Sharp criticism has been leveled that those who were at least partially responsible for the sub-prime mortgage meltdown are now setting up shop to work with borrowers in trouble.  Many are outraged that we are letting the very people who made the mess have the chance to profit from fixing the very problems they helped to create.
 
The response to this is simply that a pragmatic approach to solving the problem is more important than the principals some think have been violated.  No doubt many people out there peddling assistance to homeowners in trouble are the very ones that pushed wrong products on the wrong people.  However, the problems in the marketplace loom large.  Government agencies are studying the issue, weighing, considering, pondering, but not actually helping.  The market continues its harsh correction and people are losing their houses.

We need the professionals involved helping to renegotiate bad loans.  And by the way, we also need regulatory oversight to keep charlatans from abusing the people in trouble.  So let the former participants who helped create the wreckage help those people in trouble.  They may be the best equipped to actually work through the issues and the opportunity to make a buck is their incentive to do it.  It may offend some sensibilities, but now is the time for a realistic and practical approach to fixing the problems that exist.