Blame Realtors, Brokers and Bankers - Not Greenspan 21 comments
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Almost everybody praised Al Greenspan when he was on the job. Now everybody blames him for the creating the real estate bubble by cutting interest rates.
Cutting interest rates to stimulate the economy is not a new concept. Many countries have done this before. It is like opening the tap for more water flow. The intent was to jump-start the capital spending on building houses, factories and producing big ticket items. The intent was not to sell the same house many times by inflating its price. That does not stimulate an economy or create jobs or add to production. It only fills the packets of realtors, brokers, lenders and bankers.
Nowhere in the world does a house broker (realtor) gets a 6% commission. Refer to this research paper (.pdf warning) for more details.
Each time a house is sold, the house broker (realtor) gets 6% , the mortgage broker gets 3%, the lender gets around 2% (beyond the interest) and the banker gets another 2% for creating the toxic waste called MBS or CDOs. These CDOs were 13 to 14% less than their worth (deducting all commissions to reach the actual asset), were rated as AAA by the cheating (rating) agencies and were sold to sitting ducks (investors) around the world.
All these parties acted as a cartel and invented all kinds of loans: NINJA, interest only, negative equity loans, Atl-As and various kinds of ARMs. They knowingly issued these loans to people with no credit or bad credit, with no down payment. They coined a decent name called “subprime loan”, as if it was just a shade below prime loans. This was not about increasing homeownership. It was basically gouging investors around the world.
Al Greenspan never advocated for these actions but he failed to warn the government against them. Even if he had warned the government, they would have turned a blind eye because all of these greedy parties who claimed to be "promoting homeownership" had lobbyists on their side.
It is these percent based commissions, coupled with loose or no standards in lending, which caused the problem. These brokers harvested money but neither put any capital nor bared any risk, unlike the rest of the business world. In the Bay Area, during bubble times, a realtor would close two deals and make 40K easily in one week. Even the best neurosurgeon in the world would have to work for a month to earn this much.
Since they smelled the blood, they went further and overbid the houses and provided cash back to buyers in order to fetch the highest price and in turn to get better commissions. These actions, without any moral stand, simply pushed the prices to stratosphere levels.
For every foreclosure without any reduction in disposable income of the owner who is foreclosing the house, the house broker (realtor) and the loan broker must be sued. They basically cheated the banks.
There should be a cap on the commissions charged by these parties.
In the cases of Enron and Worldcom failures, our justice system prevailed. Will it now prevail against the rating agencies and cartel of brokers and bankers for systematically cheating world investors?
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This article has 21 comments:
I would like to say unless SIV can be critically modified or even erased, we have less chance to avoid any coming financial catastrophe in the near future.
The Fed has other duties and tools available to them for controlling/directing the economy and investing. Many conservative economists over the years of his career called upon him and the Monetary Committee to utilize those other tools, raise margin percentages for one, to halt the exuberance.
When he said the low, long term rates were a Conundrum it should have been a Red Flag that something was going on and the Fed should have been on their toes. When the Banks began giving money away they had a responsibility to slow or even end the party.
No one wants to be a Party Pooper and this is one reason why the Maestro was so revered. He always seemed to be able to orchestrate another Encore.
Now you can blame other people for getting drunk, but it was Al who spiked the punch. And now that interest rates are non-zero, the housing bubble is over. QED.
Uh...how about housing speculators, which included sub-prime borrowers?
Bubbles start with speculation. Brokers, realtors, bankers...along with every other housing related vendor...benefited once the speculators' train got rolling.
Let's start with the realtor. This person's function is to buy and sell homes for...THE BUYER AND SELLER. A realtor finds property based on the customer's desires and needs...and sells property per the direction of the seller. In Southern California, there were condos being sold that within one week would have 20 offers on them...and all of the offers were with 100% financing! Now, should the realtor advise his seller not to take the highest bidder as long as everything else is equal? No, that would not be acting in good faith. Now, let's say you're the realtor advising one of the 20 buyers. Basically, if you don't find a property for the buyer, the buyer is going to get another broker. It isn't a situation where the broker is making the offers at the higher pricess as the author implies...it's the buyers demanding that they get a property...and it's the buyer that decides what price to put the offer in at. This author doesn't understand the process...because it is very evident that this situation came about because demand far outweighed supply. It's a situation where the buyer directs the realtor to do what they have to do to find them a property and then directs the realtor where to place the bid....and if they don't, the customer will find another who will do as they direct.
And this brings the whole issue back to where so much of the blame rests. That's with all of us who participated in the market. Let's take these poor buyers who are now pointing fingers everywhere except in the mirror. When they bought, they knew the market was moving and appreciating. They were also provided HUD, lender, and escrow forms that clearly state the purchase price, the interest rate, the rate it adjusts to, the current payment, the payment the loan will adjust to, and when. Any person who stands up today and says I was duped is basically saying, "I did not read the large print on the many forms I signed, on the largest purchase of my life". And people like this author buys into that. Please go into your own files and pull out the last real estate documents you signed and count the number of forms that clearly states the terms of your loan. For the bleeding hearts and politicians to publicly state that the buyers were duped is a disgrace. It demonstrates many of the problems that we as a country face today. It's all about trying to place blame on someone else, and not themselves. Whatever happened to honorably admitting "I made a mistake"?
If a broker or realtor couldn't help a customer, the customer would simply go find another who would.
The problem here is one of a systemic nature. There was failure throughout the entire system. Yes, Greenspan kept rates low for too long and then raised them too fast for the market to adjust. Yes, the investors in the derivatives should have insisted in the supporting paperwork for adequate due diligence. But the buyers didn't have to buy! And they did...And they created the demand.
The situation was further fueled by well meaning politicians who placed pressure on the largest lenders to lower lending standards so that lower income and minorities could own homes as well. Now, those same politicians and many others are blaming the largest lenders for...lowering lending standards to lower income and minorities. The results of these actions should be very clear given that many of these homeowners are walking away from the homes BEFORE the loans adjust.
And so it goes...I was watching a Congressional hearing the other day where a Congressman was recounting a story about a black couple who were financed by Countrywide. Their closing date was delayed and through the process were informed that their loan was going to have a higher interest rate than originally quoted. Because of this, the buyers can no longer afford their home. What the Congressman didn't say, is that loans are normally delayed to everyone, and the buyers had every right to contact another lender to see if they could do better somewhere else. The buyer also could have chosen to back out of the deal. But no, instead let's blame the lender. Could it have been that there were some credit issues that arose during the lender's due diligence...and this caused the increase in rate? It's a sad state of affairs that we find ourselves in.
Not just the market, but in general.
Perhaps the public taking a little more time to actually accumulate enough cash to put a down payment and wait until their income actually will support their mortgage payment would mitigate meltdowns of the nature that we are now experiencing. No, that would mean that the buyers and sellers would have to actually think. Never mind.
Even the repotrt listed as reference on commission rates indicated that the fact the 6% fee is relatively standard and has been for many years indicates a fair and balanced fee for service rendered.
It also touches on the important differences between US and other conutries - and that is risk the Realtor assume in a US listing. In the US the Realtor assumes risk of ALL costs - advetising, marketing, fees ... all expenses are borne by the agent or company and none by Sellers.
If the home does not sell the agent and company receive nothing. Try that with you doctor or attorney - tell them you aren't paying unless the cure you or win your case.
You pay them for their knowledge and experience - and you pay them on an hourly basis. Realtors have equally valuable knowledge and experience, yet are expected to take full risk.
That is why commissions are 6% - to reflect the assumption of costs and risk.
Additionally, in yet another show of ignorance, the author shows a lack of understanding of market valuation of real estate. In the US, because of the long history and consensus that the fee is fair, home prices have that 6% factored into the home price. This is evidenced by buyers who will generally try to reduce the price paid if property is offered by owner.
If the real estate industry were to reduce rates significantly the home prices in the US would drop by a commensurate amount.
Clearly this alleged "author" was more interested in attacking - than in presenting a well researched, ACCURATE, story. Had they done even the most basic research they could have found these answers ... this info is well documented.
In the end this story is nothing more than mindless finger-pointing iwth little rational thought or basis in fact.
Did you check how much British (1%) or Aussie (3%) home owner pay to sell the house in the Article.
Any advt or marketing, generally won't cost more than 6K. My view is NAR has a stranghold on listings, pass laws to decimate the competition wherever possible.
If you have read the complete research paper, you'd have seen this conclusion.
----------------------...
Based on Global Data, What Should US Residential Fees Run?
We estimated the US residential brokerage fees using the full variable final
model estimated without US data, as shown in Appendix 3. Based on the
estimated coefficients, US residential brokerage fees should equal something
closer to 3.0% versus the common 6% or 7% fee. Note that this result is
sensitive to the number of sales per agent. If the number of sales per agent
for England is plugged into the same model (much higher than that of the US)
the fee estimate equals a fee close to the actual fees observed in England.
The conclusion is that fees in England, Hong Kong, and many other price
competitive markets are close to equilibrium, while fees in the US seem to
be artificially high based on price rigidity within the US system.
----------------------...
Investors are equally responsible with other parties. A primary home buyer should have been careful.
Even educated peole want to listen what they wanted to hear. A person with no knowledge, will trust the realtor.
Realtor will say " House price will always go up'", and "after the loan period you can sell to another for huge profit".
He actively clouds the vision of buyer and hide facts that longterm appreaciation is around 5 - 6%.
A realtor or broker must assess and advice his client what can he afford in the long run.
The notion of "Anybody can buy any house" created the demand. It came in to existence due to absymal lending standards and exotic (toxic) mortgage products.
They went greedy. Otherwise why'd a strawberry picker got 700K mortgage in SanFranscisco
or an office assistant at a realtor in Sanjose got two condos.That too, he doesn't even know he owns them until he got default notice from banks.
Those new condos were overbid by $$K and parties must have split the profits.
I am sure you can find excesses if the same realtor sold the house 3 times in 18 months. You can find such cases in Las Vegas or in bay area.
Without such immoral activities prices won't go up rapidly.
All problems could have been avoided, if the rating agencies did their job well. They should have never marked a security with AAA rating.
They knew very well that there are going to Non Performing Mortgages on those MBS or CDOs.
They simply overlooked. They did not do their Job.
Realtors simple did their job or brokers did what was legally alllowed at that time though it is immoral.
A proper rating would have made investors to avoid those securities and in turn sense would have prevailed in lending.
You have noted
"Additionally, in yet another show of ignorance, the author shows a lack of understanding of market valuation of real estate. In the US, because of the long history and consensus that the fee is fair, home prices have that 6% factored into the home price. This is evidenced by buyers who will generally try to reduce the price paid if property is offered by owner. "
Let us say there are two CDOs based on two identical houses.
One mortgage sold by owner for 500K. The other one sold through realtor for 530K. If you are an investor which CDO will you buy?
So the investor who bought the 530K CDOs got the collateral that is actually worth 500K.
Except Argentina and Belarus no other country has 6%. In those places and other developing countries it is better to pay that otherwise you will end up with a title didn't even existed.
UK and Australia are the ones we should compare and there owners pay 1% and 3% respectively. In Australia, realtor pays advt cost.
It is unusual to see those airhead agents stepping out of a luxury car to open the door to a potential donor. Still we do not see it being outrages.
There is some hope in a form of upcoming Internet agencies acting similarly to travel agencies with reasonable fees charged for a service - not for a value of the merchandise. I'm going to use one in a near future. In a meantime, I refuse to pay for the luxury of those if not thieves and criminals, then parasites at best.
Do they mean to tell me that people in lending had "no idea" that risky loans would default, or that massive defaults would hurt the economy? They had "no idea" that selling worthless loans as investments would have bad consequences? For that matter, did investors do real research? Or did they just rely on the industry itself for that research, (a mistake any homebuyer with a builder dispute or lender dispute would be chastised for making)? Who in their right mind would buy these loans when consumer complaints were commonly found online about builders and lenders deceiving borrowers into using toxic loan products? Didn't banks who lent builders money bother to check their financial health first? how could Greenspan "not have seen it coming?" Either the man is a liar or a moron. Why did law enforcement look the other way when consumers reported the mortgage fraud of builder F. Jeffrey Miller in KS and MO in the 90s? He's now been indicted, but the homeowners will get nothing. This was preventable with Miller as it was with thousands of others doing the same things.
If anyone is to blame for this mess it's anyone in the industry/govt who had anything to do with the unwise, unethical, and sometimes illegal practices that led to this, and with looking the other way instead of stepping up to the plate. If anyone in the industry abstained from these things, good for them...they'll probably survive this "crisis." Let the companies that were irresponsible go under. These bailouts being proposed aren't for homeowners. They're for the industry. When consumers who think help is coming figure that out, then we'll see even more just walk away from their houses.
boston-real-estate-wat...
People who need to be blamed:
1) Alan Greenspan reduced the interest rate to boost economy. When this was misused by the real estate market he should have taken proper action. He failed to do that because he wanted to keep his friend Bush's sagging image upright. Probably they also believed the market will heal by itself magically or at least it will keep roaring till their term is over. Unfortunately the economy showed its real color in their term itself.
2) Greedy mortgage companies, banks and their agents who helped to give away loans for lot of people who can't pay in case of any economic downturn. Lot of people have been lured by these companies agents to take the risky loans.
3) Greedy investors by knowingly or unknowingly becoming part of the speculation. Lot of people were ready to buy the real estate without thoroughly checking. They were greedy enough to get lured by all sorts of people.
4) The real estate agents who conducted so many meetings, parties etc to promote real estate sales giving a wrong notion that HOUSE PRICES WILL NEVER GO DOWN. They continued this meeting and promotions even in 2006. What kind of mindless liars or ignorant agents they are. They were greedy to sell a house and get their commission very urgently.
Readers, tell me if you were not approached by agents to buy house. You name will be in Guinness records.
5) Foreign Banks and investment companies, which were greedy to make some quick bucks and bought the securities.
In my opinion, the main persons to be blamed are Alan Greenspan, Bush, Mortgage companies, Banks, real estate companies, agents, Foreign investors and last but not least the 'individual investors'.
Prices went up because everybody was greedy not just me, everybody, buyers wanted to flip, sellers wanted to cash in, mortgage brokers have to eat, Realtors have to pay rent. Most agents did not make a lot of money because there is a lot of competition. I did well but I am not rich and most of my friends just get by. Judge yourself before you judge me, did you buy or sell over the past five years, then it is your fault also.