The Blame Game™, 2007 Edition.
In the past twenty-four hours I've run across three, count 'em three, news reports laying the blame for the "mortgage mess" squarely at the door of, well, who ya got? The media and public are looking for a new Sacco and Vanzetti to sacrifice, a new Julius and Ethel Rosenberg or, if 20th century history isn't your game, a new Saddam and Osama.
Someone must pay! Someone preferably not in the media. Someone preferably not part of the media-consuming public, unless they're part of the mortgage industry.
And the funny thing is, this witch hunt isn't going after real estate agents. That ain't normal. The even funnier thing is, the people hunting the witches could be the head witches.
With agents momentarily out of the cross hairs, I don't seem to have a horse in this race. But I do, which explains the note of indignation that will creep into this article. Because for years I've seen the follies of the public pinned to the real estate industry. I've seen agents publicly castigated for whatever fixes homebuyers got themselves into, even when homebuyers weren't in any fixes. I've even seen a seller publicly blame his agent for getting an obscenely high price for his house.
I don't doubt that some people got reamed by the mortgage industry. But personal responsibility is so nineteenth-century. Nowadays it's "the devil made me do it". Just ask the media, the regulators and the politicos.
I ran across the first report, Upside down: Homeowners share lessons in foreclosure, yesterday morning on Inman Real Estate News. Inman's audience is, at least based on their readers' responses, confined to the real estate industry. Inman News is a specialist press, geared to people within the industry and not to the mass market. As we'll see, that's an important distinction.
What's so interesting about Inman's story is that it focuses solely on "victims" of the "mortgage mess" who don't get much press: real estate investors, either of the traditional long-term (or so they thought) variety or the short-term "flipper" investors. Why aren't these worthies usually heard from? Because it's hard for the mass media to sell flippers and investors as victims. And victimhood sells, whether real or imagined, whether inflicted by witches or self-inflicted. And selling, not reporting, is what the mass media does so well.
Meet Dave, who bought abandoned houses, then discovered "there are certain areas of town you just don't want to be in". Sounds like Dave found out that people don't abandon houses in high-demand neighborhoods. Now Dave's stuck and going down. He can't sell his houses, even for less than he paid. He can't rent them for a profit. His own home is on the market. He lives on credit cards and borrowed money.
Up to this point I feel for Dave. But then Dave blows it by blaming his problems on inflated appraisals. Those appraisals may or may not have been inflated. But then again, maybe Dave bought at or near the peak of the market, when recent sales supported the prices he was paying. Now he's trying to sell in a rapidly declining market, when today's prices are lower than even last month's prices, let alone the prices current when he bought.
So instead of blaming appraisers, Dave might want to kick around the idea of blaming himself:
Just a thought.
Next let's meet Jeff, who also thinks he paid too much for his investment property. Jeff seems to blames the seller, "a then-licensed real estate professional who is no longer licensed", who "referred him to an (out-of-state) lender". Yup, Jeff, that's mighty suspicious.
There's a lot we don't know about what went down here, but let's read between the lines and make an educated guess that Jeff showed up on the seller's doorstep with neither an agent of his own nor a lender of his own. In other words, Jeff showed up with a "kick me" sign taped to his back. That's never the best way to make an entrance, especially when you're posing as a savvy investor.
The fact that Jeff bought from a "licensed real estate professional" seems to inject that familiar villain, the real estate agent, but let's examine this more closely.
First, was the seller really a "real estate professional", or was he simply one of the many small-time real estate investors who get a license (not impossible to do) to give them a (mostly imagined) advantage in buying and selling homes?
Second, did this "licensed real estate professional" do anything illegal or unethical? Apparently not. He disclosed his licensee status to Jeff, as his state's law probably requires. He helped Jeff find financing. He sold his home for top dollar, exactly what Jeff planned to do before his market went south. That "licensed real estate professional" did everything except make Jeff's profit for him.
Third, does the fact that the seller is no longer licensed make him fly-by-night? Let's try to answer this with a few more questions. Was the seller's license revoked for misconduct? Or did he not renew his license because he realized he doesn't need one to flip homes? In fact, a license just raises a flipper's liability exposure. Or maybe he doesn't flip anymore. Or maybe he never did. Maybe he was selling his own home. Or maybe he was flipping but got out in time. In other words, about the time people like Jeff found out that flipping was a "sure thing".
With both his investment and primary residences in foreclosure, Jeff worries about where he'll live. "The government is going to have to step in...How can you stop someone from the ability to live somewhere and what's stopping them is their credit?"
Well, Jeff, welcome back to renting. And welcome to the world of investing, where people profit from their smart moves and pay dearly for their bad moves, where the only good risk is a calculated risk, where "sure things" aren't.
Next up is Kossandra, who doesn't necessarily blame the mortgage industry for her fix: one investment property sold at a loss, the other sold through a short sale, her primary residence now on the market "off and on" as a short sale. "Not every single lender out there that does creative financing is a predatory lender. I wouldn't have been able to have a house if there wasn't a creative way of getting me a house."
But wait, she does blame the mortgage industry. "All it takes is for one (lender?) to go south and it messes with everybody else." But if she meant "one borrower" she might be closer to the truth. Again, we don't know the details of her demise, but taking on two investment properties when it required lender creativity just to get her into her primary residence suggests that she bears a whole lot of responsibility for her own situation and even a small measure of responsibility for the state of the financial and real estate markets as well.
Finally there's Wendy, who cashed out of the then-hot San Francisco market and spread her proceeds around the then-hot Sacramento market. And while San Francisco real estate is still hot, Sacramento real estate is not. Turns out people would rather live in San Francisco than Sacramento. Whodathunkit? Someone who did their due diligence. Turns out all that new construction in the Sacramento area—the kind of large-scale construction they haven't been able to do in San Francisco since the 1930s—was too much for the Sacramento market to absorb. Whodathunkit? Someone who did their due diligence. Now Sacramento rents are down, Sacramento buyers on the fence, and Wendy is wondering which of her Sacramento properties to walk away from.
If there's a thread running through the stories of these four investors, it's that real estate was a "sure thing". Where did they get that idea? Sure, maybe from their agents, if they used agents, but the real estate industry doesn't operate in a vacuum. "Sure thing" was in the air during the boom. So how do ideas get in the air? Not from NAR® press releases. Something has to sell that idea, sell it hard, something that permeates the life of John Q. Citizen far more than the real estate industry. Something that bombards John Q. Citizen with messages every waking moment of John Q. Citizen's day. "Sure thing." "Easy money." "Next big thing." "We show you how."
Something that releases John Q. Citizen's inner Johnny Kwikbuck. Something Johnny Kwikbuck trusts (and who trusts the real estate industry?) and is willing to buy into. Something that, when things go bad, gives Johnny Kwikbuck permission to turn into Jack Buckpasser.
Now what could that "something", that omnipresent and trusted "something", be?
Which brings us to the ABC News report I was treated to last night, The mortgage mess: unscrupulous lenders, unsuspecting borrowers. Okee-dokee. Get down on your knees because now we're in the awesome presence of Big-time Twenty-first Century Morality Play, suitable for consumption not by Inman's sophisticated real estate insiders, who know better, but by a mass audience looking for bad guys to hiss after a hard day at work.
No flippers or investors here. No sir. Just heart-tugging little-guy victims. The public don't want it no other way. By the way, I wonder why they call this "news"? Wouldn't "public whipping" be more honest?
There's no doubt that the "mortgage mess" has real victims. There is some reasonable doubt as to who they are. But there's absolutely no doubt that the handful of lenders and mortgage brokers who did their part to create the "mortgage mess" aren't the only opportunists. In fact, they look like pikers compared to the real pros.
First let's set the table for our audience: "Record foreclosures by homeowners. A growing number of lender bankruptcies."
Then cue the politico, Richard Blumenthal, attorney general of Connecticut: "As we turn over the rocks...appalling practices...victimized people...lives in tatters." Fine time-tested sentiments, suitable for tarring and feathering any industry, group or nation, but a day late and a dollar short. Dick, where were you in 2005 while this was going down? Under one of those rocks?
Then introduce the first victim: Donna, four months behind on her "high-interest" loan. A 53-year-old nanny who earns $2100 a month, her loan application has her making $5500 a month. How did that happen? It's "he said, she said", always helpful in establishing the truth. Donna says the loan agent did it. The ABC reporter, Betsy Stark, doesn't mention whether Donna's signature is on her application. Let's say it is. Let's say it has to be. Would that make a difference? And why is her loan "high interest"? Is it because some unscrupulous loan agent upsold her to a rate higher than she needed to get a loan? Or is it because Donna has a history of defaults and bad credit? Would that make a difference?
"Fraud", says Blumenthal. Governor Blumenthal. Senator Blumenthal. Have a nice ring, don't they?
Note to reporter: now go through the motions of balanced reporting and present the other side: "Some say [voice dripping with scorn] these homeowners have themselves to blame for their troubles, and that they should have known better or should have read the fine print". Apparently tone of voice can't get you sued, while words can. By the way, this reporter's voice always drips with scorn. That's how we know she's seen it all and knows it all.
Okay, now scuttle back to what sells: "But reading the fine print and asking lots of questions did not protect Abigail Balderama, a California homeowner living on a fixed income with a disabled husband. In a letter obtained by ABC News, Baldarama's mortgage broker explicitly offered the couple a fixed rate of just over 1 percent for five years."
Take a split second here to show the audience a letter with "1.38% for FIVE YEARS" highlighted. Don't show anything else in the letter that might clarify that this was just a one-month teaser rate for an adjustable loan that's really 7.8 percent for four years and eleven months.
Balderama: "We thought we were getting a good deal. A very good deal."
It's entirely possible that Balderama's loan agent pulled the wool over her eyes. On the other hand, that "we thought we were getting a good deal...a very good deal" lingers in the air. Because "we thought we were getting a good deal" is always famous last words. Because "a very good deal" is usually too good to be true. Which suggests that maybe there was more wishful thinking than fine-print reading.
It's also entirely possible that Balderama's loan agent hustled her through the paperwork sign here sign here sign here. I'm amazed at how many consumers (buyers, borrowers) put up with this. I'm even more amazed at how many consumers prefer this, apparently so they can get through the boring stuff and get home to watch Deal or No Deal. The lawyers have brought us more disclosures than the average consumer can or wants to absorb. Not that I'm blaming lawyers. The average consumer needs to be more diligent about doing her due diligence. Maybe it would help if we interrupted the disclosures every five minutes with snappy commercials.
Blumenthal: "Anyone can be a victim of that kind of deceit no matter how sophisticated they are." Yes, but any borrower who shops around enough to know that 1.38 percent for five years is "a very good deal" should wonder if maybe there's a catch. Which makes me wonder whether she really went over things with a fine-toothed comb. Because I'll bet that 7.8 percent interest rate or something strongly suggesting it is in the paperwork she signed and initialed. Because if it's not, that interest rate isn't enforceable.
Funny no one from ABC News mentioned this. Would have just gotten in the way of a good morality play.
As we lower the curtain, let's throw one last rotten tomato at the mortgage industry: "The broker has not returned their calls or ours." Well, I can't blame the broker for not returning ABC's calls. Who in his right mind voluntarily turns himself into a kangaroo court? Calls like this need to be kicked upstairs to the people who know how to deal with professional witch hunters. On the other hand, I certainly can blame the broker for not returning Balderama's calls, if in fact s/he didn't. That would've been the opportune moment to point out the borrower's signature on the page that explains the second-month rate adjustment to 7.8 percent, assuming it's there.
Then this morning I came across Subprime: Let the finger-pointing begin! on the Fortune/CNNMoney Web site. The writer, one Peter Eavis, finds plenty of blame to spread.
I was gratified to see that the first culprits Eavis shoves forward are borrowers themselves. Imagine that? Someone somehow expecting consumers to show common sense, someone somehow expecting consumers to at least try to control their destiny. Obviously this guy isn't running for public office. Eavis blames cable-TV shows and—be still my heart!—even newspapers and magazines! Like maybe Fortune and Money, the magazines his employer Time Warner puts out? Don't go there, Peter. "Amateurs...snapping up multiple condos in hot spots..." No, Peter, no! It can't be your readers' fault! Never! Gotta be someone else's! "...teaser rates and complicated terms...hopeful buyers (with) little sense of what they were getting into". That's what I'm talking about! Victims over here! Bad guys over there! Sharp line between! Make it easy! Folks be busy!
Then the next of Eavis' culprits, mortgage brokers, slink in. Well, that's a no-brainer if you're in the finger-pointing biz. Never mind that most of them are honest and competent and could tell you hair-raising stories about their customers. Who else you got?
Appraisers, actually, "the [mortgage] brokers' handmaidens", who "too often buckled under pressure from lenders to overvalue houses". Mebbe so, Peter, but I wonder how reluctantly they "buckled". I'll never forget the appraiser ready to appraise a condo at a purchase price of $800k until I pointed out that the purchase price was $729k. Automated appraisals make a career in appraising not as lucrative as it once was. And since appraisers are supposed to protect the same lenders who pressure them to "make the price", maybe the residential appraisal industry is little more than a rubber-stamp committee in the loan pipeline—paid by the borrower, not the lender.
Not surprisingly, mortgage lenders get their share of Fingerpointing. An easy call, but the alternative, laying off thousands once the best borrowers had gotten loans, didn't look like much of an alternative in 2005. And what self-respecting American industry would turn its back on another two years of big profits?
Wall Street always makes a handy scapegoat but, here again, no red-blooded American institution turns its back on profits. And supposedly those were sophisticated investors—banks, pension funds, mutual funds—buying those securitized loans. Foreigners were huge investors too which, as some wit points out, means we were sending them defective paper as they sent us defective toys.
Which brings Eavis to the rating agencies who evaluated the risk these mortgage-backed bonds offered. Apparently the rating agencies play the same role on Wall Street that appraisers play on Main Street: "worthy but plodding accessories". Eavis cites the "abrupt downgrading" of nearly $6 billion in subprime-mortgage-backed bonds, many of those mortgages less than a year old. "That means the rating agencies had little idea about the quality of those loans when the bonds were issued."
The last nominee to Eavis' hall of blame is the Federal Reserve, particularly Alan Greenspan, who "chose to use the housing market as his main instrument to prop up the economy after the 9/11 attacks". To prove his case, Eavis mentions Greenspan's 2004 pronouncement that "homeowners should consider using adjustable-rate mortgages to save on interest and prepayments costs", and his 2005 "blessing" of "the creation of new loan products, including subprime loans". But what we might remind ourselves is that adjustable-rate loans aren't inherently evil. Yes, the so-called "exploding ARMS", the 2/28s or 3/27s that snap upward with a vengeance, account for more than their share of damaged borrowers. But non-lethal adjustables offer benefits equal to their risks, especially when used by the solid, sophisticated borrowers who once were the only borrowers who could get them. And new loan products, including subprime loans, can also be a very good thing. Because lost in all the hubbub is the fact that 90 percent of subprime borrowers aren't in default. That's a lot of borrowers who otherwise would never have had the opportunity to own or refinance their home and, so far, they're making the best of it.
Fingerpointing isn't a bad job, but it's alarming for two reasons. The first is that it's from Fortune, whose sister magazine, Money, put out some of the most one-sided, wrong-headed and self-serving real estate reporting of the early twenty-first century. In fact, the writer responsible for most of it is now with Fortune, where in 2005 he predicted, in the breezy tone that assures us he's seen it all and knows it all, that the real estate boom would continue on its merry way.
Eavis is a promising newcomer, but there's nothing in his bio to suggest an in-depth knowledge of real estate. Right now he's just another financial writer struggling up the ladder, another Sideshow Bob reporting the story of the day while trying to sneak into the big tent. The dirty little secret of financial reporting is that these guys get pushed into the breech to learn their job while noisily performing it, even as their tone assures us they've seen it all and know it all. They're apparently a dime a dozen, graduates of the "right" schools but with relatively modest backgrounds and demonstrably modest skills and insights. And because they work for big media outlets, we buy into every word they say.
Why not hire a writer who knows the real estate industry cold? Good question. My guess is that real experts cost real money and aren't as amenable to following the guidance of editors who know less than nothing. Then again, today's front-page news is tomorrow's back-page item, so why bother investing in a writer who'll soon be functionally obsolete? Besides, this isn't about good reporting. It's about stroking the audience and keeping it entertained.
The other interesting thing about Fingerpointing is the sense of deja vu it evokes because—would you believe it?—sister magazine Money ran a very similar article right after the 2001 stock market bust, pointing an accusing finger at the credulity and greed of the investors—many of them Money readers—who made it happen. That indictment played about as well as you might expect, and lasted about as long. Then in a rare outburst of mea culpa Money turned the accusing finger on itself, perhaps because its readership was pointing in the same direction. But as an editorial policy and marketing strategy, "we done you wrong" has serious limitations. Sensing this, Money changed direction once more and took on Wall Street. This strategy didn't have legs either, probably because someone in Money's advertising department suddenly remembered that Money's advertising comes from Wall Street. Besides, no one cared about Wall Street in those days. So Money went after the industry at the center of the market people did care about, real estate. What happened next wasn't pretty and it wasn't good reporting, and it cost Money at least one long-time subscriber.
So who's really to blame for the "mortgage mess"? It's encouraging to see one reporter courageous enough to assign at least partial blame to consumers and the media, but don't expect it to be popular and don't expect it to last.
If I was the mortgage industry, I'd hunker down real low. Because the longer the "mortgage mess" goes on, the more the mass media will make the mortgage industry a cause célèbre and the hotter it'll get.
Just a friendly warning from someone who's been there. Welcome to the spotlight. Now duck.
copyright © John Fyten 2007 Site Map Home