Who ya gonna blame?
Pumped-up trilogy, part 3: Frock coats are making a comeback.
The probability of a Republican victory...was better than that of being dealt a royal straight flush in five-card-stud poker, but only marginally so...Association with financiers...was doubly damning for the Republican party. Not only were (they) blamed for causing the (recession), their attitudes during the crisis showed them to be even more heartless and selfish than did the increasing revelations of their past shady dealings.
"Hey, I know! Let's take that bail-out money and throw a big party in Las Vegas!"
What damning accusation can possibly be left unsaid against—what brick of public opinion remains un-hurled at—the mortgage banking industry?
Mortgage banker may have replaced real estate agent, used car salesman and axe murderer as the most ill-regarded of occupations. And is it my imagination, or are bankers dusting off their old black frock coats and stovepipe hats, the traditional outerwear of the villainous Victorian banker, and wearing them in public again?
Not since the 1920s and 1930s has the mortgage banker been so reviled, first by the '20s farmer, then by everyone else. I'm scaring myself reading The Great Depression: America 1929-1941, by Robert S. McElvaine, which I quote above with a few updates in parentheses. Here's another timely quote:
The prestige of bankers and big businessmen [think heads of the Big Three before Congress] in general had already dropped at a rate similar to that of the stock market. Now that prestige, so great only a few years before, hit bottom.
Here's another:
We cannot allow our economic life to be controlled by that small group of men whose chief outlook upon the social welfare is tinctured by the fact that they can make huge profits from the lending of money and the marketing of securities—an outlook which deserves the adjectives "selfish" and "opportunist".
Franklin Roosevelt, 1932
So we've been down this road before. It's been awhile, but we still know the drill. We've kept the rusty pitchforks handy, the tar bubbling and the feathers at the ready.
How did we get there this time? You've heard the stories ad infinitum, and I won't rehash them here. Suffice it to say that the usual safeguards were shoved aside in favor of volume production, apparently at every level, from the store-front mortgage broker to the Wall Street corner office. The best summary of this train wreck might be found in real estate writer Ralph Roberts' January 23, 2008 article, "The Rigger & Trigger: What's Really Going on in the Lending Industry":
Roberts' article, based largely on his interview of an anonymous loan underwriter, suggests that underwriters, the key checkpoint in the loan approval security system, were easily pressured to wave bad loans through. If true, it's the same pressure appraisers claim they were under to pump up appraisals. Since both guardians of the sanctity of the real estate purchase were so easily neutralized—reluctantly or otherwise—you have to wonder just how well-managed and well-regulated the system could ever be. Especially since the guards have now been ordered to make getting past the gate as difficult as possible, even for the well-qualified.
Jack Guttentag, the widely-read "Mortgage Professor", doubts how effective regulation could be in preventing this or any future mortgage mess. In his October 27, 2008 Inman News article, "Regulation couldn't prevent mortgage crisis", Guttentag says that "regulation in itself is a weak defense against financial crises. One major reason is that it tends to look backwards, similar to generals fighting the last war." Or, I suspect, like Internet security experts fighting the last breach.
"Regulators have no better foresight than the firms they regulate", he continues. "The statistical models used by both are based on past experience. A change in the underlying structure of the economy can make such past history irrelevant, which is exactly what happened....But doesn't that simply mean that regulators...should err on the side of caution? To a degree, yes...but [stricter regulations] not only reduce profits, they also impose social costs..." Although Guttentag seems to feel that thoughtful, as opposed to politically-driven knee-jerk, regulation has a better chance of preventing the next disaster, he ends by asking, "Can we prevent it from happening again?" His sardonic reply: "Yes, the next crisis will almost certainly be different."
That's the Mortgage Professor's way of saying it's hard to hit a moving target.
With everyone taking potshots at Wall Street in general and mortgage bankers in particular, the only hope the latter may have lies in this question, put to my wife by a sales clerk the other day: "Why did Realtors make all those people sign bad loans?"
Yes, confusion may be the mortgage industry's sole ally these days, but never underestimate confusion's power. Besides, what was the role of the real estate agent in the mortgage debacle? And what should the agent's role be in protecting clients from mortgage fraud (even clients who happen to be more perp than victim)?
Think agents should be on the hook for their clients' mortgage mistakes? Then you have high-level company: none other than California's Commissioner of Real Estate himself, Jeff Davi, who implied in a recent Department of Real Estate newsletter that the buck stops with agents. Davi, whose pronouncements always seem made with one eye on the next governor's race, later pulled in his horns. But sure, Jeff, why not make agents responsible? If the underwriters (and appraisers) can't or won't do their job, why not give it to the agents (and have them cut their commissions while they're at it)?
As an "obvious solution" this has a few problems.
First, it sets a standard of care for agents so impossible to attain and so laden with liability that it reads like something co-sponsored by the American Target Manufacturers Council and the Real Estate Barracuda Section of the California Bar Association. Since the Commish is himself a real estate broker, you'd think he'd know the buyers who cling, like shipwreck survivors to a life raft, to family- and friend-recommended loan agents dangling great mortgages their clients either can't get or—oops! who knew?—have a few strings attached that won't be revealed until everyone is at the closing table—if then—and the buyer is out of options.
Another reason it's not a great idea to hold the agent community accountable for either this mortgage crisis or the next is that very few of us are actively involved in the mortgage process—or have a clue about how to serve a useful role in that process. Just like very few of us are licensed general contractors, CPAs, stagers, inspectors, etc. etc.
If this sounds like a handy excuse, just the latest iteration of "am I my brother's keeper?", then consider this. By a quirk of my office's seating arrangement, I've spent the past six years or so sitting next to various top-notch in-house loan agents. I've heard these skilled, diligent and ethical professionals on the phone every day. I've spoken to them, often daily, about my clients' financing and about the mortgage industry in general. I should know more about their job and industry than the average agent and yet, the more I know, the more I know how little I know of this arcane and highly specialized field. It operates in tandem with sales, yet differs so greatly as to be a completely different profession, requiring different training, experience and even temperament.
Still not convinced? Look at it this way. Which one department or vendor do you come in contact with most often on your job? Think about having to learn that position, from A to Z and soup to nuts, as well as your contact knows it, while performing your own job too. Let's also say that, like the mortgage industry, the conditions your contact works under change continually, on a daily or even hourly basis. What's true today may be only partially true or even completely false tomorrow, with expensive consequences if you're not paying attention. You'd be expected to stay on top of those conditions, of course, as well as your own, and well enough to double-check your contact's work. All without help or more time or a pay raise, but with twice the liability exposure.
Not that this keeps a few agents from brokering loans, or keeps a few loan brokers from acting like agents. As for the former, I don't know how they do it, but I do know that the latter don't have the greatest reputation for professionalism among full-time agents.
So what was the average real estate agent's role in the mortgage crisis? Not much, I'd say, based on my limited experience, and I think that experience is typical. Not that we're all pure of heart and, of course, some agents made a good living working with clients who couldn't afford the homes they bought. It's just that, like most agents in this area, I have little first-hand experience with the kind of "high cost" loans that pumped up the ultra-affordable end of the market from 2004 to 2006 and then torpedoed it. As far as I know, my association with subprime lending consists of:
That's the sum total of my experience in subprime, in ten years of selling real estate. Multiply this by the sixty or so agents who at any point in time have desks in my office, times the tens of major brokerage offices and hundreds of smaller brokerages in my area, and you understand why the midrange and top-end neighborhoods here were virtually unaffected by the direct fall-out from subprime. How well they weather subprime's effect on the stock market remains to be seen.
I began this article with a quote that implied that the Republican administrations of the 1920s were firmly in the pocket of "the Interests", as Wall Street and Big Banks were called back then and not at all fondly. We'll end with a guess as to the current Republican administration's role in green-lighting the money men (and women) to flood the financial markets with potentially worthless mortgage-backed securities.
Ordinarily I'd say it's ridiculous to blame or credit an administration for whatever the economy does on its watch—it's like blaming an administration for human nature or crediting a president for the movement of the planets—just as I'd say it's naive to expect an infusion of morality into the economy or a long-term dose of common sense into our buying habits, just because the Gross National Product has contracted for two or more quarters. It takes more than eighteen months of recession to undo a lifetime of advertising messages.
But I can state the obvious: the Bush Administration hewed to the hoary pro-banker tradition of the Republican Party. Before the mortgage crisis, the National Association of Realtors® chief legislative concern was keeping Congress from caving to strong administration pressure to relax the long-time ban on banks managing and selling real estate. NAR succeeded, thanks to its usual effective lobbying, but in apparent retaliation the administration launched a multi-pronged campaign against the real estate industry—nothing less than a full-out assault, paid for with your tax dollars and mine—that included FTC hearings where any crank with a grudge against the industry could testify (including the bankers' pet economists) and Big Banking could stand up for the little guy(!?); an extensive Department of Justice investigation into alleged industry collusion against discounters (and since when do Republican administrations get fired up by the possibility of anti-trust violations?); a DOJ Web site that takes aim at the industry's full-commission business model (and since when do conservative, pro-business administrations unload on legitimate and long-established business models?); and, perhaps no coincidence, generous federal grants to Fair Housing groups to investigate discrimination, not in rentals, where it's endemic and been industry Topic A for years, but in the virgin territory of sales (and since when do Republican administrations get fired up by the possibility of housing discrimination?).
All this role reversal and playing against type was enough to make you think Ralph Nader, not Dubya, was president. And it must have been a real shock to all those rock-ribbed Republican real estate agents.
But real estate, for all its all-powerful image and high-powered lobbyists, is still Main Street. Which, as you may have noticed, is not Wall Street.
See also Pumped-up Trilogy, part 1: "The devil made me do it", and part 2: Scumbag or scapegoat?