Who, me?Dean C. Williams Esq.Sub-prime mortgage crisis,causes As the sub-prime panic continues to spread, the finger of blame reaches more and more industry players. Who will be next, and who or what is really to blame? Throughout history, in times of sudden hardship, humans have sought someone to blame. Mary, Queen of Scots, was blamed for treasonous unrest in Elizabethan England. Gavrilo Princip started World War I by assassinating Austrian Archduke Franz Ferdinand. Herbert Hoover started the Great Depression. Yoko Ono broke up the Beatles, and Kobe Bryant broke up the Lakers. Granted, the ramifications of the latter two were dramatically less severe. Yet in each of these cases, as with the current sub-prime meltdown, the blame lies more so in inherent structural problems than in any one individual or profession. This is not to say that all parties are innocent—for as cracks continue to shoot through the ice all around the homeownership value proposition, there are certainly lessons to be learned by all of us. Nor should we seek to simply put blame to the system out of shameless self-preservation. But a review of those currently being blamed reveals a common thread that has largely escaped the public's attention—and should demand ours. Hardly a day goes by without increasingly bad news for the mortgage industry. Massive layoffs have taken place, lenders have folded and foreclosure rates continue to climb. Spooked by the impact of the sub-prime meltdown on major investment institutions (most notably, Bear Stearns), investors are retracting their capital from sub-prime lending and deploying it in more promising ventures. The lifeblood of the mortgage industry is drying up, and without fundamental change, any transfusion is unlikely in the near term. The days of taking solace in the diffusion of risk are behind us. So closely removed from the mortgage industry's Golden Age, how have things gone so wrong? As was recently reported in The Wall Street Journal, "Mortgages matter because they represent about four-fifths of the U.S. consumers' $12.8 trillion in total debt. About one in six sub-prime variable-rate mortgages were delinquent in the first quarter" ("The debt-ometers," The Wall Street Journal, Aug. 7). In a nation increasingly known around the globe for the debt incurred by its citizens, approximately 80 percent of that consumer debt is tied up in mortgages. Thus, what may appear to be only a marginal problem on a percentage basis is in fact a spectacular problem when considering real dollars. Mortgage industry leaders have been quick to point the finger of blame toward fraud. The problem of fraud was presented in a fascinating article by New York Times reporter Julie Creswell. Creswell quoted Constance Wilson, executive vice president at financial fraud detection firm Interthinx, as stating that: "There is a whole underground world—an online cottage industry—that has grown up that allows anyone to commit mortgage fraud" ("Web help for getting mortgage the criminal way," The New York Times, June 16). The article demonstrates how obviously respectable institutions of high finance such as www.raisecreditscorenow.com, www.noveltypaycheckstubs.com, www.fakepaycheckstubs.com and www.verifyemployment.net aid aspiring fraudsters by providing fake or misleading financial documentation—even bogus employers to do telephone verifications. It should come as no surprise, then, that according to a recent report by the Mortgage Asset Research Institute, "the most common types of fraud found to date in 2006 originations are in the areas of employment history and claimed income" (Ninth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association). Mortgage industry leaders are rightfully pressing for greater scrutiny of this issue by federal law enforcement. It is difficult to responsibly issue loans when the borrower is providing fraudulent information. Nonetheless, unless the Rust Belt states—which are among the national leaders in per capita foreclosures—happen to have a greater predominance of dishonesty than the rest of the nation, it should be fair to say that fraud is only part of the problem. Indeed, as the Mortgage Asset Research Institute itself reports, "incidents of mortgage fraud are now more evenly distributed across nearly all states, whereas in prior years, reports tended to be concentrated in relatively few states" (Ninth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association). Experience and statistics show us that adverse life events (death of a family breadwinner, prolonged illness, loss of a job, etc.) cause more foreclosures than fraud. Industry leaders recently participated in a Homeownership Preservation Summit led by U.S. Committee on Senate Banking, Housing and Urban Affairs Chair (and current Democratic presidential candidate) Christopher Dodd. The session produced what it called a "Statement of Principles" (you can view it online at http://dodd.senate.gov), which has resulted in much mutual back-patting. The statement is notable both because it places more of an emphasis on saving a loan than on saving a borrower's long-term financial well being and because it does not suggest any action that responsible lenders are not already doing (other than tracking their progress through the principles themselves). Nowhere does it mention selling a home that has become unaffordable. This speaks directly to the finger of blame that is being pointed at lenders, that they care more about loans than about borrowers. Anyone who has attended a conference put on by the Mortgage Bankers Association knows such a claim to be false, but most Americans (and their members of Congress) have not. It is difficult to shift blame when an industry only focuses on the status quo and even tries to push the blame onto consumers. And Congress has taken note of this. A number of bills have been drafted that would increase regulation of the mortgage industry, open it up to lawsuits by the bushel, and effectively scare capital (and thus credit) away from the real estate finance sector. In a recent Wall Street Journal op-ed, Lawrence Lindsey, former chief economic adviser to President George W. Bush, wrote, "Nearly 10 million more households own their own homes today than a decade ago. Most of this increase was due to financial-market innovation that made access to home mortgages more available. Excesses occurred, but a choice must be made about whether to sustain the progress of the last decade or revert to the pre-innovation days of the early 1990s. It is not only homebuyers who will be affected by the choice we make. The values of every existing home in America are at stake" ("Mortgage madness," Wall Street Journal, Aug. 3). There should be no doubt that during a boom cycle, some loan originators were over-zealous. But no amount of analysis can predict a death in the family, the loss of a job or a prolonged illness. The mistakes made on the lender side of the foreclosure equation lie not in the loan origination, but in the options given to a distressed borrower when a loan cannot be worked out. And what option is that? Sending them to a traditional real estate agent. Real estate agents have been placed in a difficult position. In bazaars around the world, merchants are waiting for the same thing as American real estate agents: someone who will make them an offer so they can barter back and forth. They are reliant on appraisers, whose authority in the real estate disposition process has been magnified far beyond their value and accuracy. (When was the last time you bought or sold a house for the list price?) And now, online valuation sites are arming sellers with even more erratic expectations. As it was recently said in The New York Times: "Either my house lost $94,248 in value over the last two months or it gained $32,799 in the last 30 days" ("What's My House Worth? And Now?" The New York Times, Aug. 2). And so, stigmatized with a list price based on expert guesswork, agents wait for the offers to come in as more and more properties are dumped on a declining market. As more and more properties go onto the market, the market value of the listed property declines and the agent signs on more listings, thus lowering the focus on selling that original property and continuing the cycle. This is called speculation. If you or I own a share of Google stock and want to sell it, we can call our broker and give one of two instructions. We can say we want to sell now and will take whatever the market presently gives. This is a non-speculative transaction. Or, we can say we want to sell the stock when its market value reaches a certain price. This is a speculative transaction, and is the way more than 95 percent of real estate is sold in the United States. For those who can afford to wait—who can afford to speculate—the system, as it stands, can offer predictable and controlled results. But what about those who can't afford to wait, who just want what the market will bring? What about homeowners facing the threat of foreclosure? What about lenders whose real estate portfolios bulge more every day with more vacant and non-earning assets? Under our current system, we still send them out to speculate—hoping someone out there besides their appraiser thinks their house is worth the listed price. In my hometown, we recently unearthed a time capsule that had been buried 50 years ago and contained a shiny, gold 1957 Plymouth Belvedere. To the surprise of many of us, people came from around the world to see this car in all its glory. And when it was removed from the crypt that had held it for the last 50 years, it was found to be completely rusted over—incapable of ignition, let alone transportation. In a similar vein, our method for selling real estate has been the same since the days when this rust bucket had been a brand new, beautiful piece of American craftsmanship. The financial services around homeownership (mortgages, insurance, appraisal, etc.) have all evolved, but when it comes to the most important element of the transaction—the actual buying and selling of real estate—the vast majority of homes are still offered in the same speculative way they were 50 years ago. The blame for the current rash of foreclosures falls not with lenders, nor with agents, nor with consumers themselves—all of whom are doing the best they can within an antiquated system. Until the United States moves toward a viable two-tiered real estate disposition system that allows equal opportunity to sell a home while speculating or not speculating, brokers will get burned by the hand of fate, agents will be swamped by devalued products and consumers will be left wondering whether or not they really want to risk homeownership. While great historical upheavals have often led initially to blame, they also usually led to structural adjustments that alleviated any need for blame in the future. Those who value the concept of homeownership are presented with such an opportunity and ignore it at their own peril. Dean C. Williams Esq. is president and CEO of Williams & Williams. He may be reached at (918) 217-6446, e-mail dea[email protected] or visit www.williamsauction.com.