Notorious R.O.B.

I think I might have fallen in love with Larson/Sobotka.  I haven’t the faintest idea who they are, but it looks like they combine some business consulting with legal work with something else involving MLSes and such.  Bears looking into more.

But they have done a great service for the RE.net by compiling a guide to the new VOW policy.  In fact, they call it a clearinghouse for the new NAR VOW rules, and I think it fits.  There’s a lot of depth here, and a lot of breadth.  Check it out in full.

For myself, I immediately zeroed in on this:

What a VOW is

For purposes of the DOJ/NAR settlement, a VOW is:

A web site, or feature of a web site, operated by a Broker or for a Broker by another Person through which the Broker is capable of providing real estate brokerage services to consumer with whom the Broker has first established a Broker-consumer relationship (as defined by state law) where the consumer has the opportunity to search MLS data, subject to the Broker’s oversight, supervision, and accountability. (See Policy Section I.1.) [Emphasis mine.]

Interesting.  The law-school training kicks in and I see at least three questions to be resolved, probably through litigation:

1.  What does “providing” mean?

2.  What sorts of activities constitute “real estate brokerage services”?  Is this governed by state regulations?  Or is this to be under some common law agency theories?

3.  If state law defines “Broker-consumer relationship”, then what to make of provisions like this one from Delaware?:

Entering a name and email address on an Internet or World Wide Web site is sufficient to establish a broker-consumer relationship for the use of that system, but does not in of itself create a broker-customer or client relationship for any other purpose.

Especially in light of the clause that reads, “capable of providing real estate services” in the NAR DOJ settlement, under Delaware law, there may be enough of a relationship created by entering a name and email address to use a VOW but not to take advantage of any of the real estate services provided.  Does that even make any sense?  Isn’t the display of property information itself a “provision of real estate services”?

Or does the NAR-DOJ settlement override Delaware law by operation of the Supremacy Clause?  Even when it specifically says state law controls definition of “Broker-consumer relationship”?

Heh.  I love regulations written by lawyers, don’t you?

But Larson/Sobotka has more riches in store for us:

• An IDX site is not a VOW. IDX is an MLS policy under which a brokerage firm participating in MLS grants permission to other brokers participating in MLS to advertise its listings on their web sites, in return for their permission to advertise their listings on its web site. IDX sites are governed by MLS IDX rules, which are entirely unaffected by the settlement. Note that a brokerage firm can operate both an IDX site and a VOW at the same location on the web. (For example, the brokerage can show the consumer some information on its IDX site but then require her to register to see the information available only through its VOW.)
• Zillow, Trulia, and other national aggregators and commercial distributors of listings are generally not VOWs. (Note that these sites are not IDX sites either, and the data feeds that some MLSs provide to them are not “IDX feeds,” as they are sometimes erroneously labeled.) These companies may receive listing data from brokers or MLSs, but display of those listings is subject to the agreements between the brokers or the MLSs and the aggregators. Neither the settlement, nor any of the policies imposed under it, applies to any of these types of sites. Note that if Zillow or one of these other sites were to become licensed as a brokerage firm, become a participant in an MLS, and actively assist consumers in buying or selling real estate (or both), it would be eligible to operate a VOW.
• MLS public consumer-accessible web sites are not VOWs. (Note that these sites are not IDX sites either, as they are sometimes erroneously labeled.) A VOW is by definition the web site of a real estate broker. An MLS could operate a VOW only if it were acting as a real estate broker – we are aware of no MLS that claims the right to do so.

If for nothing else, Larson/Sobotka deserves some sort of award for spelling these things out so clearly.  Now, to be sure, these should be construed as opinions of one law firm until litigation gives us definitive court rulings, but they strike me as being largely correct.

Assuming that Larson/Sobotka’s interpretations are correct, there are many implications that flow from the above three observations.

One, if IDX is entirely ungoverned by the settlement, then as Brian Larson points out, one can expect that the industry will begin to move towards VOW websites and away from IDX sites.  That could, in theory, be a Very Bad Thing for brokers and agents, however, as the plain fact is that imposing a “signup requirement” to consumers (especially if defined under state law, and that state law is onerous) will drive consumers away from such websites to those that are far more user-friendly.  How that will play out is wholly unknown.  Perhaps MLSes start relaxing IDX rules in response; perhaps brokers start working through their Real Estate Boards to change state regulations; perhaps something else altogether.  But this could be huge.

Two, if Zillow, et. al. are not VOW sites, then they do not fall under the protections (if that’s what they are) of the NAR-DOJ settlement.  So brokers or MLSes can explicitly prohibit its agents or members from giving data to these national aggregators without running afoul of the Settlement. Now, before you shrug, I happen to think there’s a fairly high likelihood of this happening.  Why?  Because of #3 –>

Three, if public-facing MLS websites (such as www.har.com) are not covered under the Settlement in any way, then they also don’t have to follow the “Broker-consumer relationship” rule either.  Which means that of all of the possible websites out there, only the MLS or Realtor Association websites can have all of the property info on every single listing without being subject to IDX rules, and without having to share any of those privileges with anyone else.

In other words, unless I’m totally misreading this, it seems to me that we now have a situation in which HAR (just to use an example; not that they would do this) could

1. display all of the listings info on HAR.com without limitation, and without the “signup” requirement;
2. prohibit all members of HAR from sending any data to Trulia, Zillow, or any national aggregator; and
3. force brokerages to use either shut-from-the-public VOW requirements, or ass-backwards IDX rules filled with purposely inane requirements to discourage the use of IDX.

Wow.  Just wow.

If this is a correct reading, then I differ with Brian Larson only in that even if there are 10,000 VOW’s by 2010, there will only be 50 websites by 2010 that any consumer goes to.

And how does this impact Realtor.com?  As Brian points out, nothing in the Settlement even mentions Realtor.com at all:

The settlement between DOJ and NAR makes no reference whatsoever to Realtor.com, either in the settlement agreement, in the attached VOW policy, or in the attached policy regarding the definition of “participant” in MLS. (In fact, the DOJ press release makes no mention of Realtor.com, either.) The DOJ lawsuit, and its settlement, deal almost exclusively with “virtual office web sites” which are by definition web sites of brokers participating in MLS offering brokerage services to their customers/clients. Realtor.com is not a VOW.

So Realtor.com is not a VOW.  Does its special relationship with NAR give it the same access that all of the local associations and MLSes now have? Will it be the sole national real estate website that can offer all of the information on a listing without requiring a consumer-broker relationship?

I’m thinking the answer might be Yes.

Talk about a seismic shift in the online real estate world.

Am I missing something crucial here?  Am I misinterpreting things?

-rsh

PS: I’m definitely adding the MLSTesseract to the blogroll.  A great site if you’re into some of the details of this stuff.

So the news comes that the bailout package has failed to pass the House with 133 Republicans and 95 Democrats voting nay.  Well, at least it was a pretty bipartisan fail.  I’m sure we will be treated to much sound and fury from the talking heads and the chattering class as to why, who’s to blame, and so on.  At the same time, things are going to get worse before they get better, so I expect something new to come down the pike any day now.

I would like to recommend three immediate things that Congress and the Administration can do to buy some time while they work towards a more comprehensive solution that can survive a vote.  What we need now is time more than anything else, so all three suggestions are geared towards things that they can do in the next couple of days.

1.  Suspend the mark-to-market accounting rule for 90 days.

The bailout package included a provision that would have enabled the SEC to suspend the mark-to-market accounting rule:

A provision in the bill, whose adoption was in doubt after the House of Representatives rejected it Monday, gives the Securities and Exchange Commission the right to suspend — by rule or order — mark-to-market accounting under Statement Number 157 of the Financial Accounting Standards Board.

While the article linked to above shows that there are some powerful and influential people (among them Arthur Levitt, former chairman of the SEC) who are against suspending mark-to-market rule, I believe that as a short-term, breathing-room measure, it makes sense to do so.  Hence, I would do it for 90 days.

I want to make clear that I’m not against mark-to-market rule in general.  There are lots of good reasons to have this rule.  But I do agree with Jeff Miller on TheStreet.com that there is a difference between a normal market and a panic-driven, illiquid one.

Furthermore, while mark-to-market in and of itself may not be a major problem, when combined with reserve requirements of banks and other financial institutions, it can become a catalyst for meltdown.  Say a bank has to hold 10% of all deposits as reserve requirements (the Fed can set it between 8% and 14%).  If mark-to-market rules require a significant writedown of assets, such as mortgage paper, then the bank comes under enormous pressure to sell assets to keep its reserve requirements up.  That in turn induces further declines in asset prices, as paper floods the market, which in turn runs into reserve requirements, and so on.  That’s a pretty crappy feedback loop.

I had the opportunity to speak with someone who should know some facts (he’s a representative of one of the largest foreclosure-related companies) recently, and he pointed out that some 95%+ of mortgages in the U.S. are absolutely fine.  The debtors are faithfully making their monthly payments.  Some of these mortgages were combined with subprime mortgages and other more dubious debts into exotic mortgage-backed securities and sold — the source of many of our problems today.

With a bit more time, analysts can begin to delve into the morass that is CMBS and CDO and other instruments and start to figure out which ones are good and which ones are bad.  That in turn creates folks willing to buy mortgage securities at deep discount.

Plus, that bit of time can give the legislators and regulators time to work with industries to come up with a stronger, less interventionist, program to help deal with the crisis at hand.

2.  Rein in the breathless media

While the First Amendment prevents any direct government action to restrain the media, certainly the various leaders from the President to the Speaker of the House to the candidates for various offices can step up and act like adults.  They can explain to the nation that while we do have some problems to work out, that (again) 96% of mortgages are not in default, that people are still making their monthly payments, and that the problem can be dealt with.  Someone needs to point out — and directly contradict the breathless press reports of doom and gloom — that the fundamentals of the economy are (were) pretty decent.  Employment is still high, Q2 of 2008 showed a 4.3% gain in productivity, and things just aren’t that bad.

The whole situation, to some extent, was a creation of the media.  Part of the short-term solution needs to be putting the idiots running our newsrooms in their place.

It is no secret that most business and finance journalists have absolutely no idea what the hell they’re talking about.  Business leaders, economists, and others who do know need to step up now and start speaking up directly to the American public.

3.  Trial Run of Insurance Plan

While it would be great to have a single bailout package that calmed everyone down, without turning into a fascist/socialist state, I’m afraid it’s going to take some time to get done.  Why not try a trial run of the least-intrusive plan, that of the House Republicans?

Of course, it would be helpful if the “patriots” on the Left would stop playing partisan politics for a moment, but I think the Democratic leadership could probably make that happen if they wanted to do so.

Again, as a short-term measure to buy time and create breathing room, why not go forward with a $10B or so plan to insure “toxic assets”?

The “insurance” plan works by creating incentives for private market participants to take the risk of buying mortgage securities, because if they go into default, the insurance pays off.  But until they go into default, there is no massive cost on the part of the insurer (aka, the government).

The thought appears to be that offering to insure “toxic assets” might provide enough incentive for private entities to start going bargain hunting.  Again, with 96% of all mortgages safe and sound, it seems like a great time to go buying up mortgages for pennies on the dollar.  Insurance adds a layer of risk protection that further incentivizes private market players.

If the first $10B worth of securities are federally insured, and those securities get snapped up by the market, then the program can be expanded.  If they all go into default, then the losses to taxpayers is limited to $10B or so.  Seems like a low-risk approach to take that will have the effect of reassuring the credit markets that there are indeed buyers out there, if the risk/reward is low enough.  Again, while that is working its way through the market, legislators have time to work on the bigger package.

Breathing Room

This whole affair really reminds me of a Chapter 11 bankruptcy filing.  Contrary to popular imagination, there are situations where companies go into Chapter 11 (Reorganization) bankruptcies not because their business is fundamentally screwed, but because they experience short-term cashflow problems.  They may have customers, may have a valuable ongoing business, but due to loan covenants and the like, they face going out of business.  Seasonal companies, such as retailers, or big-ticket sellers (who may have $50m in outstanding invoices, but only $2m of cashflow) often face problems like this.

Oftentimes, they go into pre-arranged bankruptcies to buy some breathing space while the business works itself out.  Lenders are happy, as they get to reorganize the debt and get paid, instead of having to liquidate at cents on the dollar.  The business keeps going, the employees keep getting paid, etc.

What we need now is that pause, that breathing room, while Congress and the White House get together again and try again for a more comprehensive bill.

I think the three things above could help, not in the permanent solution, maybe, but certainly in the short-term (say the next 90 days or so).

Or… I could be dead wrong.

-rsh

There, but for the grace of God, go I.

If you are at all interested in the real estate industry, then you need to be reading Dan Green on a regular basis. I just met him at RE Blogworld, and have put his blog into my reader ASAP (and linked it here). Dan is brilliant, and understands the financial markets and mortgage markets better than most people in the world.

And even he finds himself getting verbal whiplash these days from having to contradict himself more than Obama does.

Exhibit 1: Dan’s post of Sept 16, 2008 titled, “How Mortgage Rates Are Responding To Lehman Brothers, Merrill Lynch, And AIG” which says, in part:

It’s a shame because the post went deep on Wall Street’s recent troubles and how each piece of bad news actually helps everyday homeowners. When I went to publish, the post vanished. And by that point, markets were already open, mortgage rates were already plunging, and I wanted to be the phone with clients. I did manage to Twitter, however.

A one-paragraph recap follows:

The government’s takeover of Fannie Mae and Freddie Mac rendered mortgage bonds among the safest investments in the world. Therefore, when political or economic uncertainty exists, mortgage rates should fall in safe haven buying.

The post was especially timely because safe haven buying driving mortgage rates down yesterday. As the stock markets shed $800 billion in value, investors moved into safer instruments like bonds — including mortgage bonds. With more demand, prices were up and rate were down. And how.

Because mortgage debt is now government-guaranteed, the sell-off in stocks was terrific news for both active home buyers and for homeowners that missed last week’s gold rush. However, it did little to soothe Wall Street’s nerves. That job falls to Ben Bernanke.

Then, a mere seven days later, on Sept 23, 2008, Dan posts “Mortgage Rates Respond To A Rapidly-Devaluing U.S. Dollar” which says in part:

And lastly, the mortgage market got hit.   Because mortgage bonds are repaid in U.S. dollars, the value of those repayments dropped.  This forced mortgage rates higher because the only way to entice investors to buy devalued mortgage-backed bonds is to offer them with a higher interest rate.

If you’re wondering why conforming mortgage rates are up by 0.750 percent since last week, this is it — it’s because mortgage rates are responding to the expectations of a weaker dollar going forward.  This is the reverse of what happened in August.

Simply amazing, in part because Dan is spot on, and in part because politicians in government simply do not seem to understand the economy and markets, despite being Wall Street tycoons and brilliant academics and the like.

Why wouldn’t inflation rise when the government has just signed a blank check to big American corporations?  Of course it would.  And as inflation rises, interest rates — including mortgage rates — are bound to go up as well.  People don’t enjoy getting paid 10 years out in dollars that are worth half what they are worth today, do they?

This whole fiasco with the bailout reminds me of my favorite Thomas Sowell quote, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

At the Blogworld event that just happened, the panelists on the Financial Blogs panel were unanimous in excoriating the government — and they appeared to be politically all over the board — for its latest actions in intervention.  One panelist called it (paraphrasing) “the absolute triumph of socialism.”

I think we’re seeing the absolute triumph of idiocy as well — and all parties, all branches of government, are indicted in this.

Until things stabilize — and no one knows when that will be — we’re in for a wild ride.  The markets behave in unpredictable (although common-sensical) ways to economic shocks like a $700B bailout of financials by the government.

But a couple of things seem possible, at least when one thinks about our industry.

1.  If it was hard to find buyers who can afford to buy houses before, I’m thinking it’s going to get more difficult, not less, going forward.  Even if the removal of junk mortgages from the market (thanks to the taxpayer bailout) means banks can breathe easy again, the inflation-induced rise in mortgage rates (combined with the shellshock of banks coming out of this mess) likely means fewer buyers for homes.

Of course, that means home prices are about to take another pounding.  If I were a seller, I’d be shaving another several thousand dollars off the listing price right about now.

2.  Selling a house in today’s environment — unless you absolutely have to — became far more complicated and likely less attractive.  For example, I locked in 30-year fixed rates long  before this crash (something in the 6% range, I believe).  Inflation could very well hit 6-7% annually, as most financial experts appear to think the $700b figure is actually the floor not the ceiling of this bailout.  If inflation = my interest rate, then my loan is effectively free.  Unless I can get a bank to give me free money (zero-interest loans) to buy my next house, I just can’t see how it benefits me to be selling in this market.  At all.

All in all, I have a feeling that realtors are going to have to get educated on this in a hurry.  Some of them really understand finance, the markets, and macroeconomic factors and may be able to help clients make the right decision.  But the ones who think “yield” is only a street sign are going to have a tough time getting people to trust them as real estate experts.

As Alex Periello likes to stress, real estate markets are all local.  That remains true, of course.  But giant macroeconomic factors will play a role, at least if your client is paying in (or looking to get paid in) U.S. Dollars.  It’s high time to get boned up on financial matters.

-rsh

According to the Zillow Blog, 1 in 7 American homeowners are now “underwater” on their mortgage. So the Zillowites ran a survey of 1300 homeowners. And found interesting answers:

One question we asked was:

Do you think homeowners who are currently facing foreclosure because they took out an adjustable rate mortgage or other loan that they can no longer afford should receive government assistance in order to be able to stay in their home?

Nearly half (48%) of homeowners said no. Meanwhile 28% support government intervention, and 24% “don’t know.”

Thank goodness that at least 48% of American homeowners still believe in capitalism. But the title of that post is “Foreclosures Are No Longer a Subprime Crisis”. The author goes on to ask:

But what about homeowners who didn’t take out a “creative,” or risky mortgage? Are there really many homeowners out there with good credit, a solid down payment, and all the right intentions who are at risk to default on their loans? Zillow’s Q2 Real Estate Market Reports point to dozens of U.S. markets where the stage is certainly set by fast-growing rates of negative equity.

Take the Miami-Ft. Lauderdale MSA, for example. The median down payment in 2006 was 10%, or $30,873 based on the median home value of $308,731 when that market peaked in Q1 2006. Since the peak, Miami home values have fallen 26.8% , meaning the average buyer that year has not only lost his down payment, but is now underwater on his mortgage by nearly $52,000. Should this homeowner now lose a job, or fall behind in payments, he’s in dire straits.

The implication is that we should in fact be supporting some sort of a government bailout for these “responsible” homeowners who are in dire straits. Whatever you might think of those idiots who did the no-money-down ARM’s and such, we ought to rescue the homeowners with good credit, a solid down payment, and all the right intentions who are at risk to default. That’s the implication.

You know what? I’m on board with a government bailout. By all means, let us rescue these honest homeowners who were victimized by a horrible housing market. They’ve already lost all of the equity in the house — at least the example in Miami did. If they should lose a job or fall behind in payments, why… that’s a terrifying situation. Sign me up. I’m all for it.

There is a condition, however, that I would have to insist on. (You knew there would be strings attached, right?) Here it is:

If you take taxpayer money to bailout your house, you forfeit all future gains.

Here’s how it would work.

A homeowner can get a low-interest government loan to restructure their existing mortgage. Using the example above, the home was valued at $300K; homeowner put down $30K, and financed $270K. The home is now valued at -25% from that peak, so $225K. The government will pay the bank $270K to buy the mortgage from the bank; it will then issue a low-interest 30-year fixed rate (say at the discount rate, which is what the Fed charges money center banks, currently at 2.25%) loan for $225K to the homeowner, eating the loss of $45K. The bank gets its principal back, although no profit on the loan. C’est la vie. It’s better than foreclosure and REO. The homeowner is able to stay in his house, and has payments that are way below market.

At the same time, the government computes what the market rate would have been for a 30-year fixed rate mortgage for the full $270K by the homeowner, with his FICO score, etc. It computes the difference between that loan and the government loan it just gave to the homeowner. Using today’s prevailing 30-yr fixed rate of 6.36%, the expected interest payments over 30 years would have been $335,448.27. The government loan, $225K at 2.25% over 30 years, comes to interest payments of $84,619.34. The difference is $250,828.93.

If the house is ever sold, the homeowner’s gains are limited to $225K plus the interest paid on the government loan to date. All amounts over that would go to the government. If the homeowner sells the house in 2012, he would have paid $21,190.27 to the government in interest. His gains are limited to $246,190.27. Everything over that amount goes to the government: you forfeit your future gains.

If the housing market should turn around, and the house’s value goes back up to $300K, then that appreciation goes to the government. If the appreciation is so much that it will cover the difference between a private mortgage and the government mortgage, then the homeowner is able to get that.

So for example, say our rescued homeowner sells his house in Miami after living there for 20 years, paying a 2.25% government mortgage. In the year 2028, his house in Miami is now worth $600K. The homeowner is able to get the $225K original valuation plus $74,608.17 in interest payments. That comes to basically $300K. The difference between the private mortgage @ 6.36% and the government mortgage over 20 years is $226,113. That goes to the government. The remainder of $74K ($600K – $300K – $226K) goes to the homeowner.

If the home is sold for less than $270K, the homeowner will end up owing the government the difference, which it will take directly out of paychecks, tax returns and any other direct transfer programs.

The principle is the same as the bailout.  If we, the public, are going to insure people against loss and risk, then by golly, we should get the rewards of the transaction.  In a normal capitalist economy, people are allowed to fail, because they’re allowed to succeed.  A private homeowner who weathers the storm can come out the other end and make the money back — because he’s taken on the risk, he takes on the reward.  If we’re going to have a program that makes people whole for risks, for job loss, for anything bad that could happen, then we should by rights be able to reap the rewards of taking that risk ourselves.

If the public rescues homeowners because house values dropped, then the public should benefit when house values rise.

With that proviso, I can support a government bailout.

-rsh

In light of this atrocious story, it might be time to think about some new initiatives. (H/T: Zillow Blog)

Not only is the bank owner losing any potential value in this property, but it will cost the bank an additional $10,000, “to pay $2,500 in sales commission and another $1,000 bonus for closing the $1 sale; the bank also will pay $500 of the buyer’s closing costs. Throw in back taxes and a water bill, and unloading the house will cost the bank about $10,000.”

It is well past time for us to consider a new 21st century Homestead Act.  I wrote about this previously as well, but the sight of a $1 house is evidence that something dramatic needs to be done.

• Rough outline of a new Homestead Act:
• Banks surrender the property to the municipality.  They can claim a loss for future tax writeoff, but importantly, they get the property off their balance sheets.
• Municipality waives all back taxes, transfer fees, etc.
• Utilities write off all water/electric bills, etc.
• Property is made available as is to any legal resident willing to live there.
• You must stay in the residence for at least five years.
• During your stay, you must maintain the house in reasonable condition and not engage in any illegal activities in the house.
• It must be your primary residence for those five years.
• You must pay all property taxes and fees associated with homeownership, such as for trash removal, water and sewage, etc.

At the end of the five year period, the homesteader receives full title to the property free and clear.

In a stroke, you have eliminated the foreclosure problem, provided a path out of urban blight issues, and provided low-cost housing to families who actually want to work at achieving their American dream.

It’s time.

-rsh

Back in the day, I used to read the New York Times religiously.  I mean, I lived in New York City, was young, and was making a lot of money.  It’s what you do.  It’s kinda like going to church on Sunday if you were a Puritan in the Massachusetts Bay Colony, or doing the Starbucks run for an enormous segment of the urban yuppie population.

Then I realized that the editrix of the Old Gray Lady typically had no f’in clue about what they were writing about with such authoritative gravitas.  And nowhere is this more apparent than in the official Editorial section, the one written under the Times’ own byline.

We see this once again today in their editorial about Fannie Mae and Freddie Mac in which the Times Editors calls for a quick government rescue of  the two beleaguered  companies.  The editors write:

Unfortunately, support for swift passage is mixed from one important quarter: Mr. Paulson’s boss, President Bush.

On Monday, the White House renewed its threat to veto the foreclosure prevention bill if it contains a $4 billion block grant program for states to buy up foreclosed properties. The veto threat is misguided, first, on policy grounds. Mr. Bush wrongly portrays the grant as a handout to speculators when its main thrust actually is to protect communities from a destabilizing buildup of abandoned, unsold homes.

Ah, yes, well… so the Times hates Bush.  This is news?

What is news is the Times’ claim that the $4B block grant program will not be a handout to speculators.  Here is a situation where the Times confuses intent with impact.  The intent of the $4B handout may be to “protect communities” but the impact is to payoff speculators who took on financial burdens that they could not handle.

Where does the Times get the confidence to assert that the $4B will not end up in the hands of speculators?  What data or research can they point to to back up such a claim?  Oh that’s right — none.

Meanwhile, there are numerous other ways for communities to protect themselves from destabilizing buildup of abandoned homes.  Here’s just one suggestion.

Furthermore, there’s this laughable passage:

The veto threat also is a bad idea politically. Mr. Bush has not objected when the big firms and rich executives of Wall Street have been on the receiving end of federal assistance, but now he is threatening to block a measure to aid hard-hit neighborhoods filled with ordinary Americans.

Uh… dear Pinch & Gang… even with the bad financial news that probably means Fannie is bankrupt… it’s still a $15B company.  It’s hard to get any bigger, and it’s hard to be a richer executive than the boys and girls at Fannie and Freddie.  So.. WTF are you talking about?  A Fannie/Freddie rescue would absolutely be corporate welfare at its finest, justified by some mumbo-jumbo about stabilizing the market, or some such.  Those were the same arguments offered up when the government arranged for a bailout of Bear Stearns or Long Term Capital.  It’s the exact same thing.

Furthermore, the reporters of the New York Times itself are saying, “We have no idea what this bailout will cost us“:

The proposed government rescue of the nation’s two mortgage finance giants should appear on the federal budget as a $25 billion expense, the independent Congressional Budget Office said on Tuesday, but officials conceded that there was no way to really know what, if anything, a bailout might cost taxpayers.

Do the editors of the Times read their own damn paper?

Basically, the Times believes that we should write a blank check so the rich executives and investors in Fannie and Freddie can cash out.  Good idea, guys.  It sucks that the government is going along with it, but that doesn’t excuse the utter ignorance of the Times.

-rsh

Inman News has a very interesting… I guess one would have to call it an Op/Ed or News Analysis on the Washington Post’s story on HUD Secretary Jackson’s last day:

An article in last Sunday’s Post deserves credit for attempting to go beyond the allegations of cronyism that forced Jackson to resign, and taking a deeper look at the role HUD policies may have played in the housing downturn. Unfortunately, the article doesn’t deliver on that promise.

The Post claims that because Jackson “pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down,” he will be “remembered as a Cabinet secretary so committed to carrying out President Bush’s goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis.”

Matt Carter does go on to explain some of the political shenanigans that went on in wa-wa land (aka, Washington DC, which is like la-la land, aka, Hollywood, in that they both indulge in fantasies, but different in the personal attractiveness factor) and basically debunks the WaPo story.  The entire thing is worth a detailed read, especially if you’re interested in legal and political issues in real estate.

I thought it interesting, however, that there were two assumptions made in the story.

First, Matt assumes good faith on the part of the Washington Post.

What’s ironic about the Post’s story is that the Bush administration (and Republicans in general) usually come under fire from housing advocates for attempting to limit the government’s role in lending — especially when it comes to Fannie and Freddie, which during the housing boom were hobbled by caps on their portfolios and requirements to maintain additional capital (those limitations were imposed in the wake of management and accounting scandals that forced both companies to restate several years of earnings). Some critics say the limits on FHA, Fannie and Freddie were one reason “private label” lenders — many employing much looser underwriting criteria — were able to boost their market share so dramatically during the boom.

To claim that the administration’s lone attempt to expand a government-backed loan guarantee program “threatened to exacerbate the mortgage crisis” suggests a lack of awareness of the changes that took place in the lending industry during the housing boom, or the motives for expanding FHA loan guarantee programs.

Matt — maybe it’s not a “lack of awareness” but willful ignorance?  Or worse still, perhaps the WaPo simply doesn’t care about inconvenient things like the truth.  I think he actually means to suggest it, but is politely refraining from calling a spade a spade.  I have no such restraints, polite or otherwise.  Washington Post’s story is nothing more than a politically motivated hit piece on the Bush Administration written by left-wing editors and writers in an attempt to lay the blame for the current pain in the real estate market at the feet of the White House by any possible means.

It’s a shame, but that is the state of the “news” media in this country today.  When people like Ron Peltier of HomeServices and Alex Perriello of Realogy talk about the relentlessly negative media environment for real estate, there is some truth to their complaints.

As Matt Carter himself reports in another article on Inman, fact is that this whole ‘subprime’ thing may have been much ado about nothing:

According to the latest economic letter from the Federal Reserve Bank of San Francisco, it’s likely ARM loans have higher delinquency rates than fixed-rate loans not because of the payment shock associated with interest rate resets, but because the people who took them out had higher risk characteristics.

And later in the article:

The flip side of Yellen’s analysis is that markets that weren’t subject to lots of speculation are in better shape to weather the storm. PMI’s latest risk index shows a reduced risk of price declines in markets that didn’t see steep run-ups in prices during the housing boom.

Huh.  And here we are, thinking all this time that the reason why the housing market is in the tank is because of irresponsible bankers and mortgage brokers selling these DANGEROUS subprime loans to poor unsuspecting consumers.  Turns out, mortgages have less to do with delinquencies than the price fluctuation brought on by speculation?  Whodathunk reading the New York Times or Washington Post?

About those poor unsuspecting consumers… that’s the second assumption Matt makes.  He writes at the end of his excellent analysis:

HUD estimates the simplified disclosures will help consumers save $8.35 billion a year. Had those disclosures been in place during the frenzied buying of the housing boom, many buyers who got into homes by taking out loans they didn’t understand might have instead gone with more affordable mortgages — or not taken out a loan at all. (Emphasis mine)

Why do we continue to believe that the problem was buyers who “didn’t understand”?  Why do we persist in the assumption that these delinquent buyers were tricked, fooled, bamboozled into buying million dollar homes on $35K a year incomes?  Maybe these buyers understood perfectly well that they were taking an enormous gamble but simply didn’t care; maybe they all thought they’d get out before the market crashed and make a few tens of thousands of dollars for nothing.  Maybe they fell into the trap that every bubble-economy fool falls into: the Greater Fool theory.  Maybe they’re not poor unsuspecting victims after all, but simply gamblers without morals or ethics or sense of personal responsibility.

That would, after all, fit the profile of “higher risk characteristics”.

People are walking away from houses not because the loan terms got so damn onerous, but because their gamble didn’t pay off.  That’s the only possible interpretation of the San Francisco Fed report.  ARM or 30-year fixed, makes no difference — the rapid rise, then rapid fall, in housing prices does.  Those are the facts.

The responsible buyers, the ones who didn’t feel like speculating on real estate, who weren’t “flipping condos” and dreaming of making big bucks on No Money Down deals, they’re still buying in this market.  They were buying at the height of the boom too — but they didn’t go pouring everything into $2M condos on $50K a year.  They behaved like rational adults, rational consumers.  And they continue to do so.

Are there innocent victims?  Meh… I suppose… but it would have to be one hell of a story involving either a health crisis or unemployment to pass the smell test if someone bought a house they simply could not afford a mere two years later.

As for the Washington Post and the rest of their comrade-in-arms in the media… should we see a Democrat elected to the White House in the fall, I think we’ll suddenly find that the editors will discover hitherto unseen silver linings in the real estate cloud.  The sun will break through the dark clouds, and wonder of wonders, we may come to learn that WaPo and NYT begin to see a ray of hope, a brighter tomorrow.

Even then, making assumptions about their “lack of awareness” would be a step too far in the direction of naivete.

-rsh

Really, I have no axe to grind against the National Association of Realtors. I suspect that I would like most of the individuals who work there, and I admire them for many things. The Center for Realtor Technology is a good example of things I admire about NAR.

But they make it so easy to beat up on them sometimes (HT: InstaPundit):

The National Association of Realtors falls into this latter category [of trade groups that massage their data and spin it]. They have been calling the bottom in Housing, well, ever since the top 2 1/2 years ago; Their consistent claims of stabilization and price improvements later in the the year — as prices have continued to slide — have earned them the title of Worst. Forecasters. Ever. What is more damning, IMHO, is that they are not just wrong, but purposefully misleading for commercial purposes. I believe that is defined as Fraud.

Those are some harsh words. I don’t know that NAR was intentionally defrauding or misleading journalists and people, but… they do deserve a beating. Evidence?

In a front page, 3rd paragraph snafu, the Journal writes: “On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July.”

As we noted yesterday, that was not what the data stated at all: “Changes from January to February are measuring seasonal differences, not actual improvements in house sales.” Can you imagine what it would be like if we reported retail sales from December to January this way? Headlines would misleadingly state: “Retail sales plummet 65%!” That is why with highly seasonal data series, the preferred methodology is to report year-over-year data — not month-to-month variations.

And what were those numbers? The year-over-year data for existing home sales were DOWN 23.8% below February 2007 levels. That datapoint never found its way into the WSJ article at all. I cannot recall a more blatant misreporting of fact, or a larger or more embarrassing error in a front page WSJ article, ever.

While the NAR might be high-fiving each other over their successful deception at the Journal, they may wish to reconsider. As we noted over a year ago, many realtors in the field are finding the NAR tactics frustratingly counter-productive.

The author has a point.

Now, to be fair, perhaps WSJ simply took the NAR quote out of context. Maybe the NAR spokesperson did say, “BUT!!!11!one!111! you have to remember that Feb 2008 is 24% below Feb 2007 levels, so we’re nowhere near out of the woods yet.” Who knows?

Fact is, avoiding getting misquoted in newspapers is why you have public relations professionals. At a minimum, the PR folks over at NAR bungled this article. But if they intentionally sought to create rah-rah optimism, they have failed and just embarrassed themselves in the process.

Like Big Picture wrote, this has also been counterproductive, because it encourages sellers to continue to engage in fantasy pricing.

I think it’s high time that NAR join the ranks of the industry organizations that just put the raw data out there, and refrain from comment.  No spin, no explanation — just data.  Let the commentariat do the yapping and just put the data out there in raw form.

It can’t possibly be worse than engaging in spin, then being caught.

-rsh

From the invaluable Calculated Risks blog, Vallejo Close to Bankruptcy Filing:

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

For people who have been hoping that the bottom may have been reached with real estate prices, I wonder what widespread municipal bankruptcy might mean.

Assuming that Vallejo’s municipal unions take the “devil take the hindmost” attitude that most unions do, the city will go bankrupt.  In bankruptcy, I assume the city’s finances will be administered by a magistrate or a bankruptcy judge.  (Although I have very limited experience with Chapter 9 bankruptcy, I did study bankruptcy law generally, so I’m assuming here.)

So.  Once bankrupt, will Vallejo (a) raise property taxes, or (b) lower property taxes?

If you guessed (b), bzzzt, go to the back of the line.

Maybe the court can set aside the union contract (as can be done in bankruptcy) and force the unions to negotiate all over with the now-bankrupt city, with court supervision.  But I don’t get the feeling that Vallejo is going to have a lot of services for the next few years, do you?  What would home prices in Vallejo look like a year from now, I wonder?

CR thinks that Vallejo is just the first in a long line of California municipalities that will be bellying up to the bankruptcy bar.

I think this is a development to watch.  Furthermore, it might not be a bad idea to take another look at your own town/city’s financials.  How’s their income — much of it tied to real estate via property taxes — compared to their pension liabilities and other generosities that cities flush with cash over the past few years have been showering on their public unions?

-rsh

Thanks to InmanBlog, I learn that there is an ethical dilemma brewing in RE.net.  It appears that NAR has promulgated a new standard

This standard falls under Article 12 in the Realtor code, which provides that Realtors “shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing and other representations.” (See Inman News article.)

A case example for this new standard, provided by the National Association of Realtors in its 2008 Code of Ethics and Arbitration Manual, found that a Realtor who operated a real estate site named “northwoodsandlakesmls.com” was in violation of the code and standards because “a real estate-related URL that included the letters MLS would lead reasonable consumers to conclude that the Web site would be an MLS’s, and not a broker’s Web site.”

The matter is up for local hearing panels to consider, in the event ethics complaints are filed against Realtors who operate sites with the word “MLS” in them or who are otherwise accused of using a misleading Web address.

This is tantamount to the Ford Motor Company prohibiting its dealers using a name like “Joe’s Horse and Carriage”.

With very few exceptions, MLS websites routinely suck.  Not just as “Web 2.0″ sites, but as websites, period.  Here’s NJ MLS for example.  Awful site — great people they may be over there at NJ MLS, but I think they know that their consumer site is plain old bad.  Even large, powerful MLS organizations like MRIS have public websites like this.  It’s not teh good.  I mean, how many clicks before I actually get to see a listing?

In this day and age, is NAR truly concerned that some broker is going to gain an marketing advantage by including the words “MLS” in its name or URL?  As a marketer, I do believe I would have to advise my clients not to use those letters if at all possible.  In fact, if I could figure out a way to have my client’s competitors use “MLS” in their name or URL, while my client’s site remains blissfully free of the taint, that would be wonderful.

NAR needs to get with the program.  Recognize what’s important in todays so-called “Web 2.0″ world, and focus on those.  Might I recommend that NAR begin with (a) understanding the Realtor brand, where it is, and how to improve it; (b) understanding the consumer’s mindset in a far stronger, clearer way, to provide guidance to its members; and (c) working on removing barriers to open and honest conversation between agents and consumers — for example, some of the overreaching provisions of the Fair Housing Act.

-rsh