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Truth in Real Estate

I was appalled when, earlier this year, a jumble of voices blamed homebuyers for the mortgage meltdown.

“They got in over their heads,” cried the chorus. 

Bull-pucky! 

Buying a home is the single largest financial transaction most of us will make in our lives. We don’t do it alone. To make sure we get it right, we hire a team of professionals. For the benefit of their experience and guidance, they are very well paid.

By closing time, at least five “experts” have given the transaction their blessing… the buyer’s realtor,  the seller’s realtor, the title company representative, the mortgage broker and the home inspector.  In return for their expertise, they get a bundle of fees which often runs as high as 10% of the transaction: Realtors-6%, Mortgage broker-2%, Title and Inspection-2%.  Therefore, on a typical $250,000 home, that team has been paid more than $25,000 to review and sign-off on the deal.

So what happened?

Every cratering subprime mortgage represents tens-of-thousands of dollars paid to a gaggle of these real estate experts—who didn’t do their jobs. It’s easy to see why. None of them has an interest in seeing that the buyer gets a good deal. Most of them only get paid if the deal closes, regardless of how much financial sense it makes. They also have an incentive to see that the buyer pays as much as possible. The buyer's realtor makes more money if the buyer pays more. The seller’s realtor makes more money if the buyer pays more. The mortgage broker makes more money if the buyer pays more. The title company makes more money if the buyer pays more and also needs to keep the realtors happy so she will get their future business. The home inspector wants to keep the other “professionals” happy too, for the same reason.  Not one of them has a financial incentive to closely scrutinize the deal and pull the plug if the bright light of common sense reveals any flaws.

Average Americans may only buy two or three primary residences in their entire lifetimes. They shouldn’t be held responsible for not being intimately familiar with the downsides of exotic loan structures. There’s no reason they should have that knowledge. It’s why we pay those high fees to the real estate experts. Asking a homebuyer to become a real estate pro is the equivalent of asking a defendant to have as much legal knowledge as his attorney before they head to trial.

When the housing market crashed, the big losers were the home buyers—many stuck with upside-down mortgages, skyrocketing interest rates, and facing disastrous foreclosures. The realtors, mortgage brokers, title companies and home inspectors kept their fees and were free of any downside responsibility for the chaos they helped create. Many of these experts were clearly more concerned with getting their fat share than in living up to their professional obligation to make sure that a deal made sense. The street-level deceit in the mortgage crisis wasn’t perpetrated by the home buyers, but rather by the real estate professionals who pocketed exorbitant fees and approved transactions they must have known were foolhardy, at best.

In 2009... I’d like to see the realtors, mortgage brokers, title companies and every other player who looked the other way or signed-off on one of these squirrely deals held accountable for their malfeasance. Then, we need to call on Congress to implement strict regulations and competent oversight over these real estate clowns to make sure that such massive consumer fraud never happens again.