Please Ignore the Inventory Behind the Curtain: Lenders and Agents now Holding Open Houses Together.

Great things come in pairs. We have Amos and Andy, Siegfried and Roy, and now Countrywide and your local real estate agent? We really have to examine why this tactic is being taken. Keep in mind that we’ve been in a hyper reality of housing for the past decade. The problem with those in the housing complex is that they are living with an inflated perspective of a reality based housing market. The market is simply adjusting to market fundamentals. Sadly, many are grasping at an industry that is entering a fierce bear market. It turns out that easy credit, human nature, and greed are powerful forces. In fact, the money movers figured out a method of tapping into one of America’s deepest primordial desires, that of owning a piece of land and property. They figured if you could monetize something with a powerful emotional component many people would pay to play no matter what. It worked.

Even before the peyote induced housing bubble, American’s as a whole had most of their store of wealth in housing. After Credit Mania™ came out like an Ultimate Fighting Championship, more and more American’s saw their home as a store of wealth and figured out that hey, what is the use of idle equity? Why not tap it out via mortgage equity withdrawals? Refinance, spend, let equity build up, and repeat the process. It was the perfect combination and allowed the American economy to avoid a prolong recession. Our savings rate went negative during this glorious housing golden era. The only problem is this “healthy” economy was fueled by easy credit and not production of new industries. With the technology bubble of the 90s, even though it went into another dimension as well, we are still left with remnants of fiber optic lines, better information technology, and this will serve our society for the better in the long run. Flipping and trading houses like baseball cards? Well once this bubble subsides not much will be left except a credit hangover.

The New Tag Team of Housing

If you haven’t read the story here is the link. What is now happening is even homes that go into contract are falling through the cracks. You only need to look at the sales contracts that fall through from the large home builders and you will get a good sense of the current housing market. In fact, many folks go home and get a nice case of buyer’s remorse. The mortgage market is tanking. Record amounts of debt. Open any newspaper and even a housing novice will realize buying right now may not be the best bet. So imagine a couple going to an open house, finding a place they like, and going home to run the numbers only to see that they will not be able to afford the place without “creative” [read speculation] financing. They turn on the television and hear about the tanking credit markets and the mortgage market fallout. They decide to wait out the market. Aside from the subprime mortgage G-men, we no longer have a secret group of people buying homes with exotic financing hoping to flip. So what if we could lend to these people before they left the open house? From the article:

“With housing prices lower in many parts of the country and still-low interest rates, we are clearly in a buyer’s market,” said Dan Hanson, managing director of Countrywide Home Loans. “Our hope is to make it easy for people who’ve been on the sidelines to go out, look at open houses, and understand their home loan options.”

Housing prices that are trending lower and low interest rates do not equal a buyer’s market. We’ve already examined the selling stalemate in the current market. Sellers do not want to lower home prices because they have an inflated view of what they should be getting. In basic economics the price of a product is what the market will support. Sales are radically down because people don’t want to buy at current prices. Instead of realizing that this is the new status quo, sellers and the housing complex are trying each and every way to come up with absurd products that make no financial sense. They make sense for their commissions and keeping the butter churning, but it makes no sense for a current buyer. Why would you buy right now if you know next year prices would be cheaper? You don’t. This bubble psychology is what got us into this mortgage credit mess as well.

People saw that housing went up year-over-year and figured they had to jump in. For a few years they were right. Even a broken clock is right twice a day. Economic fundamentals didn’t push the market up but mass psychology did. Folks went into massive debt with adjustable rate mortgages simply to own a piece of the America dream. Here in California, many areas saw price gains of $100,000 year-over-year; in some cases yearly price gains were higher than annual household income. How is that supportable in the long run? Clearly it isn’t. We aren’t talking about a home in the Midwest that jumped from $100,000 to $110,000 while the area income is $42,000. We are talking about homes that jumped from $350,000 to $450,000 in one year and area incomes are approximately $50,000. I know most people in the United States have a hard time wrapping their brain around bubble areas but take a look at some of the Real Homes of Genius here in Southern California and you’ll get a better idea.

Missing the Bulls-eye

Keep in mind that Countrywide even as late as May of this year was expanding its subprime mortgage outfit and talking about 50-year loans.

Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.

With that said, let us take another look at what is being said today:

“We’re pleased to assist our local real estate professionals, and we encourage buyers to work with an expert who is seasoned in helping buyers with the home purchase transaction,” said Hanson.”

Seasoned? You mean with a company that was expanding their subprime unit only a few months before the current implosion? Why would anyone take a 50 year mortgage when rates are at all time lows? Is this your definition of seasoned? Well let us continue forward in the magical world of mortgage Oz:

“It has always been Countrywide’s mission to provide optimal mortgage solutions for each homebuyer’s needs and financial situation, and it is Countrywide’s continuing commitment to help find the most appropriate mortgage solution for every qualified buyer.”

Here was the option list for the last 7 years: adjustable rate mortgage, option ARM mortgage, reverse mortgage, 2/28 mortgages, and maybe a 30 year conventional mortgage. Keep in mind that with absurd ratings of the mortgage backed securities market premiums were better on the riskier mortgages so guess what was pushed by lenders? And now these same people are the gurus of financial prudence? Scotch please! Dissecting the article you can tell someone is well groomed in the art of PR. When they say most “appropriate mortgage solution” the implication is that there is a mortgage product for you. Take this a step further and you will see that they are still trying to push people into houses while the market is entering the first stages of a bear cycle. You’ll love this:

“Through the America’s Open House campaign, Countrywide hopes to encourage buyers to do their house hunting with a clear understanding of how much they can afford and what types of financing options are available to them.”

So now after 7 years theses mortgage companies think that it is important to look at your income. You can imagine how one of these sessions will go:

Buyer: “Yeah, we have an annual household income of $60,000, what do you think we can afford?”
Housing Tag Team: “Well according to my modified housing algorithm, you qualify for a $700,000 mortgage.”
Buyer: “I’ve heard that the credit markets are getting tighter and housing prices are going lower. Is this correct?”
Housing Tag Team: “Nonsense! There is never a better time to buy then right now. In fact, if you can put down 5 percent today before you walk out of this 500 square foot home, we will make you the proud owners of this place? How does that sound?”
Buyer: “I’m not sure. It sounds like we will be out of our range.”
Housing Tag Team: “Listen. If you sign right now we will throw in an additional granite countertop and 42” plasma. You don’t even need to go to the bank! That is the benefit of the Housing Tag Team (HTT).”

Housing tied at Hip to Healthy Economy

In that past decades, real estate contributed about 10 to 12 percent of all added job growth. However, in the last decade real estate related jobs are now pushing closer to 30 percent of the entire job output. So of course the economy is healthy. Real estate has been fueled by a massive credit bubble thus leading to job growth and spending. But this circular logic has a fallacy that I’m sure many of you see. If housing hits a road block and slows down, guess what happens to a large portion of our employment sector? The economy is predicated on continuous housing appreciation; not normal appreciation that tracks with inflation but debt fueled home equity line of credit type of expansion. When you pull the curtains back on your new house, make sure you send the wizard a nice tag team hello.

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9 Responses to “Please Ignore the Inventory Behind the Curtain: Lenders and Agents now Holding Open Houses Together.”

  • Doc, to follow up on your Florida piece, found this clip through Minyanville –

    50% off condos in Miami – and tons more coming down the pike.

    The unemployment figures are skewed, as well, since non-salary commissioned LO’s can’t file for unemployment insurance. So these 30% aren’t even showing up on the rolls.

    And of course Orangzilo has the 7000 LO’s out at open houses – they have quotas to meet, and the builders that CFC have joint ventures with (KB, etc.) are sucking wind from a tailpipe right now.

  • Oh – 1 more thing about CFC and realtors. In California CFC vetted a payment plan to referring realtors and got it approved by the powers that be.

    The CFC loan officer establishes one or another type of ‘marketing’ relationship with the realtor, variously called a CBA (Controlled Business Arrangement), ABA (Affiliated BA), or a JV (Joint Venture), any of which permit the LO to pay a referral fee to the realtor on the closed loan. There’s a few more requirements, but essentially, there is a non-disclosed (to the buyer) financial incentive to the realtor to use the CFC LO. On top of any commission the realtor gets.

    Once the relationship is established, it’s like a pusher and a user – the user (realtor) is going to continue to go the pusher for that extra kick, regardless of whether it’s truly beneficial for the buyer.

    CFC benefits because they have the best customer retention program in the business (why B of A is interested in them). LO benefits by a steady stream of referrals. Realtor benefits from extra income.

    Buyer? Hmmm.

  • exit: Concerning CFC referrals from realtors. Seems to me as long as the realtor isn’t acting as the mortgage broker for the borrower, it doesn’t seem like that bad of a deal.

    Obviously, if the realtor were also the borrower’s mortgage broker, that would be an obvious RESPA Section 8 violation. However, if they’re casually referring a homeowner to a Countrywide retail office (without providing “settlement services”) that borrower could still go to another lender if they wanted to.

    To me it doesn’t seem like anything more than good marketing.

  • Dr Housing Bubble


    It is definitely a tight knit circle. In addition, there is a major lag factor for these job losses. The credit crunch only happened on a large scale a few months ago. Fall and winter are slower selling seasons in general. I imagine the large impact will be early Q1. Even in my very old posts, I was predicting this crunch hitting during late Q4 or earlier Q1 of 2008. It wasn’t some amazing guess or prediction, simply looking at this data how could this market keep up the pace?

    You bring up good points and I always appreciate your thoughtful comments. It’ll be an interesting Q4 that is for sure.

  • Michael Blomquist

    Interesting post!

    I would like to encourage you and your readers to join me in convicting the criminals behind this growing pandemic. I am not talking about the mortgage broker or borrowers who committed fraud while inflating their incomes. I am talking about the kingpins. The debt rating agencies, analysts and investment bankers who were selling the illegal drugs…I mean loans.

    This catastrophe will effect the innocent and the guilty. Those who inflated their incomes and those who did not. Numerous laws were promulgated after the S&L crisis to protect our financial markets from another catastrophe, but the regulators and others dropped the ball.

    Have we gone insane, lazy or completely ignorant? These criminals need to be prosecuted!

  • @Chris

    In a truly ‘neutral’ environment where a borrower were to go to another lender, sure, it seems harmless.

    That’s a pollyanna view, however.

    The buyer has entrusted this financially and emotionally gigantic transaction to the realtor – trust being the operative word.

    For a realtor to then ‘refer’ the borrower to a CFC LO without disclosing that a referral fee is attached to me is unethical, despite it being blessed by the DRE et al. Who do you think pays for the referral fee? The lender? Sure…. in the same way that a seller pays for closing costs. If you’ve read any of Doc’s explanations, you’ll recognize that it’s the BUYER who is paying the costs in the form of a higher sales price, or in the case of a mortgage, a higher rate or fees.

    You say ‘casually referred’ – there’s nothing casual about the referral when money exchanges hands.

    The direct referral from a trusted source, a so-called warm lead, means the CFC has a much greater chance of closing the loan than does some ‘other lender’. And contrary to the concept of competing on equal footing, internal CFC policy permits management to close a loan just to beat the other guy even if the loan loses money.

    Why is this bad? Because the next borrower in line is NOT given the same deal. If EVERY borrower was given the same deal, then such a business model would be non-discriminatory and truly competitive. Why should borrower B who doesn’t go to another lender to beat the price down not benefit from the same terms as borrower A who did? And in the end – again – who do you think ends up paying for the discounted loan, and the referral fees? The next borrower in line.

    Good marketing means competing on a level playing field. I don’t consider paying to play an example of a level playing field. In some arenas, it’s called bribery, though here it’s called a JV or ABA and sewn up nicely by the attorneys.

  • Follow up report on the Beazer project on Foothill Blvd. in Upland.

    This is a long, somewhat narrow plot of land with multi-unit townhouse buildings set in two rows (the narrow side facing Foothill).

    Far in the back I see completed, or what appear to be completed, buildings. It’s difficult to determine if they are actually finished both inside and out, though.

    Closer up toward Foothill are buildings in various stages of construction (like with the first layer of roof on) or cleared lots.

    I haven’t seen any pick up of labor activity since a couple weeks ago when it seemed awfully quiet for a workday. There is no labor being done whatsoever on the buildings “in progress”. I do see some sign of activity way in the back on the more advanced units. My guess is this is mostly interior work.

    This site had lots of trucks, equipment and laborers a few weeks ago. So, unless I’m missing something, progress seems on hold.
    Same low level of activity I noticed a couple weeks back.

    I’m wondering whether there are many half-built “communities” in the bubble states of Nevada, Arizona, Florida and our dear California. At the very least, I could see these “homebuilders” slowing down the pace of construction on started projects just to keep inventory down.

  • Welcome to the new site. October should be an interesting month with 3rd quarter foreclosure results. I think we have a clue what the trend will be.

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