In one of my favorite movies, "The Usual Suspects," a crime has been committed. The police have caught a key eyewitness who claims that the culprit was a notoriously evil criminal named Kaiser Soze. In the end, after being released, we discover that this "eyewitness" was actually the Kaiser Soze.
Flash forward several years, and I'm now reading Michael Lewis' latest mind bending expose, "The Big Short." Here, he goes into specific detail about subprime mortgages, credit default swaps, interest only loans, and how these financial instruments led to the downfall of Wall Street's most prominent investment banks. Not to mention all the foreclosures that spread into certain markets like water from a leaky roof.
As Lewis accurately lays blame on several different parties, I realize that one particular group was left devoid of any responsibility. An insidious group that has made a reputation for repeated profitability in any economic climate.
Real Estate Agents.
To some, they fall somewhere between car salesmen and Al Qaeda when it comes to job approval. They're the starting gates of every real estate transaction and they represent the first check point on consumer credit, down payments, and complete assessment of customer credibility. Like a game of poker where certain card combinations rank higher than others, they also have a specific hierarchy with potential customers.
Cash customers beat those who need a mortgage. A buyer without the contingency of selling another home first ranks higher than those buyers that do. Likewise, a higher household income is better than one that isn't. But like great con men, they couldn't resist rigging the game in their favor.
When hesitant buyers questioned their affordability in paying for a house that seemed beyond their reach, they were told, "don't worry, I have a guy who can help." They have a guy? Was he in Good Fellas? No, this "guy" was either an internal finance expert or a friend the broker had at a local bank. It's here where the prospective buyers first discovered products like interest only loans, adjustable rate mortgages, and even options to pay any amount they wanted each month.
Don't tell me that these modern day robber barrons couldn't do the math. You don't need an A+ in calculus to realize that a family making 100K per year, putting no money down, couldn't possibly afford a multi-million dollar home. They knew it, but they didn't care. If the buyer was forced to sell in less than five years, it's perfect? They'll just resell the house and make more commission. Real Estate and Wall Street have one thing in common. Volatility is good.
Yes, you could point to the fact that the buyers should have known better. But real estate agents are supposed to be experts in their field, so as "consultants" many trusted their financial acumen.
So what can be done about it now? It's not too late. These so-called brokers have had fixed commission rates for years regardless of the neighborhood they sell the house in, the home's price, and the total number of days on the market. The government should impose a fine dating back to the beginning of this mess which is probably sometime from 2005-2008. Each brokerage agency should be required to return 2% of all commissions earned during this period. Individual brokers will be charged back for all commission checks and the proceeds will go into a fund for educational programs on how mortgages really work. This way, no one will be fooled again.
Kaiser Soze is amongst us once again. This time, let's not let him get away.
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