A just and safe system for property ownership, trade and finance is a requisite for economic and social stability in any country.
Among the critical pillars of the U.S. economy has been the policy and legal infrastructure associated with individual property ownership, known in real estate parlance as “real property.” The entire world felt the pain of the USA’s 2008 economic collapse stemming directly from a crash in the real estate market, which nearing the end of 2010, the USA still has not recovered from. Moreover, USA’s instability has thrown the entire global economy into chaos.
There were many reasons for this crash, but the majority of the blame was placed on the financial institutions that secured and then sold loans which were over-leveraged in different ways with the misguided expectation that property values would forever increase in a country consistently decreasing its own manufacturing capacity in favor of outsourcing. Lack of regulation has been cited as the reason so much unsecured debt accrued. Regulation is one thing, enforcement is another.
The U.S. government has spent trillions of dollars to stabilize the banking industry, hoping that investor confidence will rise and capital will again readily flow from the entities that warehouse money in order to extort extreme usury fees (compound interest) from people or companies that want or need capital. Unfortunately, the combination of centralized power, bureaucracy and corruption is so extreme that recovery is taking far longer than it should and more citizens are being harmed in the process. With each incident of pain inflicted on the citizenry through financial institution malfeasance, government ineptitude, or the confluence of government rhetoric, consumers dig deeper into a fiscal mailaise equivalent to an economic ice age.
In resolving some core problems, the federal government has created new barriers to economic stability. Many of these barriers could be remedied by simply enforcing existing laws. For all the talk about new controls and restructuring, financial institutions continue to operate with impunity while functioning with carte blanche freedom to circumvent the contractual and ethical rules in each state. Moreover, most of the institutions including Fannie Mae–a federally owned quasi-corporation–consistently violate federal laws, such as the buyer right to choose their escrow company written into law under the Real Estate Settlement and Procedures Act (RESPA).
More to Blame
Real estate agents are highly regulated in each state, required to take hundreds of hours of specific training on ethics and law before they can take a licensing exam. If they pass, they must sign up with an experienced broker and take more state sanctioned training each year. Some agents are better than others, but there is widespread enforcement and many grievance avenues available to parties in a transaction. The National Association of Realtors and its various chapters exert much control and influence over the process, combining membership requirements with access to something every agent needs: a local multiple listing service by which each agent can sell listed by other agents. The Association adds a number of requirements beyond the ethical code each member is sworn to uphold. The basis of the Association is to support a stable real estate market with protection for buyers and sellers. For this reason, the standardized contracts developed over decades of development and legal testing include dispute resolution services that make it possible to resolve most conflicts faster at lower costs. The written offer and acceptance procedures establish a clear path showing what was agreed to and what was not, further minimizing conflicts.
There are and were no toxic assets…
only a toxic financial industry operating within an ignorant and corrupt government.
Financial institutions made assets toxic by implementing improbable scenarios for selling their property. On paper it appeared they were attempting to liquidate property, but even when offers came in at over 80% of the loan value, banks consistently failed to follow through with short sale offers, usually by not signing documents in time. Was this a conspiracy to con the government out of more money? Did they go through the motions, write off the loss, and seek bailout funds for the difference? Knowing that properties pending foreclosure deflate surrounding property values, were they counting on greater depreciation? At the lowest point, did they want to recover properties cleared of all liens? Once the majority of the “toxic” properties were in their possession, did they introduce new barriers until they felt the time was right to actively sell property with after realizing huge appreciation? Are they still waiting?
Reality is strange and difficult to accept.
You can’t finger one bank or one person as the culprit. Those that manage these assets set up a circle of entities, none of which can be held completely culpable. They then play a childish game of “hot potato,” tossing the asset from one entity to the next.
The banks, the asset managers, relocation companies, service companies and more recently Fannie Mae use lower than market prices to coerce buyers into accepting contracts with many stipulations that are binding only on the buyer. The transactions begin with standard forms, but any resemblance to a standard transaction ends there. Unlike regular sellers bound by laws and standards, these sellers won’t sign the offer paperwork, so there is no official acceptance and no paper trail with which to track the progression of negotiated terms that would normally bind the seller. Actually, there are no terms negotiated. The terms are dictated. They seem to go through the motions of appearing to negotiate to appease and appear to be cooperating. If they finally agree to some basics, they require the buyer to sign a document that rolls back the real estate transaction process to the pre-licensing era a century ago. The so-called seller “counter offer” isn’t a counteroffer at all. It is a new contract that negates the entire standard agreement and replaces it with unilateral terms dictated by the selling party’s representative. The following are conditions typically found in these contracts:
- Removes arbitration and mediation (ethically questionable and expensive)
- Steers toward the seller’s escrow company (illegal under federal law, but there is not serious enforcement)
- Disavows any responsibility to be aware of or comply with federal or other liens, jeopardizing the buyer right to clear title (supposed to be illegal)
- Holds the seller harmless against any legal claims including malfeasance in the sale process (borderline duress)
- Fines the buyer $50 to $100 for each day closing may be delayed (highly unethical, especially with the seller refusing to comply with the same standard)
- Forces cash up front into earnest money prior to seller acceptance (puts buyer at greater risk of losing money to a process that has no paper trail)
- Allows inspections but removes any option for buyer to adjust, renegotiate or withdraw from the transactions without penalties no matter how detrimental the inspection findings (unethical)
- Ignores state-specific real estate laws in favor of a marginally legal unilateral contract (illegal if checked against many state laws)
Many buyers with real estate or business experience won’t sign the required documents or participate in the process dictated. Others who failed while attempting to purchase short sales or bank-owned property refuse to put themselves through it again. These tactics erode the buyer base and taint the market.
First-time homebuyer incentives brought many inexperienced prospects to the table in 2010. They were told things like “everyone has to do it this way…the banks would never do anything illegal, you can trust them…and you have to go along with their requirements if you want this property, otherwise someone else will.”
Not knowing any better, they go along. A lucky few become property owners without mishap, but far more are surprised by problems for which there is no remedy—they signed their rights away. A few investors will still buy these properties, knowing they are assuming full risk for the property, but they can afford to take a loss if something goes wrong. Nonetheless, bank actions continue to limit the market in ways that unnecessarily and artificially reduce property values. Appraisers value new sales based on comparables without adjusting for whether a sale went through the convoluted process prescribed by national banks and their minions.
Although the conditions are dictated from the top down, tne excuse used by these entities is that there is such a backlog of so-called toxic assets, they are buried in paperwork and must use third parties to liquidate property. They say they can’t afford any other process than they one they are using. It is interesting that they had so much time to write so many problematic loans, but now have no time to follow the rules. They have time to accept money from a depositor, open a credit card, or a checking account, but just can’t stay on top of their real estate assets? Sure.
What about the agents?
Although the ethics of accepting a listing from a seller who will not follow the rules is questionable, many real estate agencies do just that, especially the large national firms like Coldwell Banker, Century 21, Keller Williams, and RE/MAX. Often the owner of record filed within the respective county is different than the person and the company represented in the negotiations. This prevents a buyer from filing complaints against the seller representative. Do banks use third parties and do those entities use agents as scapegoats? Does using an agent circumvent class action lawsuits?
What is most interesting about this is the real estate associations require agents to attend ethics classes which contradict bank owned property procedures. The real estate associations in each state lobby heavily for more training and controls to make the industry more exclusive, but they are NOT lobbying for actions against the banks that are contradicting their ethical standards. Curious.
This is ultimately a consumer protection issue that should be handled by the Attorney General in each state, but as soon as anyone attempts to file a complaint and they find out a bank is involved, they refuse the complaint and refer to federal regulators who won’t investigate either.
States were willing to file antitrust suits against Microsoft, but none seem willing to address the economically damning practices of the financial institutions.
The American public rightfully feels outrage about the mortgage market, but would become apoplectic if they discovered the true actions and schemes of the financial industry. What happens in practice can’t be learned from reviewing bank industry statistics or listening to their testimony. Regular people are the victims of governmental ignorance and bureaucratic malaise. The masses continue unheard as financial institutions continue to fleece the taxpayers of more money while harming the marketplace with the audacity and destructive power of a proverbial bull in a china closet.