Point, counter point, more Sub Prime mortgage blaming

We’re not ones to only tell one side of the story (although continually blamed for it, and admitadly a bit bullish). We’re certainly not ones to always point to roses, and we’re definitely not afraid of helpful comments and good articles to keep us thinking, so keep sending them, and please discuss.

At the heart of the matter is the way agents are paid — traditionally through a commission, paid by the seller, of 5% or 6% of the home’s sales price. Nudging buyers toward subprime loans, or keeping mum about the risks, means more sales go through. Also, the low teaser rate on a subprime loan allows the buyer to borrow more, helping to boost sales prices and commissions. “You can’t lie,” Phillips said of the agents. “You cannot intentionally mislead somebody. But you work for the seller.”

“You work for whoever pays you,” Phillips said, adding: “Should a broker tell a buyer, ‘You realize that you’re in completely over your head here?’ — when the mortgage company has already said to the buyer, ‘Sure, you can have the money.’ Why would the broker ever do that?”

“Realtors care about only one thing — making the sale,” added Kenneth Thomas, a lecturer on finance at Wharton, adding that if the buyer needs a subprime loan for the deal to go through, the agent is likely to keep silent about the hazards.

With that said, who is to blame for this mortgage mess?

-The Sub Prime Blame Game: Where were the Realtors? [Wharton]

17 thoughts on “Point, counter point, more Sub Prime mortgage blaming”

  1. i do think realtors have a fair share of the blame. i don’t think the fallout is over either. as we’ve started to see just recently, the mortgage/wholesale business is pretty much dead. i’d like to see some more stringent controls put on realtors that make it apparent that you don’t really need more than one on a transaction. all the legalease is in already in place. the next thing to do is reduce all the duplicate transaction fees. has anyone read all that paperwork lately?

  2. james, i can’t agree with you more that some realtors have some share of the blame. i am now working with sellers that are forced to sell 2 years after they bought using an ARM and 100% financing to boot. the realtor that represented them in the sale kept pushing them to take full advantage of the pre-approval they received, and after 6 rejected offers, they caved and bought a place out of their price range.

    but i don’t see how reducing the number of agents in a transaction will affect the real estate market positively? the seller’s agent represents the seller, and the buyer’s agent represents the buyer. your suggestion is similar to saying that in a court trial, you just need one attorney representing the interests of both sides? better yet, let’s just skip the jury and skip the attorney and leave it up to the judge all together.

    agents are not bad guys… or at least most of us aren’t. it probably sounds crazy to you, but i really do work for my buyers when i work for my buyers… and i’ve turned many away from a sale that would have resulted in me receiving a bigger paycheck. i even wrote a blog post on the topic of why you need two agents in a transaction. unless a buyer or seller knows what they’re doing, having 2 agents involved that both parties interests are represented, period.

  3. Can’t fully blame agents. At the risk of being persecuted; a large majority of agents in the country are not college educated (I’m making this up, but based on anecdotal experience) and they are in this industry cause its a high paying sales job with fixed commissions that do not reward, incentivize or penalize performance. Any buyer that fully trusts an agent to do their decision making is asking for trouble. Why would you let someone with probably less education than you make any decisions in the most expensive purchase you’ve ever made? Now, that said, San Francisco has some of the best educated and most knowledgeable agents I’ve come across so just make sure that you pick your agent wisely. All agents are not created equally. So this means that you don’t pick whoever answers the phone on desk duty.

    I’ve always felt that sellers should have sliding scale commissions based on fixed number that gets rewarded on over asking amounts, and penalized on under asking amounts. Same thing for buyers agents. Our goal is to get the best price possible. Forfit some commission to me if we over-bid and I’ll pay you more if we get a good under-bid. If everyone played by these rules it would help agents set better prices and keep competition on both sides of the table.

    Now that I write this, it seems more clear that agents aren’t to blame, but the NAR’s policy’s on commission are what’s really to blame. The system is really setup to drive prices upwards by only paying commission based on the seller’s fee.

    E.

  4. Why is it that so much focus is on commissions. Every business out there is basically “commission” based. Everyone in just about every job that requires results gets paid on results achieved, which is essentially commission. And in real estate, that commission, which everyone seems to think is fixed at 6%, is totally flexible. I’ve done deals for 1%, 3%, and often 4%. I’ve gone into deals with a 6% commission and being a part of the negotiations to get the price where buyers and sellers need to meet, I’ve given up a large part of my commission. A lot of companies that aren’t the “big ones” are reducing their commissions and that’s how they’re getting listings. The big ones being, Coldwell, Pacific Union, Prudential, McGuire, Zephyr, Hill. And there is nothing wrong with that, but look at the marketing you get when you cut corners?

    Beyond that, representing both the buyer and seller is no fun. I’ve done it. Yes, I made more money, but my ass was hanging on the line for both sides. Trying to get the lowest price for the buyer, and highest for the seller. Then negotiating things like repairs and inspections is no fun. You can’t be 100% on the side of the buyer or seller in that situation. You could just have buyer and seller meet and have the attorney handle it all, but it’s actually attorneys that screw up most of the deals anyway. And if you get rid of Realtors, you’d probably get rid of MLS, and then who’d sell the houses? Craigslist? I believe most of the new companies like Redfin, Property Shark, Trulia, Movoto, Zillow all pull their main data from MLS. Those are some pretty huge shoes to fill, and getting the brokers out of the equation would get rid of that entire system.

    The system may not be perfect, but the truth is that it works, and it works very well. There is no such thing as an easy deal, and there is no such thing as a perfect world. There are many people to blame in all this Sub Prime mess, but ultimately it comes down to the buyer and seller. The buyer needs to review documents, KNOW they can afford current payments, and KNOW their payment WILL, not might, increase in the future, and when that time comes rates could be higher or lower. Blaming the Realtors is just a cop out, and not taking responisibily for our actions is all too common.

  5. rX, I agree w/you. The commission structure is just an unusual side effect of the current system and it’s not fully to blame. This mess is ultimately the fault of the buyers willing to extend themselves on deals to rich for their incomes. The lenders have some blame in letting these individuals take these loans out and continue to drive prices upwards.

    Anyone that is bullish on the market at this point given all the bad news breaking is crazy. The funny thing is that with the internet and dissemination of news being so broad and quick — people are, broadly speaking much more aware of what’s going on; but the markets are not reacting much faster. What we are seeing in the news are leading indicators. Banks taking write-downs, etc… are all things that your average consumer had no idea about or its impacts in previous or similar meltdowns.

    E.

  6. I have to agree with both Realtor X (would love it if you came forward with your identity), and eddy regarding commissions, taking blame and all that.

    Eddy you hit the nail on the head right here, “This mess is ultimately the fault of the buyers willing to extend themselves on deals to rich for their incomes.”

    But on Eddy’s comments regarding being bullish about the market, I’d have to disagree. It’s one thing to be on the sidelines and reporting on what is happening, and it’s an entirely different thing being in the thick of it (I’m not saying you’re on the sidelines, but most people are.), and seeing first hand what is happening. I want to be a bear, I really do, but I just am not seeing it. I’d love for all my buying clients to get the deals of their lives, but it ain’t happening.

    A lot of what we write here is very bullish, but it makes for good story, just the same as all the negativity. Beyond that, if the market is really tanking like we’re reading, then why can’t my clients, or the countless other clients of my colleagues be the highest bidder on their first, second, or even 5th offer? It’s because there is still insane amounts of interest in our marketplace to purchase property, and still not enough to go around. Loans are still available, and available at insane rates. They’re just not available to people who shouldn’t have been borrowing $800,000 in the first place.

    Property at all levels, condos, SFRs, big multi unit, and even huge commercial are still changing hands. Developers are still here, and they’re still going forward with projects. Commercial leasing of large office space is even enjoying a spurt, and businesses are still moving to San Francisco.

    There is no doubt things have cooled, but most savvy real estate people know that you can’t play the real estate game year over year. You’ll get bludgeoned and left on the curb to bleed a slow death. You play it long term, and in San Francisco that means at the very least 3-5 years, preferably longer. When real estate became a stock you trade year over year, and even month to month I have no idea (actually I do, during the boom), but a stock, it is not.

    So to end this rant, and get back to being an editor, it’s easy to get wrapped up in this “virtual world” of real estate, such as socketsite, curbed, theFrontSteps, and all the others, but what is happening here virtually is nowhere near what is happening “out there”…although we try our best to portray the truth.

    Regardless, thanks a ton for reading, thanks more for commenting, and thanks for spreading the good word. Your participation is appreciated, and if you made it this far in my rant, your listening skills are second to none.

    Alex (the editor)

  7. Absolutely, Alex. To offer an in the trenches perspective as to the sort of reality clients of mine have been dealing with, I offer the following. They have given up on trying to find anything “central.” All areas 5, 6, 7, 8, better 9′s. Forget it. You can’t buy anything worthwhile in those areas without highly competitive bidding. We’re now looking at historically undervalued areas such as parts of areas 4.

    Also I want to point out something that should be obvious to everyone. It’s getting accepted with a shrug of the shoulders. But it’s happening, and it has got to be indicative of something. It is this — Holy shit is our city changing! You have to go back over 30 years to the last time significant new towers were built. Then we have South Beach, which, like it or dislike it, is now part of the fabric of the city. This was largely non residential before. I remember Happy Donuts being the only thing around there! And 3rd Street? The city is changing in a way that will perhaps encourage MORE people to live here. New, expensive places are being built, and they are getitng sold. The city is changing. Is it being built by fools flushing money down the toilet? If you read the blogs I swear that’s the message that comes across. I call b.s. on that assessment.

    [Editor's note: The District Map for the "areas" Kenny is referring to. And thanks for the comment Kenny.]

  8. this is one of the better discussions i’ve seen as of late. you guys are finally stopping your clients from playing the game of overbidding for properties that weren;’t worth it and drove this madness. the problem is that not all of you are doing that.

  9. It’s not that the properties weren’t worth it, I mean look at where we are now as opposed to three years ago. Case in point, one of my clients that bought a $500,000 home on 42nd Ave, is now sitting on a pretty good investment, but he doesn’t even care about that. He has an ocean view pad with a phat deck, a roommate that helps the mortgage, hot tub, and shed out back for all his boards. And when we wrote that offer for $500k, I flat out said, “I don’t think it’s worth $450k”, because nobody thought the market could keep going the way it did, but he knew what he could afford, and pulled the trigger. His place is probably $800k ish now, and he’s thrilled. Not just for appreciation, but he enjoys living there….immensely.

    Recently, I’ve lost a couple deals because my clients asked what I thought it was worth. And what I think it is worth, isn’t necessarily what my clients think it is worth, nor is it what the 10 other buyers think it is worth. It’s a game with every offer. How much is enough, and how much is too much. Even worse…will it be the only offer. It’s a head trip, that is for sure, but the over-bidding, in my opinion, is far from over.

    Is it the starving agent, is it that there are no top quality homes on the market, is it that rates are still low and there is a ton of money still available for those with good credit and financial wherewithall? Who knows, and time will tell. But for now, what is actually going on IN the San Francisco market is nowhere near what you’re reading on socketsite, sfgate, cnn, wall street journal, ny times, etc. Like I said before, it has cooled, but for how long is the question.

    One more thing. Just today, I emailed another one of my clients and their fear is that with the sellers now holding off on listing, when they finally do list something good, it’s going to be a frickin bidding frenzy.

    We’ll see how it plays out, and tell all of your Realtor friends to get over here and provide some insight. Preferably, not anonymously.

  10. Visited 2171 Sacramento St. #3, a 1bedroom in Pac Height’s Lafayette Park area for $599,000. Small, but great deck, location, parking, and low HOAs. These units seldom ever come up. Open house was packed.

  11. the bubble might be burst here in the city in terms of what folks can get for places in the sunset, bernal, and other places where run ups were quite questionable. maybe that is all we will see of this correction, no more seven digit transactions in the fog or in bernal.

  12. Responding to The Front Steps (10/29, 15:33) — Your anecdote about your buyer-clients valuing a potential purchase more than an expert might is precisely what is supposed to happen in a sales transactions, right?

    The offeror who values a property (i.e. makes an offer) MORE THAN (not the same as) other offerors gets the deal. If the would-be buyer only offers “market value” she will just as likely lose out to other market-value offerors.

    I agree wholeheartedly that what to offer comes down to a personal decision based on how much Buyer A values Property X. If the offer is “above-market,” that is precisely the point of the exercise.

  13. Maybe. But I bet north side Bernal properties are gonna still get ~$1.2M as the Noe Valley spillover area. The views are too compelling. Same with the Fairmount Heights part of Glen Park ~$1.3M.

  14. Sanfrantim,

    You’re right. It ultimately comes down to the the people involved in the transaction. And that should not be Realtors. It is not our responsibility to make the decision, only our duty to advise on what might be best. Personally, writing the offer, although easy in the sense of effort, tears me apart every time in the sense of mind games. I want my clients to both get the place, and get the best price, but I have to educate them on the whole multiple offer psychology. In a market like ours, there is only so much we can do, but ultimately, like I’ve said before, the buyer needs to be willing to walk away knowing they would be comfortable if another buyer gets the home for one penny more.

    Representing the seller, is sort of the same. You want the highest price, so how greedy do you advise your clients to get? With one offer, do you counter, or take it and be happy you got the offer? With multiple offers, how much of a counter is going to scare people away, and how much will keep them in the game? Which buyers do you think will respond to a counter? Which ones will likely counter the counter at a higher price? Any Realtor who tells you they have the best strategy for this is full of sh*t, as the dynamic is constantly changing, especially with a changing market.

    Then gets even more tricky when the asking is Y, the buyer says they want to pay X over, and appraiser A comes in to say it is not worth Y+X. But that’s another discussion altogether and being the editor you’d think I could stay on topic here.

    Did I even answer anything? Probably not, but I vented. Phew!

    I’m out.

  15. I am in Marin, but we have a similar situation- buyers who are getting out bid or can’t even find decent homes to write on. We have lots of inventory, but lots of it is just bad. The good stuff is still being snapped up. I couldn’t agree more that there are some buyers who are willing to extend themselves too far, regardless of the advice given to them. I feel like it is my job to provide honest advice to my clients. They then have to take responsibility and figure out if they want to listen or not.

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