We Won’t Get Fooled Again…Unless We Do!
Wednesday, April 3, 2013 at 10:30AM April 2, 2013
Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
The Who, a famous 60’ and 70’s British band for those of you too young to know, had a hit song in 1971 called “We Won’t Get Fooled Again”:
I'll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
Don't get fooled again
No, no!
What does this song have to do with real estate? While I haven’t seen much in the way of revolution lately, we did experience a major real estate collapse in 2007 that many thought would permanently change how we deal with real estate. A revolution of sorts, I guess. But has that really happened?
The Revolution of Changes
“I'll tip my hat to the new constitution”
When the real estate market crashed, the real estate industry was thrust into a new world. Cries went up for new laws, new regulations and enforcement of the existing laws and regulations. Whether these changes would prove to be good or bad, you would have to be blind and deaf to not see the changes coming and, given the abuses that had occurred, changes were needed.
“Take a bow for the new revolution”
As the prices continued to fall and the foreclosure problem spread from the inner cities to the well-heeled suburbs the anger spread to all income levels and to people of all political leanings. Lawsuits and investigations sprang up like flowers in the spring. Abuses were discovered. Robo-signing. Lenders routinely “losing” documents sent to them. Lenders failing to work with homeowners to save their homes. The Fed’s, the state’s and local enforcement went after mortgage fraud, RESPA violations and other abuses like never before.
“Smile and grin at the change all around me”
The hatred and frustration with the large lenders became universal. As the investigations mounted, as the lawsuits began to stack up, and as the multimillion dollar settlements were announced, the only complaint of the masses was that it was not enough. As mortgage fraudsters began to be escorted to prisons, as “sham” affiliates and marketing service agreements were shut down and as individuals in the real estate industry who were only there to cut corners fled from the industry, many felt a sense of relief – maybe real estate would get back to the people who cared about what they did, care about their clients and strived to do things the right way.
“Pick up my guitar and play”
Of course, as this massive shift took place in the real estate marketplace, surviving became the goal. There was no easy money. Traditional transactions were dwindling while REO’s and short sales rose up like never before.
On an individual level, people dug in and worked harder than they had for a decade. It was like starting over with the deck stacked against you but hard work was all that was available to survive. Agents took listings that they would have laughed at in the boom era, builders built not to make money but to get rid of lots and pay down debt and everyone cut costs.
Work hard, get rid of debt and wait for the market to come back.
“Just like yesterday”
For many, it was getting back to the basics. It was like starting over. Hard work. Hustling to get clients. Constantly learning how to survive in this new world with new types of transactions, new rules and new obstacles. Whether you had thirty years or one year of experience, everyone was on a level playing level. The ones who figured out the new world first, who worked the hardest would rise to the top.
“Then I'll get on my knees and pray”
As the years went by, the values continued to fall and the struggles continued, hope began to wane. Would the values ever turn around? Will we ever get back to traditional sales? Will lenders ever relax their lending guidelines?
Individually, there was not much that anyone could do to right the real estate ship so all that was left was hope and prayers. Most gave up even trying to figure out what needed to be done to turn things around but just prayed that someone did and something, anything, would happen to cause the world to right itself.
“We don't get fooled again”
The one thing everyone seemed certain about was that we wouldn’t forget the mistakes of the past.
On an individual level, people said over and over again:
- We would never again act as if real estate values always go up.
- Never again would we rush into a deal because it is too good of a deal to risk losing.
- Never again would we sign document after document without really knowing what they meant.
On a business level, people said over and over again:
- We will never allow a business to be “too big to fail”.
- We will eliminate the "buying" of business.
- We will avoid risky deals.
On a governmental level, people demanded that:
- We will stamp out fraud.
- We'll make sure everyone plays on a level playing field.
- We will get governement out of the real estate business.
“Don't get fooled again. No, no!”
Prior to the collapse, we were blinded by greed, we were deluded into believing that everything would always get better for us because of who we were and, as a result, we took risks without even noticing and we racked up debt without fear because our ability to make money was unlimited. But when the bottom fell and everything we owned lost value, we were left with the staggering debt that we, at best, struggled to deal with and, at worst, cost us everything. The risks that we ignored seemed to assault us from every angle – lawsuits, enforcement actions, foreclosures, etc., etc., etc…..
We can’t allow ourselves to get fooled again only to end up in back into this world that we are trying to escape.
The Aftermath of the Revolution of Changes
Many would argue that The Who believed that the revolution of change would change the world for the better, that we had learned our lessons and would never get fooled again. I would argue that The Who didn’t actually believe that we would change in a significant way, but that they believed that we should change and that we should make sure that we never get fooled again but it was a hope, not a prediction.
We have recently seen the first positive signs of a turn-around in the real estate world. For the first time in years, there is excitement in the marketplace. Optimism is rampant. Values are rising. So after 6 years of changes and struggle, maybe now is the time to reflect on whether all these changes we have seen are significant or not. Have we learned our lessons or are we going to quickly fall back on old habits?
While everyone remembers “We don’t get fooled again!” few remember the lines that followed:
Meet the new boss
Same as the old boss
Let’s look at the changes we demanded, the lessons we said we would never get fooled on again.
We would never again we would act as if real estate values always go up.
Every day I see people who are again acting as if it is a given that the values are going to continue to rise and are making deals betting that they will. . “I know the contract for deed purchase price is more than what the property is worth today but by the time I have to pay it off, the value will be there.”
Never again would we rush into a deal because it is too good of a deal to risk losing.
How many deals were entered into before the person really knew what they were getting into because they were afraid of losing the deal? Never again, right? Wrong. Every day we see people who have signed contract for deeds that have no chance of being successful. Every day we see contracts that have been signed that make no sense, are vague or clearly violate the law. Why, because the deal was too good to risk losing.
Never again would we sign document after document without really knowing what they meant.
Remember when all you heard on the news was about people with “bad” mortgages? That they didn’t understand what they were signing? That they were tricked into these bad mortgages? Remember when the government went after real estate agents and title companies over affiliate arrangements and marketing service agreements and the defense was, ”How was I supposed to know whether this was legal or not?”
These folks were never again going to sign a legal document without thoroughly understanding what they were signing, except that these same people today are signing legal documents without really understanding what they are signing. “But they told me it was a standard document.” “How was I supposed to know everything about what the document meant?”
We will never allow a business to be “too big to fail”.
The fact is the “Big’s” in real estate are bigger than before the crash and are getting bigger. The market share is being dominated by the Big’s and the Small’s of the world are struggling to survive.
We will eliminate the “buying” of business.
Marketing service agreements are sprouting up like buds on the trees after a spring rain. Affiliate relationships are being talked about again. A bidding war is breaking out for closers and agents who the bidders are hoping can bring business with them.
We will avoid risky deals.
Contract for deeds, marketing service agreements, affiliate relationships, flipping and all sorts of risky deals are being entered into without care and thought other than the belief that they will create more profit.
We will stamp out fraud.
While many fraudsters have been fined, lost their licenses and/or been sent to prison, many more have escaped untouched. Further, the fraud statistics have not gone down but have actually continued to increase!
We’ll make sure everyone plays on a level playing field.
We have new regulations galore, enforcement actions gone wild and a new multimillion dollar settlement seemingly daily but have these new regulations, enforcement actions and settlements really cleaned things up? Do we really have a level playing field?
The reality is that the increased costs associated with new regulations, the expense of being the subject of an enforcement action and the cost of settlements apparently can be absorbed by the “Big’s” and they still are able to post huge profits while the “Small’s” struggle to find a way to comply with the new regulations in a manner that they can afford, they can’t afford to fight the enforcement action even if they believe that they are in the right and a settlement often puts them out of business. Meanwhile the Big’s buy the small’s for pennies on the dollar, the Big’s get bigger and their market share continues to grow.
Not my idea of a level playing field.
We will get government out of the real estate business
How many times did we hear that the government through its policies encouraged lenders to lend to people that they shouldn’t have and encouraged home ownership for everyone when everyone shouldn’t own a home. Fannie and Freddie fed the bubble. Programs were set up so that buyers could get 100 percent financing. Securitized mortgages allowed interest rates to go lower and lower.
Has anything really changed?
“Meet the new boss, Same as the old boss”
We have had historically low interest rates since the collapse because of government policies; especially the fed’s buying down the interest rates. Furthermore, the vast majority of homes purchased in the last 5 years have been FHA mortgages and while there has been talk of eliminating the mortgage interest deduction, it is still there as an incentive to own a home. Oh yeah, we did ban seller paid down payment assistance so that buyers had to have “skin-in-the-game”, yet many states have tried to get around that hurdle by the use of a first-time homebuyer tax credit as a down payment. Freddie Mac and Fannie both have programs for loans that call for as little as 3 percent down, and the USDA and VA offer programs that can provide 100 percent financing.
Talk of allowing the interest rates to rise, eliminating the mortgage interest deduction are met with screams of alarm. If anything, most want the government to loosen the lending standards so more people can buy a home.
In many ways, it would appear that predictions of great change in real estate were greatly overstated. Many, including myself, thought consumers and professionals in the industry would move more cautiously after the 2007 collapse that devastated so many. That we would not rush into new deals, that we would actually read what we are signing and/or have professionals review them for us, protect us, and that we wouldn’t just look at the upside of a deal but would consider the downside of a deal before proceeding.
I think we were wrong. I think I was wrong. The more things changed, the more they stayed the same.
I'll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
Don't get fooled again
No, no!
YAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAH!
Meet the new boss
Same as the old boss
Unless we look back at what we did to end up where we were in 2007, we will revert back to our old thoughts and old ways which will eventually lead to the same result. If you don’t want the same result, don’t rush into deals that you don’t thoroughly understand. Don’t go into deals without protecting yourself as best you can. Don’t do something simply because everyone else is doing it. If that means you need to hire an accountant to avoid tax problems, hire a tax accountant. If that means hiring a lawyer to avoid legal problems, hire a lawyer. Only work with real estate agents and loan officers who have knowledge, experience and a reputation for taking care of their clients and are accountable to their clients.
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NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2013 Nash Law Firm |
