December 2007 Archives

Shedding light on gray areas of realty transactions

Carol Lloyd:

"But can they really do that?"

It's a question I've been asked again and again from first-time home buyers, seasoned sellers, just about anyone who finds herself in the middle of a real estate transaction that seems to have slipped into a gray zone between common practice and legal technicalities - between friendly business-as-usual and hardball negotiating.

When push comes to shove and shove turns to brawl, many folks suspect that the transaction has fallen into shadowy territory, causing them to question every aspect of the deal, and to mistrust everyone.

Are so many real estate deals really running afoul of laws and ethics?

The US sub-prime crisis in graphics


The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.

Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. This has limited the amount of mortgage lending they could do.

In recent years, banks have moved to a new model where they sell on the mortgages to the bond markets. This has made it much easier to fund additional borrowing,

But it has also led to abuses as banks no longer have the incentive to check carefully the mortgages they issue.

America's Obsession With Our Homes

Daniel McGinn:

Once upon a time, long long ago, in a land that may well never have existed outside of our national mythology, buying your own home was supposed to mean the fulfillment of the American dream. But today, the house you own - if you're lucky enough to own one at all - has come to symbolize both much more and much less than shelter and stability. The American dream is, after all, fueled more by desire than by fulfillment, and it's in our natures to burn for more: more rooms, more square footage, even more houses. And if we weren't leaning that way already, we'd still have the lucrative promises of the real estate bubble to whip us into a frenzy.

The bubble has burst, but the frenzy is still going strong, and here to help us explore its meaning is Newsweek reporter Dan McGinn. In "House Lust: America's Obsession With Our Homes," McGinn takes us on a trek back and forth across the country to explore the first deadly sin of real estate, from tony suburbs in Massachusetts to construction sites in Las Vegas, to real estate agent conventions in New Orleans, and even to a sit-down with AOL's founder Steve Case, a recent investor in luxury time-shares.

Businesses Fear the Social Web

Jay Deragon:

We were recently meeting with one of the top executives of a Fortune 500 company and discussing the power and dynamics of social networks.
The issue being discussed was whether creating a “social network for customer feedback” was a good or bad thing for the organization. One of the executives commented “I’d hate to empower our customers to complain because there is a lot of things we do wrong that they could complain about and opening that dialog up to the public could be dangerous, risky to say the least”.

Hmm….so ignoring the issues and hoping customers don’t talk to other customers is a better strategy? Do you think maybe your customers could actually help you solve the very problems that create the complains? Do you think your employees agree with your customers but don’t dare speak up?

Business bureaucracy has brainwashed many people into thinking “nothing can change so hide the truth”, don’t put things out in the open because it is dangerous to admit shortcomings publicly. The social web is dangerous to the bureaucracy of business because it enables customers and employees to “openly discuss and share the very issues that ingrained bureaucracy has caused.”

Businesses Fear the Social Web

Jay Deragon:

We were recently meeting with one of the top executives of a Fortune 500 company and discussing the power and dynamics of social networks.
The issue being discussed was whether creating a “social network for customer feedback” was a good or bad thing for the organization. One of the executives commented “I’d hate to empower our customers to complain because there is a lot of things we do wrong that they could complain about and opening that dialog up to the public could be dangerous, risky to say the least”.

Hmm….so ignoring the issues and hoping customers don’t talk to other customers is a better strategy? Do you think maybe your customers could actually help you solve the very problems that create the complains? Do you think your employees agree with your customers but don’t dare speak up?

Business bureaucracy has brainwashed many people into thinking “nothing can change so hide the truth”, don’t put things out in the open because it is dangerous to admit shortcomings publicly. The social web is dangerous to the bureaucracy of business because it enables customers and employees to “openly discuss and share the very issues that ingrained bureaucracy has caused.”

Wall Street's Next Crisis: Commercial Real Estate?

Jesse Eisinger:

"In their own way, however, commercial-real-estate loans were no less foolish than those made to home buyers with speckled credit . . . The implosion is going to be a refreshingly simple and familiar story.

In 1995, $15.7 billion worth of commercial-mortgage-backed securities were issued. Through the third quarter of 2007, $196.9 billion was issued, according to Commercial Mortgage Alert, a trade publication. That amount means 2007 will be a record year, even though issuance collapsed in the fourth quarter as investors panicked over the credit crunch. Right now, there is about $730 billion in commercial-mortgage-backed securities outstanding. "Not only have we been in a rising tide, but the loans are very different in underwriting standards than even five or 10 years ago," says Alan Todd, head of commercial-mortgage-backed-securities research at J.P. Morgan. "We haven't been through a cycle yet" with these new structures, he adds ominously."

Investors own about one-fifth of Bay Area homes in foreclosure

Erin McCormick & Carolyn Said:

Israel Medina admits he got too gung ho about the idea of getting rich by flipping Bay Area real estate.

Medina, a Concord resident who ran a limousine company before wading neck-deep into the housing market, has seen not one, but 11, of his Northern California properties move into foreclosure in the past year, he said.

"I was a real estate tycoon; I had everything," said Medina. "Now I have nothing."

A Chronicle analysis of public records shows that speculators like Medina played a significant role in the region's subprime loan meltdown.

These real estate gamblers are hardly the struggling home buyers often portrayed as victims of the Bay Area's and nation's foreclosure crisis. Some bought houses as often as other people buy shoes, rarely putting down any money. The speculators were betting that home prices would continue to shoot up. Instead, when the market started softening and prices sagged, many of their properties ended up as foreclosures.

The Making of a Corporate Athlete. Or, conditioning for executives

Jim Loehr & Tony Schwartz:

Some executives thrive under pressure. Others wilt. Is the reason all in their heads? Hardly. Sustained high achievement demands physical and emotional strength as well as a sharp intellect. To bring mind, body, and spirit to peak condition, executives need to learn what world-class athletes already know: recovering energy is as important as expending it.

If there is one quality that executives seek for themselves and their employees, it is sustained high performance in the face of ever-increasing pressure and rapid change. But the source of such performance is as elusive as the fountain of youth. Management theorists have long sought to identify precisely what makes some people flourish under pressure and others fold. We maintain that they have come up with only partial answers: rich material rewards, the right culture, management by objectives.

The problem with most approaches, we believe, is that they deal with people only from the neck up, connecting high performance primarily with cognitive capacity. In recent years there has been a growing focus on the relationship between emotional intelligence and high performance. A few theorists have addressed the spiritual dimension—how deeper values and a sense of purpose influence performance. Almost no one has paid any attention to the role played by physical capacities. A successful approach to sustained high performance, we have found, must pull together all of these elements and consider the person as a whole. Thus, our integrated theory of performance management addresses the body, the emotions, the mind, and the spirit. We call this hierarchy the performance pyramid. Each of its levels profoundly influences the others, and failure to address any one of them compromises performance.

Global Property Price Index

Sean Olender:

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

Tom Abate:

Fremont resident Rakesh Guliani likes to say that a Roomba robotic vacuum cleaner saved his marriage.

Messy floors had been causing friction, says the 41-year-old Guliani (pronounced Goo-liani). His wife, Kavita, 35, was particularly annoyed by the footprints he and their daughters, Ashna, 10, and Rhea, 6, tended to track through the house.
"I am soccer coach to both of them, and when we come in with our dirty cleats, I am more tolerant of that because I am tracking dirt, too," says Guliani, vice president of the job-placement firm Park Computer Systems. He vacuumed several times a week but it never seemed enough to satisfy his wife, a technical writer for Google.

"I was sucking the thread out of the carpet," says Guliani, who bought a Roomba last fall and programmed it to scour the carpets for dust, dirt and grime. Regular cleanings by the Roomba restored household harmony. "It never gets bored and it never complains," he says.

The Guliani family is at the cutting edge of what may be the next technological revolution - the emergence of software and hardware capable of performing tasks once reserved for that race of toolmakers called Homo sapiens.
"Sometime in the next 30, 40, 50 years we will have human-level machine intelligence," predicts Marshall Brain, a computer science teacher turned author and technology forecaster.

Real estate assistants invaluable in keeping the industry running

Carol Lloyd:

This piqued my curiosity about a job that often operates invisibly behind the scenes in the most high-end segment of the market. Superachievers in the real estate world, where workaholism is an industry standard, probably work longer hours than lawyers and high-tech professionals. And generally, real estate agents do not hire assistants until they become victims of their own success: working seven days a week, yet still getting more work than they can handle. (One National Association of Realtors bulletin advises that you need one assistant for every 50 clients.) Is being an assistant a way to earn a decent living in real estate without the pressures of going out on your own? Or is the job a road to long hours, low pay and possibly dealing with agents who look down on you?

According to a 2005 survey by the Realtors' association, 1 in 5 agents has at least one personal assistant. Fifteen percent report having one personal assistant, and 4 percent report having two or more assistants. The association breaks the assistant category into three jobs: personal assistants who are licensed as real estate agents, personal assistants without licenses, and virtual assistants (who do paperwork from home as contract workers). The survey found that most personal assistants process new listings and enter them into the MLS, photograph listings, send out mailings, manage escrow paperwork and schedule appointments.

As one might have guessed, no two real estate assistants I interviewed defined their jobs the same way. (I found none that included pipe-loading among their duties, and all expressed convincing affection and gratitude for their bosses.)

Sarasota Real Estate Auction: A Bitter Aftertaste

Robert Plunket:

WHEN REAL-ESTATE MARKETS sour, owners of luxury homes and condos sometimes cling to a comforting theory, at least in the slump's early stages: Their properties are pretty much immune to a downturn, just as their own lives are immune to the daily economic tribulations of those sad and pitiful Janes and Joes forced to reside in those tacky $600,000 hovels out by the Interstate.

Alas, reality and theory don't always coincide.

Consider Sarasota, Fla., a small city in which property values are king and which was one of the hottest of the hot spots in the U.S. real-estate bubble.

Hugging Southwest Florida's Gulf Coast, with a sparkling downtown facing a gorgeous bay, 35 miles of white-sand beaches, a wealth of museums, opera, ballet and theater, plus a well-heeled population of sophisticated retirees and second- and third-home owners, Sarasota thought the ride would never end. Home prices jumped 150% from 2000 through 2005, according to the National Association of Realtors. Condos rose about 130% in the same span. And those figures, which also cover neighboring Bradenton and Venice, may understate the gains in Sarasota proper and its barrier islands, which boast a disproportionate share of the area's to-die-for properties.

But now prices are in something approaching a free-fall. The current readings say they're down 19% since the end of 2005 and 10% in the past year. Lots of residents who had considered selling their homes during the craziest of the craziness, but didn't, are wringing their hands.

Perhaps the market's hottest sector during the boom was luxury properties. "We were always under priced, compared to Naples and Palm Beach," says Michael Saunders, a woman considered one of the doyennes of Southwest Florida real-estate brokers. "Then, in '04 and '05, we outdid ourselves catching up."

US property risks

Financial Times:

The subprime residential lending crash has dealt the market a body blow. But its aftershocks could hit lenders with a second real estate-related punch, if the highly leveraged commercial property market succumbs to the contagion.

Banks have significantly tightened their lending standards this year, and commercial real estate has felt the effects particularly quickly. Commercial mortgage-backed security issues, which finance about half of deals and were a key driver of the recent market boom, dropped 84 per cent in October from a record high of $38.5bn in March. At one point, some loans actually exceeded property values. Now, typical loan-to-value ratios have retreated to about 70 per cent – when deals are completed at all.

Lenders have, appropriately, returned to their senses. But some may have changed from partygoer to policeman too late. Tough new standards will not reduce risk on ambitious past financings. US banks could see $11bn to $78bn of commercial real estate losses if the lending crisis spreads, according to Goldman Sachs. Each lender’s risk would depend on its mix of whole loans and CMBS, as well as newer, riskier commercial real estate collateralised debt obligations and even riskier B-note or mezzanine debt. Those more speculative lending markets were bursting at the seams with demand this year. But they have never been tested by a serious downturn.

SF Chronicle interview:

Daniel Mudd, 48, is president and chief executive officer of Fannie Mae, the giant government-sponsored entity that, along with Freddie Mac, buys and packages billions of dollars of mortgage loans for resale in secondary markets, which helps to keep interest rates low.

Mudd moved to Fannie Mae from General Electric Co. in 2000 and has previously served as chief operating officer, responsible for the origination, systems and administration areas of the company. At GE, he spent most of his career leading financial-services corporations in the United States, Asia and Europe.

Mudd graduated with a bachelor's degree in American history from the University of Virginia. An officer in the U.S. Marine Corps, he was decorated for combat service in Beirut. After he left the service, he obtained a master's degree in public administration from the John F. Kennedy School at Harvard University.

He lives in Washington with his wife, Maura, and four children.

The following interview was edited for space and clarity

Q: How did the mortgage crisis happen and who's to blame?

A: For a period of time, the market grew. It grew too fast. It had a big adjustment and a period of big dislocation came in the summer, and now we are in a period of volatility and uncertainty. One day it looks good, the next day it looks bad, the third day is a little better, so two days down, two days up. The market is looking to find a new level. And by the market, I mean home prices, housing starts and mortgage rates.

Is it in anybody's interest to see this amount of dislocation? No, I really don't think so. Rates were low for a long period of time. Home prices accelerated for a long period. Both lenders and borrowers had a huge amount of confidence that ultimately led to overconfidence. The lack of other things to invest in caused people to invest in real estate, and a lot of the products, and I think it's specifically pronounced in California, were designed to get monthly payments down at the beginning.

The artificial depression of prices in the beginning causes them to adjust in the end, upsetting the middle, and that becomes really hard. So I think the trigger was a lot of the subprime products that are now coming home to roost.

The Segmented Society

David Brooks:

Van Zandt fell for the Beatles and discovered the blues and early rock music that inspired them. He played in a series of bands on the Jersey shore, and when a friend wanted to draw on his encyclopedic blues knowledge for a song called “Tenth Avenue Freeze-Out,” Van Zandt wound up as a guitarist for Bruce Springsteen and the E Street Band.

The 1970s were a great moment for musical integration. Artists like the Rolling Stones and Springsteen drew on a range of musical influences and produced songs that might be country-influenced, soul-influenced, blues-influenced or a combination of all three. These mega-groups attracted gigantic followings and can still fill huge arenas.

But cultural history has pivot moments, and at some point toward the end of the 1970s or the early 1980s, the era of integration gave way to the era of fragmentation. There are now dozens of niche musical genres where there used to be this thing called rock. There are many bands that can fill 5,000-seat theaters, but there are almost no new groups with the broad following or longevity of the Rolling Stones, Springsteen or U2.

People have been writing about the fragmentation of American music for decades. Back in the Feb. 18, 1982, issue of Time, Jay Cocks wrote that American music was in splinters. But year after year, the segmentation builds.

Last month, for example, Sasha Frere-Jones wrote an essay in The New Yorker noting that indie rock is now almost completely white, lacking even the motifs of African-American popular music. Carl Wilson countered in Slate that indie rock’s real wall is social; it’s the genre for the liberal-arts-college upper-middle class.

Technology drives some of the fragmentation. Computers allow musicians to produce a broader range of sounds. Top 40 radio no longer serves as the gateway for the listening public. Music industry executives can use market research to divide consumers into narrower and narrower slices.

Useful words. The advertising and marketing approaches of the past don't work in a highly segmented society.

Housebound: Why homeownership may be bad for America

Clive Crook:

For decades, owning a home has been one of the safest and most profitable investments an American could make, and the country has been alive to the fact. Households in the United States, taken together, spend nearly all that they earn, and save next to nothing. It is thanks only to high homeownership and rising home prices that they have seen their net worth grow. The nation’s housing has been both its savings and a key enabler of economic expansion: The long boom in house prices powered consumption that would otherwise have seemed unaffordable. That is why falling house prices—something that the country as a whole has not witnessed since the 1930s—are hurting so much, and why they pose such a danger to the economy.

The cultural importance of homeownership has deep roots. In many societies, owning property was once a requirement for full citizenship, and almost all Western democracies gave property owners the vote first. Even so, the United States is unusual in the importance its citizens attach to owning a home—and, as driving through the country’s endless suburbs leads one to conclude, preferably the biggest home possible. Lavish tax breaks have expressed and redoubled the enthusiasm for many rooms of one’s own, and for the titanic mortgages required to pay for them. The cultural attachment came first; the tax relief duly followed. Together, they seem immovable.

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Low fee? Let's deal

Frank Nelson:

IF you think these must be tough times for real estate agents, John Thyne has news for you.

"The current market is great for us," says the co-founder of Santa Barbara-based Goodwin & Thyne Properties, one of a growing number of discount brokers serving Southern California.

The depressed state of the housing market has renewed debate over commission charges, with some people arguing they're too high and should come down while others make the case for raising rates. In this uncertain environment, sellers are starting to pay more attention to discount brokerages and those that offer flat-fee services.

That doesn't surprise Thyne, who reckons that homeowners, squeezed between stagnant sales and static prices, and watching already skinny profit margins shrink even more, are looking for alternatives to traditional, more expensive brokers.

And that's just what Goodwin & Thyne has been offering since January 2004. The company, trumpeting "full service at a fair price," charges sellers only 1.5% commission, a far cry from an industry average hovering just above 5%, of which half typically would go to the seller's agent.

Big Rebukes On Title Referrals

Kenneth Harney:

Rigged appraisals, lax underwriting and toxic loans may dominate the headlines, but they are hardly the only issues causing problems in residential real estate.

The federal government and state regulators are targeting other housing-related misdeeds that can cost consumers big money, especially involving alleged under-the-table kickbacks among builders, real estate brokers, loan officers, mortgage bankers and title insurers. Buyers and sellers are rarely aware of the cash changing hands and thus are paying needlessly higher prices for services.

In a little-publicized series of legal moves in the past five weeks, regulators have reached settlements with six major home builders and one of the largest title insurers in the country. Under the settlement terms, the firms have agreed to pay the government a total of $6.4 million while denying that they committed any illegal acts.

The largest settlement was announced Nov. 16. First American Title Insurance agreed to shut down 84 "affiliated partnerships" formed in Florida with real estate brokers, mortgage brokers, banks and home builders. Federal and state investigators charged that while the affiliates claimed to be title companies, they were actually referral conduits that performed few, if any, title services. Officials said they existed primarily to steer lucrative title insurance business to First American, which split consumers' insurance premiums with participating "partners."

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