Thursday, September 18, 2008

Being in the Bubble

In 2005 I came to know a very savvy real estate broker who was among the youngest female brokers in the State of Michigan. Starting out with very little, she worked really hard, working two jobs for years, selling houses, buying houses, and renting them out. (She told me a story that when she was 18 she bought her first house with cash she made as a waitress and real estate agent. Keeping all her cash suspended in loose bundles above her drop ceiling, lying on her bed she would hit her panels from time to time and it would rain dollars. She loved the feeling.) When I met her she owned 30 houses free and clear in various neighborhoods, 31 including her spread off Lake Michigan. At the time we met she was ready to retire.

"Do you want this business," she asked? "You're a smart girl." She could not dream of selling it to just anyone, whether the sell would be profitable or not. It had to be sold on her terms in ways that she demanded; money was most certainly not the only term. I imagine also that not too many people would hang around long enough to meet her demands and hang around you had to do. She's a rather complicated personality who never had anyone work for her for more than one year. Real estate agents rarely kept their license with her brokerage company. Everything had to be done her way. When she got angry her red hair seemed more fiery and her bluish green eyes were more piercing.) When I met her real estate agents would come and go as a revolving door. She didn't seem to care. After 35 years in the business, she had developed a loyal client based and had her community locked up.

She convinced me to get my real estate license which wasn't terribly difficult to do and I assumed it wouldn't take too much of my time. I'm a sucker for learning and I'm always interested in hands on investment opportunities. Before getting my license I would pop in to visit her often. She was quick and observant; she was also somewhat of a barracuda with great aplomb and ease. She did not have a business degree, nor had she graduated from college, but she knew how to run her business. She kept overhead low, charged application fees for her mainly mid to low income clients, and lavished praise and promised assistance on anyone who came through her doors, including the occassional person who had run out of gas on the nearby Interstate. She had been in a premier spot in a suburb of Detroit for 35 years so there were many walk-ins.

During this time there were many more walk-ins than normal as she advertised, namely by word of mouth, that she could get for her loyal clients, those who live within the city she had locked up, "no doc" mortgages. What are no dock mortgages, "I asked?" "No doc means no doc," she quipped. "You don't have to prove anything," I continued?" This seemed wild. "Do you mean to tell me anyone who walks through that door can get a loan without proving they can afford it?" "Yep!" "It's a special program that HUD offers to first-time home buyers to get them into houses." Over the months I witnessed scores of people walk through her door with utility bills, a modest down payment, and bogus claims of working for this or that employer. Right! My new mentor was always on the phone with her select mortgage reps who loved the sound of her commanding yet pleasing voice, knowing she would make them plenty loot on any given day. They seemed to worship her.

If you're thinking she did shady deal, she didn't. She did everything by the books. But the crazy thing to me was what the book allowed! To this neophyte with a interest in real estate, the book seemed whacked! Yes, it would be great for first-time buyers to buy a home, but without documentation that they could afford it, even the homes in her neighborhood that were going between $60k to $80k. As they filed in one after another I was appalled. It was obvious that these people could not even pay for a $10k home, and here they were getting mortgages way beyond what they could afford. But at the time everyone seemed happy. First-time homeowners were in their homes, mortgage companies were paid well, banks securitized mortgages, and she was racking in the dough.

But it seemed very much like a huge bubble to this real estate neophyte. Everybody was so happy, yet there was a sadness in my gut. I kept thinking that somebody's gonna have to pay for this. But then again maybe I was missing something. It just seemed crazy that banks and mortgage companies would allow such a thing. Surely, they knew better than me. Maybe they knew something that this upstart real estate agent did not know. What could it be? I didn't know but I got my license, worked in her office part-time for one month, and moved my license elsewhere thereafter. I couldn't do it. It felt incredibly wrong, incredibly sinister. But who would the bust affect? Surely it was coming.

The spot where the real estate office had been for 35 years is now a jewelry store. The broker is no longer in real estate, having sold the premier location on a land contract. She is not partially retired and sells real estate in the upscale lakeside community in which she lives. But I'm sure that many of the houses she sold during the bubble is now in foreclosure and the banks and mortgage companies who secured these loans are now being bailed out by the Feds. But who is responsible for this mess? All of those involved were implicit or complicit in our current financial crisis. There is enough blame to go around. My concern, having been in the midst of the bubble and now witnessing the bust, is that it must not happen again. Can those who devised such loans be charged with criminal misconduct? This does not seem likely, but maybe it should be.


Toronto real estate agent said...

It's hard to find the responsible one - is it FED with its interest rate policy used few years ago? Government? Greedy realtors? Clients, who bought houses they were not able to pay? Or it's just a part of an anonymous economic cycle? I am not sure who has the biggest piece of this cake. I just hope it will be over - soon!
Take care

judith ellis said...

Hi Toronto Real Estate Agent - There is no doubt that there is plenty blame to go around. However, there seems to be no doubt that homeowners are definitely en masse the biggest losers.

I am less incline to think that this financial crisis is a part of an "anonymous economic cycle." It feels very obvious and deliberate to me. But I, like you, hope that it will end soon. I also hope that there are stricter personal accountability measures for all.

Thanks for your comment. Do pop in again.