REALTORS’ Deal with the Devil

After recently taking REALTORS to task for advocating more “government backed mortgages” and looser credit limits as the way out for the real estate industry crisis, I thought perhaps I was too harsh on the industry. It’s possible that most REALTORS don’t realize that every time they argue for the government to subsidize un-credit-worthy taxpayers that they are really arguing that the government steal money from the existing homeowners - through taxation to bail out Fannie and Freddie everu so often. Maybe most REALTORS were just too shortsighted to understand that every increase in taxation hurts their future source of business - the future seller who becomes the future buyer. And since most REALTORS only last about 18 months in this business anyway, maybe most REALTORS really don’t care about this stuff, since they are only focused on where they can get a commission in the next 45 days.

Then, something frightening was quoted in the Wall Street Journal on Friday, May 9th, page A3 and I realized that the REALTORS have made the ultimate deal with the devil. In an article by Ruth Simon and Nick Timiraos entitled “Mortgage Firms Cool to Principal-Cut Plan,” no REALTORS are mentioned. There is a proposal by the U.S. House of Representatives that was passed this week that calls for:

…mortgage companies to reduce the principal on troubled loans. In exchange, the Federal Housing administration would pay off the current loan and issue the borrower a new FHA-backed mortgage.

As one might expect, the lenders aren’t too excited about this proposal. Essentially, the government is trying to lure them with a discounted bailout. They would lower the “principal” on the loans that are struggling - which means discount the value of their assets - and the government would give them a quick buy-out. The deal is: they get paid off and no longer risk the potential of foreclosures or defaults. Apparently, legislators don’t recognize how mortgage companies make money. They don’t make it on exchanging principal. They earn a living on interest income. Lowering the principal - in exchange for not taking the risk of foreclosure - it a double whammy. They not only lose money they have already lent, but they lose the option to earn any potential profit on the lending.

Mortgage companies are in the risk business - because the risk is where the interest-payments come from. Offering them only a principal-buyout - at a discount - is essentially asking them to take an immediate loss. It’s a loss, because they already loaned the full principal - and will only be paid a partial amount of it back.

It’s no wonder that the Chairman-elect of the Mortgage Bankers Association said that “he sees no rush by mortgage lenders to write down loans” under such a scheme. Especially since the government is expecting a 15% discount on the home’s current appraised value. No sane businessman could take such an offer. Only the bizarre math of a government bureaucrat could think such a scheme acceptable.

But it gets worse, which is where the REALTORS should be very, very scared. Remember, no louder voice than the National Association of Realtor’s incoming president-elect has been excoriating lenders as “stingy” and the source of the housing market’s woes. And REALTORS far and wide have been promoting more FHA-backed lending (on the backs of the taxpayers) as the solution, even if the method involves robbing lenders of 15% of their assets.

The danger comes - publicly and loudly - from the mouth of the Devil’s Advocate himself: Massachusetts Democrat Rep. Barney Frank. When faced with the potential that mortgage bankers might not voluntarily line up for the government “stick up” plan, he said:

“I want to put the servicers on notice. If we see a widespread refusal on the part of servicers to cooperate voluntarily in what we see an an important economic problem… they can expect much tougher regulation in the future.”

Essentially, what Congress is saying is: Give us your money, or we’ll shoot.

Since all lenders are evil, by nature and in the eyes of government, who should care if we engage in a little highway robbery? If they won’t abrogate their own contracts with consumers, we’ll do it for them. If they won’t stand by while we willingly gore their bottom lines, we’ll make sure we get them in the next round by regulating them more harshly. Do what we say, or you’re going to get it big time later, mister!

Let’s not forget that every brash stick-up man has a little side-kick. In this case, that’s the REALTORS. Remember, those evil lenders are holding up the recovery because they are “stingy” with their lending and won’t have “compassion” for borrowers in trouble by voluntarily losing money for them. Yeah, yeah, give it to him boss; you can almost hear the snivelling sidekicks egging on the bullies.

Ironically, the REALTORS are defeating themselves. If they want lenders to lend more, the last thing they should be doing is advocating a government-led destruction of their business. Who will be left to lend to anyone, after the industry takes another 15% hit on their assets? When interests rates soar, because the risk of lending will become riskier, nobody should be surprised. If the government can come into any industry and just decide to cancel all of their contracts “or else face tougher regulation in the future,” then less companies will stay in the lending business. If REALTORS think lending is stingy today, just wait how credit tightens after the government raids the mortgage industry.

Ironically, this isn’t news. In fact, while reading the Wall Street Journal article, I was reminded of a passage from Ayn Rand’s Atlas Shrugged, where businesses across the country started closing down and walking away because government regulators had essentially stolen every profit and asset they had through “tougher regulations.” Worried that the economy was about to collapse, government regulators (Rand calls them “looters”) got together in a secret meeting and came up with “Directive 10-289.” The Seven Points of Directive 10-289 attempted to harnass industry to the welfare of the people - the essential point of Atlas Shrugged. Two of the points, it seems, could have been written by Barney Frank himself:

In the name of the general welfare to protect the people’s security, to achieve full equality and total stability, it is decreed for the duration of the national emergency that….

…. Point Two: All industrial, commercial, manufacturing, and business establishments of any nature whatsoever shall henceforth remain in operation, and the owners of such establishments shall not quit, nor leave, nor retire, nor close, sell or transfer their business, under penalty of the nationalization of their establishment and of any or all their property….

… Point Seven: All wages, prices, salaries, dividends, profits, interest rates and forms of income of any nature whatsoever, shall be frozen at their present figures, as of the date of this directive. (But taxes will be allowed to increase as needed for the public good)…

Frightening how reality mirrors philosophy? Note how Directive 10-289’s Point Two mandates that business owners can’t “quit, leave or retire” under penalty of nationalization. Isn’t that what Mr Frank’s “tougher regulations” will ultimately add up to? Point Seven freezes all “profits and interest rates” which we’ve heard suggested by Presidential candidates who want to have mortgage moratoriums to solve the crisis. What is a 15% discounted forced sale of assets if not a “frozen” form of income?

REALTORS may not realize that while the lenders are in the sights of the regulators today, they could just as easily become their next targets in the future. Every attack they sanction by government or scheme to transfer lending risks on to the taxpayer only erodes the possibility of a healty real estate industry in the future. When the Devil comes around for payment, REALTORS might find that they are next in line for a “government mandated discount” - on their commissions. How hard would it be for government regulators to argue that buyers and sellers are being stifled by high commissions? Wouldn’t it be the next step for government to expect all REALTORS to discount their commissions by 15% - maybe more?