Our government recently nationalized a huge part of the economy over a weekend when the markets were all closed. Perhaps you’ve heard of housing? It’s certainly a large part of our local economy. Without getting all technical, we can say the organizations that go by the names Freddie Mac and Fannie Mae are what make 30-year fixed mortgages possible without buyers having to come up with 50-60% down payment. If Freddie and Fannie were to fail… oh, wait, they did. Let’s instead say if Freddie and Fannie were to vanish, it would change housing radically. We might become much like many Third World countries, where only the wealthy can own any real estate.
So, not allowing Freddie and Fannie to crater has some big national benefits. It also presents some possible big downsides. Most importantly, it may cost all of us many billions to keep them running (that’s billions with a B). Since our government runs a deficit, and no courageous politician is likely to propose taxation to pay for it, they will have to print those dollars. A thoughtful young Realtor raised his hand at our agent office staff meeting this week and asked, “Say, isn’t that just going to raise inflation, as in $10-a-gallon gas?” I suppose that is a distinct possibility, my young friend. At this meeting of real estate agents however, nobody offered a better answer. Inflation acts as a secret tax and will impact the poor and punish renters as well as property owners. Still, we as a nation spend billions of dollars on lots of things. Few of those expenditures have as big an impact on you, personally, than housing. In life there are always trade-offs, and nobody gets something for nothing. We all hate the word tax, though, so let’s just not say it. Let’s just quietly agree the secret tax called inflation, levied to protect the mortgage machinery, might keep us from descending to Third World feudalism. That’s a good thing, right?
How did Freddie and Fannie fail? Fraud-Greed-Stupidity-Bad-Luck.
The mortgage crisis is abstract to most people, like it’s taking place at some high level, or just a factoid on a TV finance show. For me, personally, helping folks buy and sell property in and around Redding, things that affect Freddie and Fannie hit close to home. It’s harder now for legitimate buyers to get mortgages, and a lot of people are having their homes foreclosed. I think all this can be attributed to the things I believe are responsible, which I describe as the spectrum of Fraud-Greed-Stupidity-Bad-Luck.
Let’s look at foreclosures, since lately there have been a great many, and they impact everyone. Foreclosures are the local face of Freddie and Fannie’s failure right here, right now. As an agent I see many local foreclosures as a direct result of Fraud-Greed-Stupidity-Bad-Luck. If you arrange those circumstances along a spectrum from Fraud to Bad Luck, it becomes the classic bell-shaped curve. In the fat part of the curve are most foreclosures: a result of Greed and Stupidity on behalf of both lenders and buyers. There’s no shortage of Greed and Stupidity.
At either end of the spectrum, and occurring less frequently, are Fraud and Bad Luck. Greed and Stupidity are mundane and predictable. Fraud and Bad Luck are neither.
Being a Realtor in the current Redding real estate marketplace means dealing with many bank-owned homes, or homes that will soon be bank-owned. In the jargon of the trade, the foreclosed properties are called REOs, for Real Estate Owned. I’d prefer not dealing with these, but given that the market is now about one-third foreclosures, well, sometimes that’s the job. It’s not easy being a repo-man for people’s houses, but it’s somewhat easier if you can detach yourself emotionally. I tell myself, “I didn’t cause this to happen. I’m just here to pick up the pieces.” I hope everyone just moves on, and we all have some dignity left at the end of the day. It doesn’t always work out that way.
Other parts of our state are experiencing many more REOs than we are. Vast swaths of valley towns to the south of us are mired in foreclosure. Often when there is so much money in play, it draws organized crime. It’s not hard to see how the larger mess might have come about: phantom buyers, over-inflated appraisals, kickback schemes. All predicated on easy credit. Actually, “easy credit” is a wild understatement. They were giving money away. Was there any reason to believe a gushing cash flow wouldn’t draw fraudsters? It was a classic bubble. Who was watching over Freddie and Fannie? Oops, nobody.
My most memorable direct experience with fraudulent homebuyers was in Red Bluff. I got a call to list a foreclosed property, a “charming cottage,” in agent-speak. To me it was a $100K bungalow on a floodplain, with a $300K view of Lassen. I was reluctant to take a Red Bluff listing because I can’t do a good job keeping an eye on things, so I partnered with a Realtor friend who lives in Tehama County and took it on. This house had been auctioned on the courthouse steps with no takers, and went back to the note holder, in this case Freddie Mac (yes, your money, i.e., YOU. See the connection?). The house had been bought about a year earlier by a single man who had never made a payment. It took over a year to foreclose on it.
I made an initial visit, which is called the Occupancy Check, to see if anyone was still living in Freddie’s foreclosed home. Indeed there was. As we drove up, little kids signaled the occupants inside. That action looked awfully well organized. It occurs to me the kids were lookouts. Uh-oh.
What is it about meth users? Oh, yeah, the hair, the teeth and the eyes. It’s always unmistakable, and of course the house was trashed. What a scourge is meth. We talked to the occupants, who claimed to be relatives of the buyer. I told them what would happen. To avoid seeing the sheriff, we could offer them $2,000 to move out, leaving the property “broom clean” in two weeks’ time. That’s called Cash For Keys. They were all too eager to comply. They seemed to know the drill. I felt bad about the kids as we drove off.
My Red Bluff partner was a longtime agent but new to REOs. He knew the house. It had been remodeled the year earlier before being sold, and had been done up pretty cute. He did some digging and discovered the buyer named on the deed was institutionalized in an Alzheimer Care unit. Niiice. The “relatives” of the buyer had lived in the house for a year for free, and trashed it in the bargain. I told my agent friend to keep an eye on it as we waited out the two-week Cash For Keys period.
As it happened, I couldn’t be there for the lockout. I learned later that the occupants had spent the entire two weeks on one long yard sale. They were selling the appliances and anything else of value inside the house, including the water heater. Freddie Mac received a fairly gutted house.
Let’s total this up: The “buyer” lived there a year free, took everything of value, trashed the place, got $2,000 cash and are free to buy or rent elsewhere with no black marks at all on their credit record. Good gig if you can get it. Freddie Mac policies inadvertently enable meth users. Talk about unintended consequences!
I’ve no idea if this caper is common, but it’s the real face of fraud in our community, and it impacted Freddie Mac directly. I don’t know how often this scenario may have been repeated across the country, or whether anyone will ever be held accountable for this big mess. The news over the weekend was that Freddie and Fannie had failed. It wasn’t news to me. Will anyone be punished for the lack of oversight that led to fraud? Oh, definitely. You and I will bear the cost.
As for Bad Luck, one instance stands out. I won’t go into too much detail, for reasons that I’ll make clear, but the story is compelling. The subject was the longtime home of a locally well known community leader, and theirs was also a Feddie Mac mortgage that had gone into default. I didn’t know her personally, so I thought this was going to be a good story I’d be telling everyone over a beer. “Hey, did I ever tell you about the time I evicted (locally well known community leader)?”
So I met with her to arrange the whole Cash For Keys routine. She wasn’t at all what I expected, which would have been the usual Greed or Stupidity. She was a victim of Bad Luck.
Her husband had become very ill. They had run through whatever medical insurance or other resources they could, and ultimately refinanced the house, until that was all gone too. They were left with nothing. They were getting by, but the house was no longer theirs.
As a side note, some banks encourage you as their agent to negotiate the dollar amount of the Cash For Keys, and will split the money difference with you, as an incentive. For these folks, I only wish I had more to offer. When the time came, they hadn’t prepared and didn’t know where they were going to live. She had friends in the community and had a place to go if we could wait longer. The banks hate delays. They know every day they have to wait, they lose more money. Too bad, so sad. I let them stay two more weeks.
On the final evening, we sat on the steps of the now empty house and they talked about their memories of the home. Here was an awkward moment. They talked about their son, and how he used to sneak out the second-story window. I asked where their son was now, and the answer came back: “Susanville.” I was silent. My young colleague, Erin, bless her heart, asked cheerfully, “What does he do there?” We three looked at her with incredulity. Oh, dear, what you do in “Susanville” is time.
I was so sad! But the evicted homeowner remained upbeat. I mean, she had the best game face ever. I was inspired. If I were in her shoes, I think I’d have been cursing the fates with shaking fist. From her I never heard a harsh word, and she seemed only to be looking ahead, for something better. She spoke at length about what a bright future our community has. I can see why she was well regarded as a community leader. This is still a small town and I hope you won’t know her name from this story. She earned my true admiration. She deserved better. But nobody beats Bad Luck.
Selling the house turned out to be Bad Luck for me. It took way too long to sell. It had no sprinklers and the lawn died, and it looked terrible. I felt bad for the neighbors. I tried to keep it watered myself. Then I got a call from a neighbor at 10:00 p.m. asking, “Did you know there is water running out the front door?” Uh, no. Racing down there, I found a burst water heater, and had to turn off the water to the whole house. The foreclosure arm of Freddie Mac is called Homesteps, and they declined to repair it, so there we are. Interior flood damage, dead lawn, dead plants, dying Realtor reputation among the neighbors. Sorry, folks. Bad Luck is contagious.
Like I said at the beginning, this all goes easier if you can detach yourself from the process. Good luck with that, repo men and women!
My spectrum model of Fraud-Greed-Stupidity-Bad Luck is an abstraction. The failure of Freddie and Fannie is not abstract. They have real impacts on real people, right here in River City. You can see it in the dead lawns of the foreclosed, and you may feel it in the future when you go to buy something with your possibly devalued dollar. The alternative to the weekend nationalization of Freddie and Fannie may have been unacceptable, but completing their rescue may have an impact on all of us with the secret tax of greater currency inflation. The news may seem far away and removed, but the effects may be hard on the dollar in your pocket. Encouraging home ownership is a good thing that separates us from the more mediocre nations of the world, but handing out money without oversight was wildly irresponsible. Tragically, nobody seems likely to go to “Susanville” for the fraudulent use of your money. Plan accordingly.
Skip Murphy and his daughter Erin are Realtors with Coldwell Banker in Redding, helping people buy and sell real estate. Which occasionally means working with foreclosures.
