Sunday, January 4, 2009

The Foreclosure Crisis; Real Estate Regulatory Reform

Today's Indianapolis Star contains an article discussing ideas by legislators as to how to address the foreclosure crisis.

I have long said on these pages, that we need to take a comprehensive look at real estate regulation. The trouble is we have too many cooks in the kitchen. The Secretary of State regulates mortgage brokers, while the Department of Insurance regulates title insurance agents. Then you have the Department of Financial Institutions which regulate many lenders and the Attorney General's Office which regulates real estate agents and appraisers.

While I was head of the Title Insurance Division, we tried to get the agencies to work together. DFI was great to work with. The Secretary of State's office was aggressive in regulating mortgage brokers, though sometimes there staff was hurt by a lack of experience critical to understanding the complexities of the real estate transaction. The Attorney General's Office was very non-aggressive (trying to be polite here) when it came to regulating appraisers and real estate agents. There was a lot of frustration in the various real estate industries, that we could not have a comprehensive regulatory approach, and all the regulators on the same page in terms of enforcement.

At the outset, we need a change in philosophy in this country. Our approach has been that we should try to put everyone in a home to the point where government subsidized and helped make mortgages available to people who were not financially in a position to own a home. There is nothing wrong with renting if you can't afford the traditional way of buying a house. That's a mindset that I believe is changing, thankfully.

One of the things that the House Financial Institutions Committee needs to look at closely is the role of the appraiser in helping mortgage brokers and lenders put people into homes or into refinanced mortgages that they clearly could not afford. At the heart of every mortgage fraud scheme is a willing appraiser willing to produce phony numbers to help the scheme move forward. The same concept is a major cause of the foreclosure crisis. Many homes that are in foreclosure are the result of homeowners being allowed to get mortgages because of inflated (or in some cases deflated) appraisals which allowed the loan to move forward.

In the article, the legislators talk about forcing mediation on mortgages going into default, a moratirum on foreclosures or the State providing financial assistance to homeowner's finding themselves struggling to pay their bills. All those are treating the symptoms of the problem, which namely is people being put into homes or refinanced mortgages that they could not afford. It was a house of cards that was destined to fall eventually and did.

If legislators wants to make helpful real estate reforms, they should look take a look at the entire real estate regulatory structure in Indiana and in particular the role of the appraiser in making these mortgages, that end up in default, happen.


Pete Boggs said...

Government's role in the foreclosure epidemic IS MOST OF THE PROBLEM. Fannie Mae & Freddie Mac are creations of the US Congress. "Quasi" public entities are only that; a bride of Frankenstein stage play, that pretends such marriages are functional or legitimate. Confiscatory property taxes (in addition to innumerable other taxes & fees), which are actually a back door income tax increase (think about where you get the funds to pay the unjustifiable increases) have blurred the lines of ownership. We've given up on the ownership society & fast become an onerous society, of bureaucratic bloat, designed to serve the self interests of a political class. We're being haunted at present by the ghost of Constitutional Literacy.

Paul K. Ogden said...

I agree Pete. The major culprit i the crisis is Fannie Mae and Fredie Mac encouraging people to become homeowners when they were not ready and couldn't afford the homes. It's a mentalilty government has had these last several decades that home ownership should be encouraged to the point of government subsidization.

roger61611 said...

Subsidies and incentives and Fannie and Freddie and the deductibility of mortgage interest and the 250k/500k tax-free profit on home sales, all combine to do one thing - drive up home costs.

We need to end subsidies for home ownership. (Yes, I own a home)

But the other big reason Indiana is the scene of so many foreclosures is the General Assembly and state government.

Realtors have a setup that they use to keep "sold" prices as secreted as possible.

Appraisers are essentially criminals in the conspiracy.

Two suggestions -

1) All "sold" prices available online on a decent website in near-real time, so everyone can see what houses sold for. The Star's execrable site does not count.

2) All appraisals to be made available to the public in the same way.

I used to own a house that I purchased from the bank after it was foreclosed on. House was in a crummy area. Previous owners were poor, black, and were railroaded into paying $61,000 for ahouse worth no more than $20,000, and the conductors on that railroad were a mortgage company, a Realtor, and an appraiser, all of whom conspired to rip off (a) the buyer and (b) the mortgage purchaser, Deutsche Bank.

Think about real estate in the US for long enough and the only conclusion a sane person can reach is that the government is a criminal conspiracy.