Friday, August 26, 2005

Real Estate Fallout Predictions

So darn predictable. After the Nasdaq bubble burst, economically illiterate politicians pushed a bunch of anti-business laws marketed as protecting investors (lowlighted by Sarbanes-Oxley). When real estate tumbles, the Eliot Spitzers will have plenty of ripe targets. Mark my words, they will go after mortgage brokers because they get paid a commission based on how much the homebuyer borrows. Class action lawyers and politically ambitious prosecutors will find an “incriminating” email or two and use it to bilk millions from banks, lenders, or whomever.

From Forbes,

It helps to know what a typical broker's rake-off is. According to Wholesale Access Research & Consulting, they charge an average 1.5% for a conventional loan and 1.3% for a jumbo (over $360,000).

For the arithmetically challenged, this means that when you take out a $300,000 mortgage, the broker can expect to pocket around $4,500. Clearly, brokers don’t need to sell many loans to generate a decent income. Selling two such loans a month would yield $108,000 in yearly income.

I can foresee it now:

“My mortgage broker convinced me to borrow an extra $50,000….. the scumbag earned $750 more for himself because of my increased loan….. Now I am losing my house and it is all his fault....”

60 Minutes will chime in:

”....are you burdened by high mortgage payments….well, maybe you were a victim of fraud,… 60 Minutes tonight….”

Real estate bears would be wise to buy the google keywords now such as “mortgage fraud”, “sue my mortgage broker”, etc. before they explode like “Vioxx”.

Before Merck withdrew Vioxx from the market, it cost about $2 to get top placement in google search results. Smelling billions in lawsuit money, class action lawyers bid up the search rights to “Vioxx” to over $40 a click. That means that you could have googled “vioxx” and then clicked on the first provided link and it would have cost some law firm $40 – just for clicking. It would have made great sport for the class action haters – googling and clicking on their links just to cost these rotten lawyers money. (Highlighting again why I own Google stock.)

Back to real estate. Banks outsource much of the mortgage business to third party brokers for the explicit reason of avoiding charges of discrimination and conflicts of interest. That won’t matter, large banks have the most money and the Eliot Spitzers will find a way to extort it from them. It is a sad reality that having a lot of money, whether as a person or as a business, puts a bull’s eye on your back.

No comments: