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The solution to the Housing Crisis and who to blame and how to fix it.

(EMAILWIRE.COM, July 07, 2008 ) Washington D.C. July 7, 2008

First, I have been monitoring over 208,000 micro-markets in the USA for the last 5 years, bought over 80 investment properties, authored a book, and the founder of a Web site that has the most current local data and information available anywhere on the Web. So my opinion is well backed by deep due diligence.

There are lots of “opinions” our there. Realtors blame the press and bad loans. Lenders blame Wall Street and the builders. Buyers blame the mortgage brokers. Real estate investors blame the Realtors and poor due diligence systems. Everyone likes to blame someone, and no one likes to take responsibility. Such is the American way, it seems.

So what is the right answer?

As they say, just follow the money, and look at the financial systems.

First, the Realtor, which includes agents, brokers, licensed agents (non-Realtors), and all there support staff and systems. Almost all Realtors make there income from sales commissions, which is typically 6% of the sale. The mortgage broker or bank typically charge 1% commission (usually called points) on a loan, again they make the income in commissions. The lender typically profits the cost of funds compared to the interest on the loan plus leverage. On a typical loan, the lender make a lot less than the Realtor, but there are a lot less lenders than Realtors, so keep this point in mind.

There are also lots of near fixed fee players involved too, like the title company and an appraiser which typically work on a set fee or $250-$1,000 per transaction, and they cannot make commissions by most state laws.

Then once the loan is settled, the banks typically package these loan product and they are sold at Wall Street to investors as MBS. Then there is the loan servicing company, which make and even less commission, but deals with a very high number of loans, and automated systems

So let’s look at a typical $1,000,000 purchase loan and follow the money.

Realtor makes sales commission of $60,000
Mortgage broker/lender makes $10,000.
Title company makes $1, 000.
Appraiser makes $250
Wall Street and service companies make roughly 0.5% or $500
Investor makes (or losses) the spread.

So where in the above is the responsively of quality due diligence? Most lenders have a QA department, which have guidelines to prevent default. Since the lender in on the hock for the loan for a year or less typically, even after it is sold. Realtor are just seller of real estate, and typically the only info they have access to is the MLS (Multiple Listing Service) which for the most part just has historic sales and listing data. Lenders, on the other hand, have access to a far greater amount of data and info, since it is there responsibility to due diligence. They have access to the MLS, title info, credit info, appraisal info, and a lot of other sources to prevent fraud and poor loans.

So what was missing from the lenders, and were they really to blame? In some sense yes, in some senses no. They clearly created loans, and sold them quickly to Wall Street and each other, to mitigate risk. They clearly have access to the most current pertinent data at the local market. OR DO THEY?

This last statement leads to the real core problem and real culprit of the housing crisis. So let’s ask the top Realtor and top lender some questions, to see if they really do have the most current local market data.

First, data and local information are available from many levels. The MSA or market, the county, the Zip Code, the Census Track, the Block Group, and the property. There are 396 MSA’s, 3,219 Counties, 49,213 Zip Codes, 65,231 Census Tracks, 209,325 Block Groups, and 70,000,000 homes. Clearly the home itself has a lot to do with what IS worth today. What about the variables that WILL influence prices by the Block Group, Census Track, or Zip Code? Do lenders (or Realtors or appraisers for that matter) have access to current local info and trends at the Block Level?

To find out, just ask you local Realtor or lender the following?

1) What was the job growth in my Zip Code or Block Group last month, and how did this affect prices?
2) What was the income growth in my Zip Code or Block Group last month, and how did this affect prices?
3) What was the migration in my Zip Code or Block Group last month, and how did this affect prices?
4) What were the number of Short Sales or foreclosures in my Zip Code or Block Group last month, and how did this affect prices?
5) What is the forecast for my Zip Code or Block Group, and has my local market bottomed?

AND on and on AND on….

Once you see these answers, you will see what I see. The problem was and IS caused by a lack of quality local information. Currently lenders are reacting by tightening guidelines and reducing loan amounts in declining markets. NOT in markets that will decline. Primarily because they are having trouble raising capital. But who what’s to buy a loan or package of loans that has improper due diligence?

So the blame was and IS on the lenders, but not for what most people about. It was and is because the loans have no local risk assessment and STILL don’t. No wonder we are still in a housing crisis and inventories remain high.

We at offer solutions and the missing data and information at the local level to everyone who cares about making a smart decision and a lending decision based upon quality due dalliance, and not just a snap shot of the present.

About the author Eddie Godshalk

Founder of which includes over 640 variables and monitors over 208,000 micro-markets trends with data that is updated as often as daily. With 6, 12, 18, and 24 month forecasting and confidence levels for lenders and real estate investors. Author of Thriving in Today’s Real Estate Market.

Eddie Godshalk

Remapper COrp
Eddie Godshalk

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