While there is a ton of badly needed regulatory reform that will address many of the problems already laid out on this blog to be included in the package, I will focus in this post on the impact of these wide-ranging changes on the real estate buyer. But first, an example of the broader much-needed reforms:
The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.Now to return specifically to real estate buyers. First and foremost, buyers will have to navigate a very new landscape of mortgage financing without necessarily understanding the recent history and context of the changes, which could lead to frustration and confusion. To wit:
Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.Now more than ever before, financing is a huge complex piece of any real estate transaction. While it always should have been the starting point for buyers, in recent years when money was flowing freely, few people in the industry ever had to be concerned about a client getting financing for a deal, so long as the client had a pulse. Of course, things have changed dramatically, and directly as a result of that free-flowing period.
Therefore real estate brokers and agents of residential or commercial orientation, in order to fulfill their "market making" roles, will have to become far more involved in an ever-increasingly complex mortgage and finance environment to help buyers make their way through the complexity. We brokers can no longer just refer a buyer to certain lenders and leave them on their own. Doing so in this environment is a profound disservice.
As new regulations get rolled out, real estate brokers must stay at the leading edge to comprehend not just the rules, but their implications in any specific market. We must also help clients with their due diligence efforts when finding qualified lenders to help ensure clients find competent, informed, and ethical lenders with solid reputations. Bad financing is by far the most common reason a deal fails. This is a larger and far more complex obstacle than ever before.
The proposals that will come to pass in specific form are aimed, according to officials, at core regulatory problems and gaps:
They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.Even high level regulations that affect lending way upstream will have to be understood by real estate brokers, not just mortgage brokers, as we move forward to manage fully the implications for buyers on the ground.
The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.Going forward, real estate brokers and their agents who cannot understand the implications of such complex reforms for their clients in their specific market, and who cannot fully explain those implications to their clients if necessary, those brokers and agents will surely lead their buyer clients to failure, and that will undermine the market for everyone.
Bottom line: Brokers and their agents can no longer blindly refer buyer clients to a cadre of lenders they've used in the past. A higher standard for due diligence is required in this market, and while that responsibility falls principally on buyers, everyone assisting the buyer must support that effort. Those who don't understand the critical times and adaptation they require will not only be doing their clients a profound disservice, they will impede the progress and recovery of real estate markets for everyone.