John Holbrook

Before we can begin working on viable solutions for the mortgage and finance industry, we must first properly identify and define the problems. I would like to first share with you a simple analogy as it relates to the mortgage profession.

The most beautiful golf courses in the world are show cased on television week after week during the PGA tour. What goes on behind the scenes to create and maintain these master piece golf courses is what is truly amazing. The superintendent of the golf course must be aware of weather conditions, different types of grass and soil conditions just to name a few. He must also know how and when to react to devastating conditions before they are beyond control. Let's take for example, the common grass weed.

Grass weeds can wreak havoc on a golf course and are a golf superintendent's worst nightmare. Not only are they ugly, they strangle and kill the healthy grass root systems around them as they spread like wild fire. Because there are so many breeds and types of weeds, the right chemicals and treatment must be applied in a timely manner for the superintendent to achieve his goal and eliminate the weed. If the weed is not properly identified, valuable time can be wasted applying the wrong chemicals. The weed can be temporarily mowed down, only to return somewhere else a few days later. Before you know it, the weed has multiplied and popped up in places never imagined.

I have used the above illustration because I believe the common grass weed is a perfect example and a parallel to the crisis we are facing in all aspects of the mortgage profession. The golf course is the mortgage business. Just like the perfect golf course should be lush and green with healthy grass, the mortgage business should be green with money involving healthy participants. In our current and obvious situation however, our mortgage profession is being strangle by a weed and is not being properly managed. The weed is not new. It has been around since the beginning of banking. We have simply failed to identify the weed and therefore have applied or attempted to apply the wrong remedies.

Nearly 20 years ago, during the savings and loan debacle, some of the weeds were identified, but the most important mark has been missed or avoided. FIRREA Title IX was adopted requiring appraisals involved in a "Federally Related Transaction (FRT)" to be in compliance with USPAP and to be performed by appraisers licensed by their respective states. The assumption was that licensing individuals who would be held responsible for their valuation of real estate assets would improve the accuracy of valuation and thus assist in thwarting an over valued pool of mortgages. One problem with this action is there has been little accountability enforced on behalf of the governing boards due to a lack of staff, funding or simple obliviousness of the problem. The weed was mowed, but it has simply morphed and multiplied.

The real weed, as non-politically correct or un-popular as it may be to state, is nothing more than unadulterated greed. The mortgage business is chock full of money and greed from the top to the bottom:

• Wall Street- Made ton's of money by creating Collateralized Debt Obligations (CDO's). In order to create CDO's and SIV's, Wall Street was eager to purchase Mortgage Backed Securities from...
• The Secondary Mortgage Market (Fannie, Freddie & Ginnie).The GSE's (private when they are making money but conveniently government backed when they are failing) made money selling loans to wall street and investors by first purchasing loans from...
• Institutional & Non Institutional Lenders (Insurance Co's, Savings Bank, Commercial Banks) who purchased, bundled and sold loans originated by ...
• Mortgage Brokers (local mortgage companies) who made money brokering/selling loans to all the above players by hiring...
• Loan Officers, who are not regulated, often have little training or expertise, but make commissions typically directly tied to the amount of the loan and the YSP (Yield Spread Premium), who often get their business on referral from...
• Real Estate Agents, who also make commissions directly tied to the amount of the real estate transaction. The agents receive referral and repeat business from...
• Home Owners, who are mesmerized and hypnotized by the allure of easy money as advertised in a refinance or by the low payments of an exotic loan. NONE of this can happen however without the...
• Appraiser, who, because of regulations rarely receives an order directly from the one whom he/she is intended to protect (the soundness of the Lending Institution(s) and the General Public). Instead, the appraiser is typically engaged by the commission paid loan officer, who is under the pressure of not only the real estate agent to close the deal, but by his employer if he wishes to be compensated.

Whether done purposely or inadvertently, the entire system relies mostly on the opinion of one individual - The Appraiser. Without the appraiser's opinion of value (or an alternate such as an AVM), the loan never leaves ground zero. Should this really be a problem? No, it shouldn't. After all, the appraiser is regulated and has rules they must abide by right? Reality is, because of human nature and the innate desire to survive, many appraisers who have dedicated time and considerable amounts of money to enter the profession, are making tough and often unethical choices. The lesson is learned early on, that if one does not "play ball", they will be quickly ostracized and soon out of business. "Playing ball" is, and has always been the root that enables the nurturing of the greed weed on all levels.

Another new business model has emerged due to technology, which has agitated and empowered the issue. The mortgage industry has evolved from going to the local bank on the corner that your father's father banked with and applying for a mortgage. Now one can log on to their computer and apply for a loan from lenders from around the globe that they've never even met. In a capitalistic system, competition between businesses for a consumer will typically create the best deal for the consumer. Unfortunately, it has also created dark consequences. Many loan officers fear that they will loose a customer to another lender/broker that will "get the deal done". This fear is then transferred to the appraiser, who fears that if they fail to "get the deal done", it will still get done, just with another appraiser. In reality, much of the pressure the loan officer receives is from the home owner themselves, who feels empowered to take their business somewhere elsewhere that will "get the deal done".

Why does it seem that so many home owners have adopted this approach? Perhaps the definition of home ownership has also evolved. Owning a home has gone from owning a place that you plan on raising your family, retiring at and having the future grand children visit, to a place to sleep, make a short term hopeful investment and cash out every other year like a virtual ATM machine. The average American no longer looks at the actual price tag, but makes a buying decision based on the payment. From leasing a vehicle, using credit cards to support a lifestyle or purchasing a home, this toxic mentality has some how become blurred together and accepted as the norm. The abuse of cash out refinancing has falsely emboldened the general public into believing they can always fall back on the equity of their home. After all, their homes seem to magically appraise exactly to the amount they need to pay off all of their debts and avoid PMI. Our broken tax system also supports this behavior as many justify using home equity to pay off unsecured debt because of tax relief. This mindset has created the potential for and is revealing itself as a greater risk to lenders than ever in history. Another weed.

As we have seen over the past 12 months, the entire fabric of our economy is tightly weaved with the housing market. Think of all the jobs that are related to housing. You have the obvious ones: Builders, developers and construction workers. But think about all of the items that are the components of a home? The brick, roofing, lumber, carpet, tile, flooring, HVAC, appliances, electronics, furniture, paint, electricians, plumbers, landscapers, etc... All of these materials and jobs have components, jobs, and materials of their own that are all related. You also have real estate agents, appraisers, lenders, attorneys and a mile long list of other professions that are directly tied to the buying and selling of real estate. A melt down like we are experiencing is already having a major effect on the entire economy and sentiment of the American people. As home prices continue to decline, so does the consumer buying power for other good and services, which will lead to further suppression of our economy. The lesson learned here is that it is imperative to the stability of our entire economy to have a sound housing market, which must be supported by sound mortgage practices.

Until our elected officials (all of them, not just the President) pull their heads out of the sand, stop taking bribes from lobbyists and actually address all of the issues simultaneously, our children's children are goingto carry the tax burden for this absurd lending cycle indefinitely.

"Show me the money?"

What used to be a funny line in Jerry McGuire, is not funny at all in the real estate world. Many people closely related to the industry are loosing their livelihood at a mind boggling rate. Whether you average 5 appraisals a month, or 100+, everyone is feeling the pinch. But especially interesting is the old saying "The bigger they are, the harder they fall", could not be more true in the current environment.

Those that have made $100K+ a year for more than a decade, are feeling the pain in ways never imagined only a few short years ago. Many felt bullet proof, but now the kryptonite market is nearly killing them. Now just like in politics, those that have made less will often fault those that made more with lines of "They are getting what they deserved". Well, everyone did not make their money unethically and not everyone is getting what they deserve.

There are many that have been crusaders for more than a decade for ethical business. There are many who have been able to stand up to the pressures provided by their clients. I am not only speaking of appraisers, but the loan officers and agents with high moral character that are also suffering. These people should be commended for their efforts. Instead, these same people who fought hard against abuses in the industry, and sacrificed additional business because of their moral foundations, are finding themselves on a slippery slope towards devastation.

How did this happen? There are several reasons. But for this thread, I want to try and stay focused on some specifics. I read in an article this morning that stated the following:

Regardless of who you are or where you work comes from, math is math. The business has slowed down back to December 2000 levels. But something else has changed since Dec 2000. The number of LO's, agents, builders and appraiser's is exponentially higher. I was unable to find exact figures for the number of each professional in 2000 vs. 2008, but I do know from reading various sources that the real estate industry accounted for much of the employment opportunities over the past 7-8 years.

This is simple supply and demand. There are now too many professionals fighting for the same piece of pie. But knowing the statistics does not soothe the pain. I know if many of you think like I do, my initial thoughts and the thoughts that have been haunting me for weeks now is "Where did I fail? How could a business model that provided for me and my family, completely evaporate?"

As I've pondered this question over and over in my mind with several sleepless nights now, I can say today with confidence, "I did not fail. A systematic failure in the mortgage markets has failed".

We have an entitlement belief system in our country today, from the bottom to the top. "Show me the money". That is all that seems to be important anymore.

From the AP earlier this week:

Quote: Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.

Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.

Fannie Mae increased its purchases of liar mortgages "at the requests of many of our customers," according to spokesman Brian Faith.

Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.

If the decision makers at the top can't prevail over the temptations and pressures, then how can we as appraisers at the bottom of the totem pole make a difference? Well, I've finally come to the conclusion that we can not. You CAN NOT change someone else's belief system. Rarely will a Republican and a Democrat convert one to the other party. Why? Their belief systems are different. Rarely can a Catholic convert a Baptist to Catholicism or vice versa. Why? Their belief systems.

I can continue for a year with belief systems we have in society and give example after example of how no matter how one tries, they will never change someone's belief system.

In our current mortgage crisis, there are home owners who BELIEVE they are entitled to a home. There are appraisers who BELIEVE, they are entitled to make a high wage earning living. There are appraisers who BELIEVE, that form filling is OK, because there are LO's who BELIEVE that is all that is needed. There are lenders who are OK with this, because they have FNMA/Freddie or FHA to sell their crap to, because FNMA and Freddie BELIEVE that having a higher stock portfolio supersedes common sense and logic.

So why in God's green earth should I BELIEVE that I can change all of those belief systems, especially when those pulling the real purse strings (the Govt) BELIEVES they are entitled to their positions and they BELIEVE giving the entitled public what they want will keep them there? Well, I don't anymore.

Growing up, my mother hung a little picture (you know, the country cross stitch style) over the toilet. So every morning from age 6-20, one of the first things I would read each day was the following:

"God grant me the serenity to accept the things I can not change, Courage to change the things I can, and the wisdom to know the difference"

While I never understood what any of that meant as a child, I understand it crystal clear as an adult. I was reminded of the Serenity prayer in a modern twist, shared to me in a story by my good pal Money Man earlier this week, that he had heard his preacher share.

"When I was a teenager, my family had a ski boat. One day, my brother was driving the boat, and was whipping me in circles around the outside of the boat. He continued to go faster and faster, so I was flying faster and faster. I was screaming for him to stop, all the way until I caught the front edge of my ski and hit the water so hard I was temporarily paralyzed. Today as an adult, I look back at that event when there are things I am struggling with. The entire time I was screaming at my brother to stop the boat, all I had to do is let go of the rope."

I feel like I've been identifying and screaming about the changes needed in the industry, all the while I've been getting faster and faster on my skis. Now that I can see this industry for what it is, it is time for me to stop yelling at the driver, take control, and let go of the rope.

I will continue to appraise what ever assignments come my way, but I will no longer grasp at the hope that some politician or organization is going to come riding in on a stallion and "fix" the industry. There are too many in the industry that don't believe there is anything to fix. I have chosen to seek a new full time career, so that I do not have to depend on this industry to provide for me and my family. I will continue to teach anyone who wants to learn, or assist anyone who needs help. I am not leaving. I've simply decided to have fun with the parts that I like, and take the much waisted energy that this system drains from my soul, and put it back where it belongs with my family.

The Serenity prayer makes sense to me: "Accept the things I can not change (people's belief systems) Courage to change the things I can (find a career where hard work, morals and perseverance is rewarded) And the wisdom to know the difference (it took me awhile, but the writing has been on the wall. I just needed some glasses to read it).

I wish the best of luck to all of you who are struggling and pray that you will find peace in what ever choices you make.

Kind regards,
John Holbrook