Additional Regulatory/Legal Maneuvers
In my piece yesterday on the upswell of regulation and litigation likely to begin impacting the residential real estate business, I neglected to mention a couple of news items from the Wall Street Journal this past week that had initially prompted me to look into the matter. The piece was just getting too long...my apologies. Very quickly here are the other items of note.
Federal Reserve Governor Randall Kroszner, who runs the Fed commitees that formulate policy on bank regulation and consumer protection, is said to be in danger of not being re-appointed, due to his de-regulatory bent. He has been criticized by Senate Banking Committee Chairman Chris Dodd for his role in new mortgage regulations. Kroszner will give two speeches on the Fed's proposed new mortgage regulations next week.
Last month Related Group of Florida filed 16 suits in Miami-Dade County seeking the forfeiture of commissions paid to brokers who sold luxury condominiums it built, after buyers defaulted. If condo sponsors can get away with this sort of thing, brokers are going to have very little incentive to pre-sell new developments, in my opinion.
A former Countrywide employee who worked as a regional VP in the Houston office of a JV between KB Homes and Countrywide alleges that he was fired for raising concerns about questionable lending practices. These included personnel helping borrowers submit loan applications with false income amounts and giving unconditional approval of 10% of the backlog of home loans so that KB Home could start building the homes with contracts in hand. The State of Florida's Attorney General Bill McCollumhas has already issued a subpoena to Countrywide Credit seeking information on sales practices, loan origination standards and fees charged in its foreclosure process. Expect much tougher lending standards and laws that demand that they are adhered to.
Governor Eliot Spitzer is looking to close a tax loophole that lets out-of-towners and foreigners who have owned limited partnership interests in New York property to avoid paying state income taxes on the profits earned when they sold those interests. As a result of the fiscal pressures that states face due to the decline in real estate related tax revenue, expect more initiatives of this nature. This instance in particular may not be helpful to the New York City real estate market.
Disagreement has emerged as to whether New York Attorney General Andrew Cuomo or the Office of Federal Housing Enterprise Oversight (the official regulator of Fannie Mae and Freddie Mac) should be investigating allegations of fraudulent appraisals and mortgage fraud.
You get the point. Expect many State Attorneys General to get into the act of investigating and then persecuting various members of the real estate food chain. Congressmen will be strong arming regulators to get tough. New rules and laws will be promulgated. Developers will sue brokers, buyers will sue developers and brokers. The whole business will get tougher and less profitable at the same time that consumer interest wanes.....same as it ever was.
Posted by brenda
Fri Feb 1st, 2008 07:45 PM
Related must be joking. Please. And this is one the "smart" companies that couldn't possibly make any mistakes in Manhattan.
They're hurting already.
Those FBI and SEC investigations are going to hurt, but I suspect that the major impact might be with the rating companies, who will feel compelled to lower ratings in order to avoid censure (and worse) in the forthcoming regulatory bloodbath. S&P, Moody's, Fitch's, all decide to tell the truth in the same quarter?
By the way, has Morgan Stanley reported yet? Maybe I missed it.
Posted by Jeff
Mon Feb 4th, 2008 08:05 AM
Brenda,
Sorry for the late reply. Morgan Stanley reported their November 30th Fiscal 4th quarter results back on December 19. So they won't report again until early March. I agree that the rating agencies will be much tougher going forward, which will raise risk premia across the board. In this week's Business Week cover story entitled Meltdown: For Housing, the Worst is Yet to Come. there is a quote that illustrates how, as I believe, "Everything works in reverse" after a bubble. BW says "Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstating safeguards such as down payments and proof of income, lenders disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy".
Posted by brenda
Mon Feb 4th, 2008 08:56 PM
Thanks Jeff. I can't remember who said it, but one of the long-time bears was recently interviewed and he wasn't particularly happy that his prognostications were coming to fruition. Because the fruit was busy bearing fruit, and so on, and so on (the bad analogy is mine.)
I feel the same way. I thought things were getting a bit out of control, but I didn't understand the mechanisms that allowed for such seemingly unsubstantiated growth. Now that I have more understanding, I'm just a bit afraid. Given my husband's profession (litigation) we'll be ok, but that doesn't mean much generally.