A Jungle of Regulations

As long as real estate values appreciate, any kind of system will seemingly work. It is when real estate values depreciate that all hell breaks loose. In response to the sub-prime fiasco, regulators and policy makers all have had something to say, though none of them have any understanding of the issues.

Rob Chrisman is a name that Wall Street has never heard of. In my opinion, if you want to understand real estate from the main street level, Chrisman is a must read. Here is a recent article of his:

Definition of a "Mortgage Application"

To summarize a rather dry subject, something as simple as the definition of a mortgage application is governed by RESPA, TILA, ECOA, HMDA, FCRA, FACTA, Reg P and perhaps even more regulations that we do not know about. Reading an article about these regulations is enough to make one's head spin. Can you imagine being a practitioner who actually should read and understand all these regulations?

Why would anyone bother with something that is seemingly so unimportant? The official mortgage application date triggers a number of disclosures and other actions within a specific time frame. It really does little to protect consumers. Violations, however, will be subject to future debates, lawsuits, loan put backs and who knows what else. These are the "i" and "t"s that must be dotted and crossed correctly, regardless of their purpose. There are so many confusing, overlapping and hidden laws and regulations that the chances of a real estate practitioner not violating some law are nil.

This is an example of how bureaucrats are trying to micro-manage something that they know little about – and more of the same is coming. The intention may be noble, but in reality, consumers will end up bearing all the costs of compliance. In addition, consumers will be paying an uncertainty premium to compensate lenders for having to deal with future after-the-fact changes in real estate laws.

Why should anyone be concerned about these rules and regulations? I opine that in the future, they may have more impact on real estate values than the fundamentals such as supply and demand.

Here are a few samples of future real estate strategies, all related to the upcoming regulatory environment:

1. Slam dunk buy decision. If you are a first time/owner occupant buyer, can qualify for a minimum down FHA loan, live in an area where mortgages may be cheaper than rent – BUY. All appreciation will be yours, but if market conditions deteriorate, you will receive free rent, loan modifications, foreclosure prevention and who knows what else the government will dream up.

2. Investors beware. Lenders and servicers, rightfully so, were demonized by the Government for the subprime fiasco. It is not over. The DOJ just filed suit against Bank of America for something that Countrywide did at least half a decade ago. Some were criminals while many were at least guilty of negligence. If the market turns sour, the Wall Street bulk buyers have got to be in the cross-hairs this time. During the subprime round, the Government re-wrote the laws on foreclosure. I suspect the tenancy laws will be re-written in the future, all in the tenants' favor of course.

In summary, I believe real estate historians should divide real estate into three eras: the pre-subprime (starting after WWII), subprime and post-subprime periods. Unlike the pre-subprime era that was a long period of up and up and up, the post-subprime era will experience cyclical market declines that will result in significant losses of equity. When these down cycles occur, socialistic housing policies will dominate. These factors should be considered part of real estate strategies for years to come.

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