Lest We Forget

*Lest We Forget*
**By Scott Kersnar**

ScottK***When I was selling houses back in the late 70s I taught a course in real estate basics for consumers at a local junior college. The Russian River area of Sonoma County California, where I still live, was experiencing a real boom in property values at the time. I will never forget being at the blackboard one evening, masterfully showing the class how leverage magnifies the yield on a real estate investment, when someone raised a hand to ask a question: “Isn’t leverage another term for debt?” Of course, good point. But the market was hot right then. If people bought the lowest-priced home for sale in a good neighborhood, and were willing to make a few repairs and cosmetic changes (the way I told them to, the way my wife and I had just finished doing), they’d automatically make money as soon as the ink was dry on the sales contract.

****I was a relative newcomer to real estate. I had been a teacher for ten years I could keep an adult class interested, but had never been through a real estate downturn myself. It took an experienced member of my class to warn his fellow classmates how painful it would be to hold highly leveraged property purchased at the peak of the market.

****Soon after that, the S&L scandals of the 80s had everyone making cynical cracks about appraisals written in pencil until they met the numbers. “Made As Instructed” was the joke version of the acronym MAI, in place of Member of the Appraisal Institute. Watching what happened to the hotshot investors, no one needed to be reminded that leverage was debt, or that appraisers “making the numbers” to put deals together was against the law.

****But good times returned. Economists like David Lereah preached that from now on we would enjoy a real estate market with perpetual price appreciation. Then, when the mortgage debacle came in 2007, it took a long time for real estate prices and mortgage originations to end their plunge. The market also was restrained by the flight to quality and a landslide of regulations.

****So when we recently saw a twelve-month period of home price appreciation, was that good news? The Obama administration certainly didn’t complain. First-time buyers started looking in earnest and upside-down borrowers saw hope for daylight ahead. The bad news Interthinx told us in February was that increased investor activity brought with it a 25% quarterly increase in appraisal fraud risk.

****We need to keep in mind that when a rising tide starts lifting all boats, that means the pirate boats rise too. And the pirates look just like us; all they are trying to do is get rich by “making the numbers work.” These are the early days of a market upturn, so let’s remember now that fraud undermines the health of the market. Will the mid-AprilMBA National Fraud Issues Conference in Ft. Lauderdale unveil some tangible fraud remedies? Sure hope so.

Since 1996, when he wrote “NetSuccess: How Real Estate Agents Use the Internet,” Scott Kersnar has been chronicling the development of technology in real estate finance. He is a past editor of Mortgage Technology magazine.