Lost

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Our topic this week, in case you missed it, is ethics. In these days of self-interest, so many have lost their way. Real estate boards routinely manipulate statistics. The national association of realtors, CREA, misleads on market pricing and momentum. Mainstream media, lazy or incompetent, distorts reality instead of reflecting it, as press releases morph into news. Debt-peddling real estate agents use greed and naiveté to endanger others and profit themselves.

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This week a realtor posted a vid falsely stating I’d recently told readers here to borrow against their houses and buy stocks on the TSX so they could make 10% a year. He made it up, after he was thrown off this site. As I said. Lost.

Real estate’s essentially an unregulated industry. People like Brad Lamb can legally tell people they’ll make a 248% return buying one of his condos. Agents have no responsibility whatsoever for ensuring what clients buy is appropriate for them. Brokers and banks loan 95% of the cost of a property to people who have no money, at rates destined to reset higher.

It takes five years and 9,000 hours of work experience to become a plumber in Ontario. To become a realtor takes six months and costs $2,500. Plumbers work with water. Realtors deal with the largest investments people ever make, often involving 25 years of debt. Weeks after taking a simple course, they can be on the street selling.

I was reminded again of the Wild West nature of this business days ago when I read a Globe and Mail piece on how people can buy real estate without having any actual cash. Of course the ones routinely doing this are the young, who have neither fear nor experience. Those facilitating it are usually mortgage agents.

(By the way, you can qualify to become a mortgage agent by taking a 42-hour community college course, also offered online, weeknights, or seven Saturdays. In addition, you must be 18 years of age and have a mailing address. Breathing on your own is also encouraged.)

The author was Robert McLister, a broker and editor of Canadian Mortgage Trends. It’s actually a good publication, and McLister is a smart guy who covers his industry like an enthusiastic fungus. But the fact he and his colleagues actively facilitate the sale of expensive houses to property virgins whose biggest asset is glands, is not cool. As the mortgage brokers’ association admits, 25% of renters today have less than $5,000 saved – but are routinely able to buy houses costing $300,000 or $400,000.

How can this be when mortgage insurance requirements dictate purchasers must have a whopping 5% down payment, and when banks are now outlawed from handing over cash bribes to borrowers?

Easy. In McBroker’s world you can put the down payment on a credit card. “Mind you,” he cautions, “not all lenders allow this and the ones that do check that you can afford the extra debt payment.” But the odds of anyone actually asking if your MasterCard has melted are miniscule.

Or, just get one of those newly-illegal cash-back mortgages from a credit union, instead of a federally-regulated bank. And while the mortgage rate you’ll be offered is higher than if you actually had money, you’ll still get 100% financing. “You then need to cough up only your closing costs, which include legal and inspection fees, the land transfer tax and so on.” Those costs, by the way, usually equal about 2% of the purchase cost. You can borrow that from your babysitter.

And there’s borrowing money from your brother-in-law, assuring him you’ll pay it back on Tuesday, and then telling the bank it’s a gift. “Unfortunately, while not an epidemic problem, it’s no secret that a small number of borrowers fraudulently claim their down payments as “gifts,” even though they fully intend to repay the money,” wags McLister. “That raises the risk level for lenders because the borrower’s debt obligations increase. Of course, both the borrower and giftor must attest in writing to gifted funds being non-repayable, but that is hard to police after closing.”

In other words, kids, don’t sweat it. If you really want to buy something you can’t afford, then make it a house instead of a car or tuition. After all, let’s keep things in perspective.

Of course, not all realtors, lenders, brokers and agents put their own interests ahead of their clients’. Many are decent and caring people, living in a world where there are no sick days, pensions or salaries. Many more fail than succeed. Most of us would never trade places.

But shoddy regulation, lack of oversight, the absence of enforcement and constant lapses of ethics will only make the coming misery worse for those who can endure it the least.

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We’ve lost our way.

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avatarGarth Turner - The Greater Fool posted Friday, January 18th, 2013.

1 Comment for “Lost”

  1. Okay, now I’m totally confused. In previous articles here, it was explained that the real estate market was falling apart because of new mortgage rules. But this article seems to be saying that there are many ways around the new mortgage rules. Maybe Garth can clarify? Credit Unions are chartered province by province, and not across the whole of Canada. So are credit unions in one province bending the rules for downpayments, or is it more widespread?

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