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We all know there’s no such thing as a free lunch. But for a while, homeowners, buyers and real estate agents thought a “heavily discounted” lunch was ok. Especially when it was Uncle Sam handing out the brown bags. Now the real estate and mortgage industries are paying the price for Fannie Mae’s free-lunch fraud. Looks like the people who couldn’t afford “affordable housing” most weren’t just , but its most vocal advocates. Talk about bad strategy.Make no mistake: Fannie Mae lied. Possibly, committed fraud. In a recent report in the Wall Street Journal by Edward Pinto, chief credit officer at Fannie Mae from 1987 to 1989, the “market failures” might just have been caused by the entity, not private lenders:

…from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A….Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks….

To be clear, the subprime lending crash was not due a failure of private banks. Whistleblower Pinto tells us that systematic “mislabeling” of subprime loans by Fannie Mae – a government entity – was rampant. Call it what you want, but the Fannie fraudsters withheld critical information from the market. Private banks, encouraged (at regulatory gunpoint?) by HUD and Fannie to offer loans to marginal borrowers didn’t have the facts necessary to properly model the mortgage backed securities necessary to do it. It wasn’t greed but mismanagement by the largest public and regulated entity in the market that laid the seeds of the crash.

It was a ponzi scheme worthy of Bernie Madoff.

Pinto suggests reasons why Fannie Madoff cooked their books: Perhaps they wanted to keep the patronage of Congressman Barney Frank, who hoped to “roll the dice” with the housing agency for social engineering purposes. Perhaps the GSE’s could not otherwise comply with the law mandating at least 55% of their lending be in pursuit of “affordable housing.”

Either way, the real estate industry is paying the price of this lie. For years, much industry operational and growth strategy was based upon their public patron’s policy of risky lending. When the financial scheme crashed, it took with it a decade of “home selling” strategies that brokers had built up – around a lie.

The real estate industry and homeowners lost a decade of growth and equity because its strategy was underwritten by government fraudsters at Fannie Madoff.

But why bother revisiting history? Because the industry was more than happy to go along for the ride – and it’s doing it again today. Real estate professionals based their entire sales strategy upon “affordable housing” – and developed training classes, certifications and seminars that led both agents and the public down that path. They never questioned the causes of the price inflation they were enjoying – even though it was historically unjustified – because they had a vested financial interest to not ask questions. Just cash the checks and go on. It was an age where rookie agents earned more in their first year in the business than veteran counterparts.

And it’s happening again. Fannie Madoff received another blank check from its Rich Uncle. And her sister, FHA Madoff has exploded her exposure to risky loans in the last twelve months.

Once again, REALTORS are going along, straight to the slaughter.

Just as once the REALTORS were the biggest voice (or most silent supporter, you choose) for affordable housing, and the exotic loans that made it possible, agents continue to pursue the go-along-with-someone-else’s-plan-to-pay strategy. FHA, tax credits, cramdowns are simply new chapters in outsourcing sales strategy to the whim-of-the-day by anyone: the media, the government, the Madoffs.

Either real estate is a commodities industry with market mechanisms for establishing, trading and financing market goods, or it’s just a flea market, where agents help consumers haggle over price and pay with someone else’s credit card. When that credit card runs out – as it will again shortly – there’s going to be another market crash.

Funny how the Fannie fraud story has disappeared from the news. Maybe it’s been overshadowed by the recent report of 80,000 more jobs lost in December. That’s the trouble with economic reality: fraud is easy to hide, but people without jobs still cannot pay the bills.

Real estate agents need to develop a better strategy – one based upon selling and financing real estate like any other commodity. That means people paying for the goods with real money backed by real credit and supported by real likelihood of repayment (ie., jobs).  Otherwise the industry cannot control its own destiny. The industry remains “sad” about foreclosures – right on political cue – when any other commodity trader would rationally price it down, clear it out, wipe out the excess and move on.

Meanwhile, everyone’s gaga about the extended tax credits – Madoff Scheme 2.0. is just as risky as the last version. How else can they sell homes, it is argued, if there isn’t some money on the table to “induce” people to do it now?  How soon we forget when plenty of homes were sold without subsidies or exotic finance – for decades. Does nobody in America have any credit, cash or equity any more? Makes you wonder.

Entering 2010, it’s high time for REALTORS to have a real strategy for future success. One that does not even consider listing overpriced properties. One that does not expound the virtues of preventing foreclosures. One that does not hail as profitable an agent who shows buyers 200 homes.  It’s time for a strategy that means business – and does not need handouts or gimmicks to do it. One that requires agents to find buyers who have real equity and ability to buy a home.

Because one of these days, Fannie Madoff may actually go to jail. And the free miracle money will dry up. Then what will REALTORS do?

The other lie to be discovered is called FHA default rates; count on it – someone is about to notice. In conjunction with unsustainable debt and public outcry over spending, plus many more months of unemployment, the market is set to fall further – this time from from a historic low point. Once the free lunch line is closed (think, May 1) it will be REALTORS who again suffer the consequences of letting everyone and anyone else set their strategy on how to be a real estate industry.