Goldman to Clients: You Shouldn't Have Trusted Us
If you didn't know, Realtors' owe their clients a fiduciary duty.
What does that mean?
Actually, quite a bit.
The legal definition of fiduciary duty has two components: a duty of loyalty, and a duty of care.
By definition, your Realtor knows more than you do about the housing market -- that's what you're paying them for.
The duty of loyalty means that they won't misuse that advantage.
On the contrary, Realtors commit to use their market knowledge and professional skills to serve their customers' best interests. As opposed to, say, their own.
Now segue to Wall Street.
Already, it's clear how Goldman Sachs, et al are going to defend themselves against the tsunami of lawsuits sure to be brought over trillions in securitized, mortgage-backed securities that Goldman helped sell.
As the world now knows -- and Goldman knew at the time, as evidenced by its bets against said securities -- the securities were ticking time bombs, destined to cost the purchasers -- their clients -- grievous losses.
Goldman's likely defense?
Not that it didn't do it.
Not that the housing market bust was an unforeseeable, one-in-a million occurrence (what statisticians call a "black swan event"). After all, Goldman not only foresaw the bust, but made billions betting on it.
But rather, that its clients were "big boys" -- sophisticated institutional investors who knew, or should have known, what they were doing. Boo-hoo.
Except that that's not what fiduciary duty is about.
Whether Goldman's clients were multi-billion dollar hedge funds or Daffy Duck, it was legally obliged to use its (undeniable) information advantage to act in the clients' best interests.
Instead, it knowingly harmed its clients while acting in its own interest.
If that doesn't constitute breach of fiduciary duty . . . the term's meaningless.
Showing posts with label Realtors. Show all posts
Showing posts with label Realtors. Show all posts
Thursday, July 23, 2009
Monday, June 1, 2009
Freakonomics (Re)Revisited
"How is the Klu Klux Klan
Like a Group of Real Estate Agents?"
[Note: this post is a follow-up to to two, earlier posts discussing the best-selling 2005 book, Freakonomics: "Do Realtors Really Add Value," and "What Do Realtors Really Get Paid For?"]
You'd guess that any book with a chapter by that title -- as Freakonomics, Chapter 2 has -- would not exactly be a fan of Realtors.
And you'd be right.
The two authors of Freakonomics, economists Steven Levitt and Stephen Dubner, waste no time trashing Realtors as self-interested weasels who prey on vulnerable clients (it doesn't help that they each appear to have been victims at one time or another).
But are their criticisms fair?
To pick just one example, Levitt and Dubner make much of the fact that listing agents (who represent Sellers) only make a few more pennies in commission for every extra dollar their client's home fetches. Therefore, according to the authors, Realtors will invariably sell out their client's interests and push for quick sales, at less than top dollar.
Their evidence? Some thin, not-so-current data that purports to show that Realtors take slightly longer to sell their own homes than homes they're hired to sell.
Rebutting Levitt and Dubner's argument are these three facts:
One. Good Realtors typically engage colleagues to sell their own homes. Not only isn't it professional to sell your own home (it's too personal, emotional, etc.), it's also risky: if you make a mistake or get sued, you're likely not covered by insurance (the liability policies at brokers like Edina Realty specifically exclude Realtors who are acting as their own agent).
Two. There is an inverse relationship between time on the market and selling price. Translation: homes that sell quickly get top dollar, while homes that languish get discounted -- sometimes A LOT.
Is it possible for an unethical Realtor to convince an ignorant Seller to list for too little?
Unfortunately, I can't say that I've never seen that happen.
However, when it does, the market invariably steps in, and drives up the price (the one conspicuous exception to this is when the listing agent also represents the Buyer -- a practice sometimes called "single-agent" dual agency. It's banned in 43 states, and it's time Minnesota did, too).
Three. A Realtor who puts their self-interest ahead of their client's isn't just a lousy Realtor. They're violating their fiduciary duty to their client.
That's at the core of the relationship between a Realtor, whose job -- acting as an "agent" -- is to serve and advance the best interests of their client, legally known as the "principal."
Too lawyerly?
Try this: 'Good Realtors know not to scr-w their clients.'
For one thing, such clients tend not to refer business to you. For another, they tend to get mad and do things like fire or sue you.
Like a Group of Real Estate Agents?"
[Note: this post is a follow-up to to two, earlier posts discussing the best-selling 2005 book, Freakonomics: "Do Realtors Really Add Value," and "What Do Realtors Really Get Paid For?"]
You'd guess that any book with a chapter by that title -- as Freakonomics, Chapter 2 has -- would not exactly be a fan of Realtors.
And you'd be right.
The two authors of Freakonomics, economists Steven Levitt and Stephen Dubner, waste no time trashing Realtors as self-interested weasels who prey on vulnerable clients (it doesn't help that they each appear to have been victims at one time or another).
But are their criticisms fair?
To pick just one example, Levitt and Dubner make much of the fact that listing agents (who represent Sellers) only make a few more pennies in commission for every extra dollar their client's home fetches. Therefore, according to the authors, Realtors will invariably sell out their client's interests and push for quick sales, at less than top dollar.
Their evidence? Some thin, not-so-current data that purports to show that Realtors take slightly longer to sell their own homes than homes they're hired to sell.
Rebutting Levitt and Dubner's argument are these three facts:
One. Good Realtors typically engage colleagues to sell their own homes. Not only isn't it professional to sell your own home (it's too personal, emotional, etc.), it's also risky: if you make a mistake or get sued, you're likely not covered by insurance (the liability policies at brokers like Edina Realty specifically exclude Realtors who are acting as their own agent).
Two. There is an inverse relationship between time on the market and selling price. Translation: homes that sell quickly get top dollar, while homes that languish get discounted -- sometimes A LOT.
Is it possible for an unethical Realtor to convince an ignorant Seller to list for too little?
Unfortunately, I can't say that I've never seen that happen.
However, when it does, the market invariably steps in, and drives up the price (the one conspicuous exception to this is when the listing agent also represents the Buyer -- a practice sometimes called "single-agent" dual agency. It's banned in 43 states, and it's time Minnesota did, too).
Three. A Realtor who puts their self-interest ahead of their client's isn't just a lousy Realtor. They're violating their fiduciary duty to their client.
That's at the core of the relationship between a Realtor, whose job -- acting as an "agent" -- is to serve and advance the best interests of their client, legally known as the "principal."
Too lawyerly?
Try this: 'Good Realtors know not to scr-w their clients.'
For one thing, such clients tend not to refer business to you. For another, they tend to get mad and do things like fire or sue you.
Thursday, March 26, 2009
Appraiser 'Batting Averages?'
Adding Back Checks & Balances
If you haven't been paying attention, there seems to be widespread consensus that much of the "recent unpleasantness" (what some people in the South called the Civil War) has to do with too few checks and balances in the financial system.
So, one of the reasons that securitized mortgages became such a mess is that everyone involved had an incentive to simply collect their fee, and keep the "product" moving along the assembly line.
Clearly, that "assembly line" -- now very much idle -- is going to be overhauled at best, dismantled at worst (or is it the other way around?).
No matter what happens, though, we are still going to have mortgages, banks, appraisers, etc. (and hopefully, Realtors!).
In that vein, one of the ideas I've heard lately is to rate -- or at least track -- appraisers by the default rate associated with homes they evaluate.
Appraiser "Batting Average"
Ultimately, the appraiser's job is to give the bank that dispatched them a "pass/fail" verdict on the subject home: if the bank proceeds to make a loan (mortgage) on the home in question, will it get paid back? And if not, is the collateral (the home) worth enough that the bank can sell it and recoup its capital?
Obviously, there's more that goes into that determination than the home's market value at the time of purchase. For example, if the Buyer subsequently suffers a major illness or loses their job, they may default on the mortgage even though the appraiser nailed the price.
However, that's what averages are for.
Just like a major league baseball player needs to hit over .250 or so (a Hall of Famer hits over .300 lifetime), you'd expect a good appraiser to have a "success rate" over .95 (ideally, .97 or .98).
P.S.: speaking of accountability, I loved this sentiment from Caroline Baum's most recent column for Bloomberg: 'members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.'
So, Chris Dodd, head of the Senate Banking Committee, would sport a pink Lacoste shirt with “endorsements” from Citigroup, Bear Stearn, AIG, etc. emblazoned across his chest in large, black letters (the corporate logos go on the back).
If you haven't been paying attention, there seems to be widespread consensus that much of the "recent unpleasantness" (what some people in the South called the Civil War) has to do with too few checks and balances in the financial system.
So, one of the reasons that securitized mortgages became such a mess is that everyone involved had an incentive to simply collect their fee, and keep the "product" moving along the assembly line.
Clearly, that "assembly line" -- now very much idle -- is going to be overhauled at best, dismantled at worst (or is it the other way around?).
No matter what happens, though, we are still going to have mortgages, banks, appraisers, etc. (and hopefully, Realtors!).
In that vein, one of the ideas I've heard lately is to rate -- or at least track -- appraisers by the default rate associated with homes they evaluate.
Appraiser "Batting Average"
Ultimately, the appraiser's job is to give the bank that dispatched them a "pass/fail" verdict on the subject home: if the bank proceeds to make a loan (mortgage) on the home in question, will it get paid back? And if not, is the collateral (the home) worth enough that the bank can sell it and recoup its capital?
Obviously, there's more that goes into that determination than the home's market value at the time of purchase. For example, if the Buyer subsequently suffers a major illness or loses their job, they may default on the mortgage even though the appraiser nailed the price.
However, that's what averages are for.
Just like a major league baseball player needs to hit over .250 or so (a Hall of Famer hits over .300 lifetime), you'd expect a good appraiser to have a "success rate" over .95 (ideally, .97 or .98).
P.S.: speaking of accountability, I loved this sentiment from Caroline Baum's most recent column for Bloomberg: 'members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.'
So, Chris Dodd, head of the Senate Banking Committee, would sport a pink Lacoste shirt with “endorsements” from Citigroup, Bear Stearn, AIG, etc. emblazoned across his chest in large, black letters (the corporate logos go on the back).
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