View from the Board Room

For several years in my Other Life, I had a birds-eye view of the beginning of the financial nightmares addressed last night by President Bush and the major conversation point of all the talking heads.

From my view in the board room in DC - the real estate, financial and regulatory powerhouse good ol' boys club - what I saw didn't make sense. Of course, it was only me, the one who has had no formal economic, financial or business management education (though my longing for an MBA puts me at least in the "firmly interested, read everything" category). That should have given the world reason to pause - if I, the one whose solitary "F" on a test came in financial accounting, saw reason to go "what the...?!" things were already on their way south - and fast.

Things That Make You Go "Hmmm?" #1:
Year-over-year property appreciation growth of 17-20%. In Fairfax County, the median price of a single-family home in 2002 was $260k. In 2006 (the absolute peak of market), it was $500k. An increase of 92% in 4 years.

Dummy Logic: Something tells me incomes weren't going up 92%.

Reality '08: If it's too good to be true, and actually IS true, it won't last. And, funny thing, incomes didn't go up 92%.

Things That Make You Go "Hmmm?" #2:
I sat in a meeting one day where Countrywide lenders (bidding to be the "preferred" lender on a project) said, "We can get absolutely anyone into a loan."

Dummy Logic: Anyone? Seriously? Aren't there rules about this kind of thing? You are saying this on year 5 of a double-digit upswing, you're talking interest-only, no money down, variable interest loans - do you think "Anyone" will be able to pay that back in 5 years when the market has changed and his $1.5k/month payment has become $3k and his $80k job has become only $85k?

Reality '08: Countrywide. In shambles. Match. Set. Point.

Things That Make You Go "Hmmm?" #3:
I sat in a first-time homebuyers informational session (one of my marketing events) and listened to a lender tell a couple, "you think you can afford x condo, but we could get you into y condo ($100k more) for $7k down, interest only, variable apr - you can refinance in 2 years." Guess what the couple did? Went for the "we'll have a second bedroom, but nothing to put in it, ever, because every single dime we make ON BOTH INCOMES is going to be paying our INTEREST ONLY mortage payment. We'll sell it in two years and make a fortune!"

Dummy Logic: I'm not even going there. I nearly choked on my crudite.

Reality '08: Forclosure rates are up 27%.

Things That Make You Go "Hmmm?" #4: Companies buying old real estate (rentals) for ridiculous prices, raising the price to an even more ridiculous level (selling as for-sale condos) and then putting them up for sale to "get a piece of the action."

Dummy Logic: Huh? Am I the only one that thought that was a ridiculous way to do business?

Results '08: It didn't even take that long. By '06, pure flip conversions were slashing their prices by $100k. Is it wrong to say "I told you so?"

Things That Make You Go "Hmmm?" #4:Pseudo mortgage companies and developers - suddenly "experts" - enter the game to make a quick buck.

Dummy Logic: We're leaving the handling, sales, development and flow of capital to novices? And greedy ones at that.

Reality '08: Four words and an acronym: Bear Stearns. Lehman Brothers. AIG. The dominioes keep falling.

Given my "aptitude" (or significant lack thereof) for numbers, it makes me wonder if I am clairvoyant. More likely, the contract one must sign to make a 7-figure-or-more salary must certainly read: thou shalt not use common sense, thou shalt wring all the money out of a company as fast as you possibly can, though shalt run the company into the ground if need be to see 20% return on investment, and - oh yes - shareholders, common people, taxpayers and your grandmother living off her pension backed by mortgage securities be damned.

Seriously.