Skin in the Game: The Past, Present and Future of Real Estate Investments in America

By Swango, Daniel L. | Real Estate Issues, Summer 2012 | Go to article overview

Skin in the Game: The Past, Present and Future of Real Estate Investments in America


Swango, Daniel L., Real Estate Issues


RECOMMENDED READING Skin in the Game: The Past, Present and Future of Real Estate Investments in America by Anwar Elgonemy, CRE (©2012, CreateSpace, 495 pages)

THE TITLE of the book Skin in the Game: The Past, Present and Future of Real Estate Investments in America calls attention to a major problem in the economy and in the real estate segment particularly-that many of the investors, loan originators, secondary market entities, investment vehicle creators and others have little or no skin in the game, i.e., their own money and assets at significant risk. This volume is a look at the Great Recession, indirect and direct causes, what has been done and is being done about it, and the outlook for the economy, particularly the real estate sector. There are many lessons for us to learn! But, collectively and individually, will we?

Chapter 1 presents Elgonemy's perceptions of some of the characteristics of the American economy, particularly the real estate component in asset and capital/financial markets. He shares his thoughts about direct and indirect causes of the 2000-2005 "reality of the realty bubble" and ensuing Great Recession. Frugality is not one of our virtues; in this chapter he warns against greed and debt, individually and as a people/country/culture.

In the second chapter he dives into some of the "mumbojumbo" that has come about in the last few decades in the real estate capital and financial markets; a host of acronyms and terms including: ABSs, REMICs, passthrough securities, derivatives, multi-layered derivatives, mortgage bonds, CMO classes, tranches, tranche structuring, CDOs and other imaginative and complex inventions. You may think you have an understanding of most of these, perhaps, but here they are clearly and concisely explained-some with visual aids.

It's intriguing how a basic concept, i.e., loaning money with real estate as the security-the basic mortgage- became so incredibly complex in response to the desire for liquidity, risk sharing, and satisfying insatiable simple greed. From the mortgage to secondary markets to securitization to a tangled morass of new investment inventions, mechanisms and instruments, the developments and progressions are explained. And all this was happening at a time of residential real estate price increases exceeding inflation far beyond the historic typical one percent or so, and consumerism driving up all types of consumer and corporate debt to Himalayan levels. Enter some black swans, and you have the perfect storm-what has come to be known as the Great Recession.

In the third chapter the reader sees "it wasn't just a bubble; it was a froth of countless tiny bubbles," as Alan Greenspan put it in The Age of Turbulence.

Elgonemy reveals the faulty assumptions and how the market drank "the Purple Kool-Aid." It appears that none of the sophisticates understood the new derivatives- sliced and diced investment instruments-and/or didn't want to admit what they didn't know, or find out. Why endanger the golden goose?

The American consumer's desire to spend and live well beyond his or her means circuitously contributed to the crisis. But ... the 'spend-it-before-we-earn-it' consumerism habits were in place long before the housing boom.

And in real estate: Tempting, low-rate loans, often with artificial payments, were pushed by greedy, unscrupulous loan officers. They found easy marks in gullible buyers. ... It can be assumed that these families seldom had access to an honest real estate agent, loan officer or attorney to guide them through the stressful home buying process-they were often dealing with the lowend of the real estate profession...

The author correctly points out: "When investment markets digest expectations only, it is a bubble in the making. Investors and bankers can easily get caught up in a feedback loop that reinforces a sense of tunnel vision or expectations group-think." It became standard, normal and accepted. …

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