Real Estate Syndicate history time

My brother in law observed the following . . . . . Over my career I say many "investment" bubbles, almost all of which were attributable to the greed of Wall Street.

I first saw it with real estate syndicates. As originally conceived, they were carefully analyzed real estate projects, pieces of which were sold to a few investor partners. But when the big bokerage houses discovered this salable asset, their commission salesmen loved them. Not because they were good for their customers, but because they paid HUGE commissions, and were a relatively easy sell to high bracket customers. And so an enormous demand for product grew among the sales force, and the brokerages were determined to satisfy that demand. So the quality of the product declined dramatically, until lots of the syndicated stuff was trash.

But for a while, everybody loved it. The brokerage houses liked the commissions, and the real estate developers loved having an unquestioning market for their projects. And, as it turned out, the bigger the project, the better the brokerages liked it, because it saved them time in explaining the deal to their salesmen. And, of course, developers loved the bigger projects, because they made more money on them.

The reality, of course, is that there are a finite number of good real estate developments, and that if they are really good it is a lot better for the developer to sell it to one purchaser than it is to suffer the expense of marketing it to the public. And so, predictably, the quality of what the public could buy kept declining, even while the demand was growing.

Just as the girls all get better looking at closing time, deals that are clearly not up to standard start looking pretty good when the sales force is demanding more product. And so, with time, the real estate syndicate became a highly suspect investment.

Just so with bundled mortgages. Disinter mediation started out as a good thing. But once the brokerages discovered they could get IPO commissions by peddling packages of mortgages, even sub price loans started looking pretty good. So good that the brokers apparently took non-recourse, or at least limited recourse, assignments of junk mortgages, and dumped them into the public market--after fees and commissions, of course.

The results, just as with real estate syndicates, was that LOTS of really back bundles of loans were created for the public, while the good stuff was marketed to better informed buyers. Fannie and Freddie deserve blame for their failure to evaluate the junk they were taking, but they were certainly not the only market for the stuff that was being sold around.