Fannie and Freddie Get in on the Act
Historically, Fannie Mae and Freddie Mac purchased and guaranteed mortgages that met strict lending standards. But as the boom in risky subprime and Alt-A mortgage-backed securities cut into their once-dominant market share, the two companies turned to investing heavily in securities backed by these products. Fannie and Freddie ended up being the largest investors in these non-prime mortgage securities created by private issuers.
Armando Falcon, the top regulator of Fannie Mae and Freddie Mac from 1999 to 2005: “Fannie Mae and Freddie Mac could not accept their new diminished role in the market. They had to get their market share back. One way to both get market share back and drive up profits was to start buying high-risk mortgages.”
Bill Maloni, Fannie Mae’s chief lobbyist from 1983 to 2004: “What [former Fannie Mae CEO] Daniel Mudd should have done was convey to shareholders that this was a unique time and you may not get your single-digit or double-digit returns because the availability of good loans was not there. It takes a special kind of leader to do that. It wouldn’t have been the easiest thing to do, but it would have been the right thing, the smart thing, and ultimately they would be building statues to the guy if he had done that.”
Lyle E. Gramley, former Federal Reserve Board governor: “There wasn’t anybody looking over the situation at the governmental level who was worried about it enough to do something. I think you could point to almost anybody in government who had responsibility for maintaining financial responsibility and say, ‘Why didn’t you do more?’ ”
“You Couldn’t Get Homes Up Fast Enough”
Developers scrambled to keep up with the demand for new homes. Many buildings and communities sold out before they were completed; some had waiting lists with hundreds of would-be buyers.
Bill Denny, Long & Foster: “People would sit in lines overnight to take part in lotteries [for the chance to buy new homes]. Sometimes there would be lines of 50 or 100 people. On the morning of the sales, they would draw four numbers. If your number was drawn, it was like striking oil. The next month, they’d bump prices up maybe $10,000 and sell four more.”
William Lange, partner and general manager at Lawrence Doll Homes: “The timeline for builders was: Do it as quickly as you could. You couldn’t get homes up fast enough.”
Mark Schacknies, former director of acquisitions at Walnut Street Development: “We developed 1021 Clarendon in late 2005. We planned a preview party at Clarendon Ballroom when we were about ten months away from delivering.
“It started raining. I said, ‘Oh, great—no one is going to show up.’ But people started coming and they didn’t stop. We had to block off the entrance. The line just kept backing up like an overflowing pipe. The total count ended up at about 4,000. Two-thirds of them never even made it into the building. They just stood outside in the rain. We sold out 420 condos in ten weeks.”
Carole Sherman, owner of Bethesda Too, a real-estate development company that specializes in tear-downs: “I’d look for little split-levels or two-story small Colonials. I did a lot of houses behind Suburban Hospital. An agent would call and say, ‘This property is going to go on the market this weekend.’ You’d drive over there to see it and there’d be ten other builders sniffing around.”
Flipping homes—buying only to resell for a quick profit—became an almost sure-fire way to make money.
Kenneth Wenhold, Metrostudy: “So many people were flipping houses. They would put $5,000 down, then six to nine months later when their house was nearing completion, they would flip it and pocket $75,000. It was a $5,000 risk for a $75,000 reward. Where do you get that kind of return in the normal world?”
Mary Chieppa, an agent with Coldwell Banker who teaches real-estate-licensing classes in Maryland: “The classrooms really were the fullest I had ever seen them. But a lot of people were just doing it for their own purposes as an investor.
“I would say, ‘What brought you to my classroom?’ For the majority of my career, people always said, ‘I’d be good at it. I love houses. I walk though open houses for no good reason.’ All of a sudden I started hearing, ‘I want to buy homes and fix them up. I want to be an investor.’ ”
Craig Fuhr, a real-estate investor: “I did my first rehab in Columbia about seven years ago. I found a smoking-hot deal. I did the project with my father-in-law, and we split the profits. It took 90 days, and we made $100,000.
“I later got out of being a rehabber and became a wholesaler—someone who goes out and gets a house under contract and then flips the contract to a rehabber. It was not unusual for me to make $25,000 to $30,000 just by selling a contract to a rehabber.
“There’s one level below a wholesaler. That person is called a bird dog. All they do is ride up and down streets and find deals. But they don’t have the money to put a property under contract. I had bird dogs who would bring me deals. I would put the property under contract and pay them $500, and then I would sell it to an investor for thousands more.
“The real-estate-investing club in my area went from 25 or 30 people per meeting to almost 500 overnight.”
Developer Mark Schacknies: “Everybody was investing in condos. Syndicates out of Florida and New York would call and say, ‘Sell me—right now on the phone—50 units in your building. I represent a bunch of retirees, and I’ve got their Social Security numbers and their checks.’ ”
Andrew Florance, CEO of the CoStar Group: “In 2007, I started noticing people building office buildings not with an eye to who would occupy it. They were building with an eye to who they would sell it to. That’s the same phenomenon that happened in residential—‘I’m only buying this condo to flip it.’ ”