Most things in life can be thought of in terms of real estate. Pop-songs’ catchy hooks intrude on my mental real estate. Freeway mazes are wonders of utilitarian architecture, making the most of the real estate they occupy. I’ve been known to cast a critical eye at drivers who leave excessive space in bumper-to-bumper traffic as poor uses of — you guessed it — real estate.
So it’s no wonder that when I read an article about the foreclosure of a domain name, I couldn’t avoid seeing the parallels with the foreclosure wave of the last few years.
The gist of the story is this: Some folks wanted to buy what is reportedly one of the most valuable domain names on the Internet, Sex.com, to run a business capitalizing on all the traffic that goes there when people, uh, type Sex.com into their Internet browsers. Go figure.
Anyhow, the domain name came up for auction and the winners reportedly bid about $14 million dollars — financing their purchase with what was essentially a mortgage. They took a loan out and secured the loan with the domain name. If they defaulted on their payments, their lender would have the right to foreclose on the domain.
Despite reportedly making as much as $15,000 per day with the Web business, for whatever reason the domain owners defaulted. Their lender foreclosed, and now the domain name is set to go back on the auction block — just like a home that’s been foreclosed on.
The real estate parallels? The domain was purchased in 2006 — a time when it seemed lenders would fund the purchase of just about anything. Back then, the thinking was, "It’s the lender’s money — they can lend it to whomever they want."
Fast forward a few years, and the trickle-everywhere effect of the foreclosure crisis into banking, insurance, and every other corner of the economy has created a unanimous sentiment: Just because a lender can and will lend in certain situations, doesn’t mean they should. When it comes to mortgages, it doesn’t even mean they should be allowed to.
When I read the Sex.com foreclosure facts, I envisioned the would-be buyers of the domain name, shopping around for lenders who would finance their purchase. I envisioned them presenting their model to a series of conference room tables full of decision-makers — the money men (and women) of a real-life Venn diagram wherein the largest area of overlap representing the universe of banks, venture capitalists, angel investors and other lender-types who CAN lend $15 million to a Web-based business.
One of the side circles reflects the much smaller universe of those lenders who both COULD and WOULD make such a loan — the company now foreclosing on the domain falls there. But here’s the question: What was the population of the overlap area for lenders who COULD, WOULD and SHOULD extend such a loan on that opportunity?
To a great extent, I suppose that depends on the fundamentals of the opportunity. What was the actual business model or plan? And how feasible was it that the plan would generate enough income to profitably service the debt on a $15 million loan?
Back to real estate and mortgage — imagine the same Venn diagram, with spaces for lenders who can, will and should make various types of home loans. With mortgages, that diagram would need be blown out into three dimensions to account for the borrower’s decision-making, which can also fall into categories based on what they can, will and should (or should not) borrow. Every home mortgage is an intricate interplay of the thousands of combinations and intersections between the can vs. will vs. should of both the lender and the borrower. …CONTINUED
On the lender’s side, the trajectory from what and to whom they "can" lend, to what and to whom they "will" lend is really just a path of steps in which the lender decides their own guidelines for voluntarily assuming the calculated risk and reward of lending in various factual scenarios. When it comes to lenders’ "shoulds," though, these come in two flavors:
- (a) loans they "should" make because it’s a good business decision (low-risk or high-profit), and
- (b) loans they "should" make because it furthers a value — e.g., as a nation, we feel people of varying socioeconomic classes should be able to get a loan, so lenders "should" lend to them.
In cases like (b), Fannie Mae, Freddie Mac and the Department of Housing and Urban Development operate to combine those two shoulds into one, because we as a society think that X folks SHOULD be able to get a loan, and the GSEs (government-sponsored entities) and the federal government offer programs of insurance and repurchasing that allow banks to virtually eliminate their risk if they make these deals. Because that’s the only way the value-based shoulds would ever actually happen. (Although it’s also a pretty unanimous verdict these days that the values can only warrant lending where the other fundamental indicia of a sound loan are there — so Fannie, Freddie and FHA are all tightening up those guidelines.)
Just like the shoulds of Sex.com should have been based upon the business model, individual homeowners and real estate decision-makers can power their own shoulds by running a sound model of decision-making and household finances.
Here’s a mnemonic device for making sound real estate and mortgage decisions to avoid foreclosure — your home mortgage should be like the perfect plate of food (IMHO):
- Organic: Housing decisions should arise naturally from the natural evolution of your life, your family and your finances — and not be overly large or small for the current and upcoming phases of maturity of those things. This eliminates overleveraging and also buying a home too small that will be outgrown too soon.
- Holistic: The home you choose and the financials of your home mortgage should take into account the entire picture — including people, places, things, experiences, hopes, dreams, etc., of your whole life, not just your paper budget.
- Sustainable: Your loan obligations and finances (including savings, insurance against income interruptions, etc.) should be managed at a level where you can sustain them in light of a drop in market values, a temporary interruption in income, and any number of other predictable circumstances — not forever, but for six months (a good rule of thumb).
Sex.com’s model generated cash flow but apparently lacked sustainability. So did many American borrowers’ models for meeting their mortgage payment. Let the mistakes of 2006 be your lesson going forward: Choose your mortgage like we’re supposed to choose our food, and avoid the foreclosure of your family’s domain.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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