Are You Ready for “Reality Vegas?”

A few years back, my husband and I coined the term “Reality Vegas.” You’re probably familiar with “Fantasy Vegas” and the luxury, glamour and glitz of the Las Vegas Strip. “Reality Vegas” is when you cross to the other side of the city—the subdued part of town where it seemed that dreams and hopes go to die. Over time, the term came to capture the feeling of leaving a wonderful vacation or other happy place to return to real life with all its problems and difficulties. When I look at the coming year, I expect 2010 to be “Reality Vegas.”

Don’t get me wrong. I am not saying that the 2007, 2008 and 2009 markets were any type of “happy place.” But in 2010, the false sense of security from the artificial injections of government capital, programs and intervention will wear off. In combination with market frailty, business re-structuring and implementation struggles, we will deal with our own market “Reality Vegas.” Inevitably, for some, the past few years WILL seem like a happy place that they wish they could restore. Luckily for others, what ultimately will happen once they return to reality is that they’ll have the opportunity to dig in and prepare for the next “Fantasy Vegas.”

Early in 2009, Dr. Jay Q. Butler, director of Realty Studies at ASU’s Morrison School of Management & Agribusiness, asked me to offer students an overview of the mortgage industry and the economic impact that it faced over the previous few years. In that presentation, we discussed how those that survived the compression of our market in 2007, then watched as politicos legislated government protection in 2008, were not surprised when “change” was the theme for the incoming administration in 2009. It is now 2010, and the economic dust has begun to clear. The regulatory “cavalry” will assess the lay of the land, and those market participants who endured will emerge from the shadows to rebuild their village and adapt to the new “reality.”

Federal Reserve Chairman Ben Bernanke acknowledged on September 15, 2009 that the recession was very likely over as consumers showed signs of spending again. Larry Summers, the White House’s chief economic advisor, also agreed on December 13, 2009 that the recession appeared to be over, with a citation that job growth would begin as early as the spring. Given that consumers have shown signs of a slow increase in spending and unemployment numbers show a slight decline as well, politicians are already pronouncing victory. A cautious view, however, suggests that increased spending may have to do with synthetic government funding programs such as “Cash for Clunkers” and the deep discounting of retailers to maximize holiday purchases. 2010 will force consumers to adapt to “normal” higher interest rates since the Fed will end their purchase of mortgage-backed securities early this year, and homebuyers have not been given any indication that the homebuyer tax credit will be extended again.

As we see the reality of a slow recovery emerge in 2010, the regulatory patrol will commence to “protect” our new market from any appearance of impropriety. In fact, to maintain order, we will see regulation cross uncharted territories under the guise of “consumer protection from deceptive practices.” This regulatory power will continue to expand beyond the banking industry into related fields, specifically the title and real estate industries, as consumer protection legislation continues to give political clout to those seeking re-election this year.

Finally, battle-scarred market survivors will raise their heads to see a much revised landscape in which to forge ahead. In a year that began with the implementation of the new Good Faith Estimate and HUD-1 Settlement Statement and the major logistical changes that they have created, participants will endure the massive implementation of federal loan originator education and also prepare for the major program changes proposed by FHA’s newly created Credit Risk Officer, which include condominium project approval change, increased net worth requirements for FHA approval and appraisal changes.

There is a positive side to this “Reality Vegas” in that the new lay of the land will finally be introduced. Rebuilding will commence, and those who have educated themselves, adapted and made themselves amenable to the changes will flourish. A much stronger purchase market will emerge, with better-educated consumers, a more experienced industry and a more hopeful market. We will see many cautiously prepare themselves for the next break or vacation—a return to “Fantasy Vegas.”