Underwater Homes

This is a very interesting op-ed piece about homes that are "underwater," in other words, the home owner owes more than the house is appraised or can sell in an open market. The question addressed by the commentator is why, in our "free market economy" it seems legitimate for businesses to walk away from assets which are collateralized for more than they are worth, but it is considered a sin, morally wrong, for a homeowner to do the same thing?

What's even more interesting but not addressed in this particular piece, is how it is lenders (think banks) could allow debt on private residences with so little an equity margin. It's like forcing someone to gamble their life's savings at the craps table in Vegas.

While I personally love owning a home (I can have dogs without having to worry!) and would probably do everything possible to keep my home, I can understand folks walking away from a desperate situation, where it seems they will never recover any money. Essentially they are paying rent with interest on the house.

My sense is that in many parts of this country the real estate market is looking at years if not a decade before housing prices will recover to similar levels of the "greed and gluttony" decade. Yes, yes, I agree there is some individual responsibility here. I mean, when some ya-hoo pulls up in a Mercedes, tells you your house is worth double what you paid for it two years ago, your guard probably should have been up. I remember listening to a realtor here in Seattle constantly tell me there was no way the market could crash because there is no more room to build. I would roll my eyes. I have been hearing that line for 30 years and seems to me developers have been finding lots of land to develop. But I suspect a lot of people were seduced by the same "reasoning."

So, if it is going to take years or a decade before a house is worth what is owed, does it make financial sense to keep paying a ridiculous amount on it? If banks walk away from assets all the time, why can Joe Dokes?

On Foreclosure, Again

As if to add insult to injury.

Many of the new residences built during the past ten years were constructed in planned communities. Large subdivisions with lots of houses that mega-developers convinced politicians would be good for "affordable housing." Of course, not one house was "affordable," but they got their permits and ran with it.

Since they were planned communities, part of the selling point were the covenants, conditions and restrictions (CC & Rs) which had requirements on everything from paint colors to maintaining common areas and landscaping. It created a homogenized look.

Of course, those things cost money, so homeowner's associations were created which established fees for each home.

And now, as money gets tight, many homeowners, while still paying the mortgage are not paying homeowners dues. And the homeowner's associations are filing for foreclosures.

The way this works is that the homeowner's associations are in junior positions to the lenders, which means if they foreclosure, they have to pay off the lender in order to own the home. Could be expensive. But in the meantime, it's pitting neighbor against neighbor. And that is frightening.

Something is still seriously wrong in this country.

Foreclosures: What Is Your Bank Doing?

The two articles made my stomach turn.  First, banner headline in yesterday's Wall Street Journal that banks are ramping up foreclosures.  According to the article, now that the lenders "understand" what the Obama Administration's requirements for assisting defaulting homeowners, the lenders apparently, in a matter of a few weeks, have managed to survey their portfolios, determine who is qualified to re-negotiate their loans and who shall be foreclosed and evicted.  

Meanwhile, the changes to the bankruptcy code which would permit federal bankruptcy judges to modify home loans, the cram-down provisions, remain bogged down in the US Senate.  Banking industry lobbyists apparently can control 100 US Senators far better than that unruly US House of Representatives who did pass the modifications to the bankruptcy laws.

As appalling as the realization that lenders who are essentially being bailed-out unconditionally, turn around and pull the plug on thousands of homeowners, is what is happening to elder borrowers.  Folks who have lived in their homes for dozens of years, had significant equity, could pay their taxes on the miniscule incomes they had, but were swayed by mortgage brokers who trolled the public records looking for just these kinds of people.  They were told by these mortgage brokers that they could take the equity, live a better life, perhaps use the money to pay the loan...many of them didn't make enough money to pay the first mortgage payment.  Meanwhile the mortgage brokers walk off laughing with thousands of dollars in commissions and fees.  And of course, these elders, our mothers, fathers, grandparents, are in foreclosure or out of their beloved homes.

While there have been several very public criminal investigations of mortgage brokers committing fraud, the victims have been lending institutions.  Not people.  Not elders seduced in classic huckster style, to borrow way more than they could afford, eventually losing their homes.  So while we as a society are so busy saving banks, we have done a horrible job helping our neighbors.  We are not protecting their homes, we are not prosecuting the fraudulent lenders and brokers who preyed on people (not banks).  We are not standing up to the US Senate telling them to do everything they can do to help homeowners.  Pass the cram down provisions now!

Meanwhile, stop into your bank.  Ask to speak with the branch manager.  Tell him or her that you are upset your bank, your money, is being used to foreclose on your neighbors.  Tell them you don't want that to happen.  That you want your bank to work with every single homeowner until that homeowner calls it quits.  Tell them you want the bank to look at the mortgage brokers who brought them the loans, to send cases to prosecutors where the loan was clearly predatory and the victim is hurting.  Tell them you are embarrassed and ashamed of their behavior.  Talk to them, all their ads claim they listen.

Since I posted this this morning, I read this great piece on the status of the cram-down provisions in the US Senate.  If you live in one of the states with the Democratic Senators opposing the re-institution of the cram-down provisions, or even if you don't, call the folks on the list in the article. Call them every day.  It's important not only for the folks trying to work with the banks, but for your own neighborhood, community, and conscience.

But Is It Enough?

Yesterday, President Barack Obama finally introduced his plan to help homeowners who are on the verge or in the throws of foreclosure.  In Washington State, as in numerous states across the nation, foreclosures are usually done without any intervention from the court.  Rather, notices of foreclosure are sent to the homeowner by the lender (or usually, through some foreclosure specialist who does this for a living) and the clock starts ticking.  In Washington, a homeowner has 180 days from the notice of foreclosure to come up with the delinquent payments plus accrued late fees, attorney fees (even though no attorney for the bank is involved), assessments for mailing, publishing costs...you get the drift.  And because these foreclosures are done without any judicial review, there are chances that a lot of foreclosures happen to folks who may not be in default, or who are close to coming up with the delinquencies but can't find a voice at the end of the phone at the lender to talk to.  And from this time last year when policy-makers started talking about the foreclosure crisis to yesterday, you can only imagine that there have been a lot of foreclosures.  A lot of families put into the streets.  A lot of stress, pain, and suffering.

Meanwhile, the least discussed part of the Obama plan is the stick he will ask Congress to impose if lenders do not cooperate in stemming some of the tide of foreclosures.  Currently in US bankruptcy law if you are in default of your mortgage and you file for bankruptcy, the only thing the bankruptcy court can do for you is to suggest you find the money to become current.  A bankruptcy judge can not "force" a lender to modify the loan.  However, this was not always the case, but the banking lobbyists got to Congress and the so-called cram down provisions were taken out of the bankruptcy code (a note here, if you're a corporation a bankruptcy court can "force" lenders to adjust terms of loans...gee, are we surprised?  And ironically, cram-down provisions are still legal for second homes and vacation properties...hmmm, who owns those I wonder?).  

Today, in the financial press, such as the Wall Street Journal, there is a lot of gnashing of teeth over the possible re-institution of the cram-downs.  And I ask again, what world are these financial institutions living in?  If these geniuses get what they want, they may end up owning every house in places like Nevada!

But here is the thing that caught my attention in listening to President Obama.  Several times in his speech he said that this plan would help "people who followed the rules."  The first time I noticed this kind of language was during the Clinton Administration.  The language is code for: "we're not going to help people who are poor, on welfare, or are not breaking their backs to make minimum wage."  For instance, the Obama foreclosure plan is specifically excluding people who "bought more house than they could afford."  Apparently, they did not follow the rules.  Or the plan is not designed to help people whose mortgage debt exceeds 105% of the current market value.  I guess those folks didn't follow the rules either.

Here's what I want to know:  First, who wrote these so-called rules?  Second, since when do politicians, who haven't followed very many rules themselves, get to dictate what rules are followed in a crisis like this?  Third, is it then true that the mortgage brokers who made gazillions of dollars and realtors who are driving around in their big honking Mercedes bought with their fat commissions after luring, purring, and assuring people that indeed they could afford this house, did they follow the rules?

My suggestion to politicians?  Lose the line about Americans who follow the rules.  We all know what you're trying to do, to assuage the few people left in America who may get upset that their tax dollars are being used for any bail out whatsoever.  But really, they will never be happy so why bother trying to assure them "only the rule followers" will be helped.

Frankly, if I were President, I would attempt to call a halt to foreclosures right now.  Suspend every single one of them.  1 in 10 homes in America are in some financial stress, whether it is worth less than the mortgage, in default, struggling to make payments, whatever.  That is a lot of folks.  Call a time out.  Ask Treasury to take 180 days to compile data on exactly what the problems are, where, who are the people, and what can we do to keep the greatest number of families in their homes.  Maybe we do mass cram-downs.  Wipe the slates clean of the consumer debt, cleaning up bank balance sheets as well, adjust the mortgages to where the greatest number of people stay put.  Backload the debt for a future sale.  Eliminate the due on sale clauses in Deeds of Trust so a borrower can sell the house without the buyer having to find a new loan.  There are tons of things we can be doing now to increase the numbers of people not losing their homes.

And oh, the next time, you know, in the next boom-bust cycle?  Let's make sure everyone knows what the rules are and follows them, so we're not segregating out people who simply got suckered.  Or we're not also bailing out the lenders, automotive manufacturers and whoever else has great lobbyists, who by the way, have never played by the rules.

Our Homes

Recently, the Pew Research Center finished a poll on American's attitudes toward their homes.  By this, I mean (and maybe so did Pew) the places American's want to consider home, not just the walls, but the location or ideal, as in near mountains, on a river...

During the past number of years, urban planners as well as hip transit engineers, have dreamed of a new American order, one where sprawl would be eliminated, people would move to cities, urban areas, and live in dense, transit oriented developments.  Now, with the real estate crash, these same urban planners believe the idea of a single family house is dead, and are piling dirt on the suburbs as well.  In fact, many of them have articulated the belief that the real estate crash is exhibit A that the single family home was "unsustainable."  They believe high density housing, clustered around urban amenities is the panacea to everything that irks them.

You can see the effects of this urban planning dream in small townhouse condominiums that sprouted like weeds in cities throughout the West (they are, in my aesthetic opinion, ridiculously designed and probably a developer's dream because they can be replicated over and over without any additional design costs to the developer).  These urban planners believe the single family house with a yard is wasted space, encouraging the suburbanization of America.  They tend to think folks who disagree with them are old guard, out of the mainstream, and not particularly environmental.

But the Pew Research shows that most Americans still want to live in a house with a yard, a fence, and in urban areas that have natural amenities (think Seattle, Portland, Denver).  In fact, one op-ed writer opined that American's want to live in those cities and have a garage filled with outdoor equipment (welcome to my world)!  

Increasingly, I think there is a polarization that is occurring in our society that may lead to as intense battles as the so-called blue/red polarities we currently witness.  This divide is over age and, for lack of a better word, entitlement.  The young, hip, urban planner types remind me of the young, hip, Wall Street types, or the young, hip, dot.com types of the late 1990s.  They know a lot.  And are not afraid to let you know they know a lot.  But they also feel they are entitled to being right.  A recent study on expectations of college grades demonstrates my point.

And so, these young urban planners are confident. They know that all the theories they studied, all the GIS maps they've done, all the European cities they have evaluated, are right.  Density is the trick.

But homogeneity is so un-American.  We don't want to look all the same.  We don't live all the same.  Many of us have kids who play sports, all over the city.  Some of us work from home and use our cars during the day to check on elderly parents.  Seniors like getting out and about, maybe even driving to the store or a mall just to look, to be around people.  Not everyone commutes to a downtown glass office building.  Those who want to live near natural amenities want to get out in them.  Not all of us want to live in cookie-cutter close in townhouses.  I think if we wanted to be Europe we'd have designed our communities based on those models decades ago.

I think about my friend who lives less than a mile from her office.  I have known her for over 30 years, and not once has she walked, biked, or even ridden the bus to work.  But she votes for every tax that will go to mass transit.  She's emphatic that we should have it.  But she has never used it to get from her single family detached house with a yard home to work.  She drives to work because she likes to meet with friends who don't work where she does for lunch, or see them for dinner.  Her car has given her a way to maintain a vibrant and vital life with her community.

While I appreciate what the young urban planners are trying to do, and applaud their ability to reach the ears of many politicians who sit through the transit oriented development seminars at their retreats held in swanky hotels far away from urban centers, I also think the young urban planners need to realize they are not the only ones living in urban centers.  Diversity is what makes us vital.  The Pew Research shows that just as much as we are hip and like Starbucks, the same survey on housing also showed that more Americans like McDonalds.  Now, perhaps the urban planners want to encourage more fast food chains near their transit oriented development?

What Are They Thinking?

In today's news, President Barack Obama is going to offer carrots to mortgage lenders in order to encourage them to reduce monthly payments of borrowers.  And of course, anything the federal government can do to help struggling home owners, owners who are either in default or on the verge of defaulting, is a good thing.  At least 6% of American home owners are either in foreclosure or on the verge.  That figure, of course, does not take into account the thousands who are struggling, who are not paying other bills in order to pay the mortgage, of the hundreds of thousands who have already mailed their house keys to lenders, or simply walked away.

But what really bothers me are two things.  First, lenders who are reluctant, no, objecting to helping any borrowers.  And second, the ya-hoos who say things like President Obama is running a risk of angering homeowners who are not in default and "bitterly" resent the government bailing out those who may have made bad decisions.  

First, the lenders.  It goes without saying that while there may be banks who are not taking any government money every single bank right now is benefiting from those who are seeking help from the Troubled Asset Relief Program (TARP).  On the idea that if one bank falters, especially one like Washington Mutual or Citibank or Bank of America, all the other banks suffer, then every bank should be responsive to direction from the government.  We, the taxpayers, are helping them survive in this economic climate.  So the lenders who say they can not do anything to help the borrowers and don't have an obligation to do so are really saying, what, they think holding on to empty real estate or selling it for a loss is a good thing because it proves you're man enough to foreclose?  And to the investors in the banks, or the ones who bought the collatoralized securities and are now apparently suing banks saying they have no right to suspend foreclosures (the banks, therefore, acting as mortgage servicers rather than owning the promissory note) I ask the same question: why would you want to hold onto vacant real estate.  It makes no sense given that the majority of foreclosures are happening in particular regions such as Southern California suburbs, Florida, Nevada.  Hello!  Lenders you foreclose and you end up with what?

Second, this whole argument about moral hazard is a straw man.  The idea comes from economic theory that if you have insurance you are less likely to guard against risk (as an aside, it seems the banks and other Lords of Wall Street sure knew a lot about moral hazard as they sliced and diced the mortgages to sell as securities in order to get them off their books).  In this context, of helping home owners reduce their mortgage payments, the moral hazard proponents seem to be arguing (using the term moral hazard as shorthand) that if the government helps homeowners now, a seed, a very bad horrible seed will be planted in American's minds that if they get into financial trouble, the government will always bail them out.

Done laughing yet?  

Seems to me that if you're robbed by a financial fraud, which evidence indicates many of the loans were done through dubious lending practices, you merit, in our society, help.  Let's not call this homeowners bail out, let's call it victim's assistance.  Victims of economic terror.  Victims of theft.  Victims of greed.

These bright bankers also think opposing re-instituting cram down provisions in bankruptcy laws is also a good idea.  Good Lord, banks lived with those provisions for decades before they finally contributed enough money to Democrats and Republicans in Congress to get them repealed.  Bankruptcy judges are not unreasonable wild-eyed populists who are going to make revisions to mortgages that will cause dire consequences to banks.  In fact, I would guess most cram-downs worked in the banks benefit before it was repealed.  Can our legislators please stop being afraid of bankers and their lobbyists?  They failed.  Repeat after me, they failed.  But for some reason (hmmm, do we need to check those campaign contributions, again?) Congress drags it's feet on re-instituting laws we all lived with for decades.  

If any of the Lords of Wall Street doubt that we are in an economic depression, look at the markets today, almost at the lowest point in a decade.  Look at how their own investors respond when they believe the Obama Administration is not doing enough to, oh, what is the word, bail out the banks.  It's time to look at helping the victims of this debacle, to make sure American's stay in their homes, that their kids stay in their schools, that their families share memories with their neighbors, that the local green grocery stocks the foods that family enjoys.  It's going to be a tiny amount of help in comparison to the monies banks are getting under TARP.

And hello, bankers?  Start thinking again, ok?