Underwater Homes Part 2

Great piece in the Wall Street Journal about walking away from homes with no equity.

I still think we have a long long way to go in this real estate debacle.

Air Out of the Bubble

For the past decade, Seattle, Bellevue, and the ex-urban area surrounding these two cities have been dominated by hulking construction cranes. The whole Puget Sound region looked like one massive heron rookery. While a portion of this construction frenzy was residential glass skyscraper condominium projects (hello! Is there an original architect in this region?) a substantial portion of the new projects were commercial real estate.

Just this week, a local investment firm, seeking larger headquarters, left Tacoma and purchased the former Washington Mutual headquarters building in downtown Seattle for about 125 million, or $120 per square foot. The building had been recently appraised at $250 per square foot. Gulp. That is a huge huge reduction (the building is currently owned by JP Morgan Chase and/or the US taxpayers).

So it is not surprising in today's news a local developer filed for bankruptcy. A guy who has been in business for a long time. He now apparently has over $500 million in liabilities and around $200 million in assets (which, of course, are probably buildings that may actually be over appraised). While there are several banks holding onto liens secured with real estate, this developer also, apparently, borrowed heavily from "family and friends," and up until July of this year, paid them a consistent 9% return (does this sound vaguely similar to Bernie Madoff?). To add to this man's woes, the State of Washington has opened an investigation on him over the appeals made to the individual investors. He did not register the "sales" of the "investments" as stocks.

There are still dozens of cranes in the Puget Sound region horizon. The glut of residential housing, mostly in the form of condos, also brought commercial space. The chic thing in urban planning, now, is multi-use, so that ground floors on most condo projects are retail spaces. And just a drive-by assessment says much of that space remains unleased (making me wonder whether condominium homeowner associations are left holding the bag on the empty space?). All of this empty square footage portends another bubble about to burst. Despite the Federal Reserve's somewhat cherry outlook earlier this week, there is still an awful lot of air that has to be squeezed out of the bubble before the real estate markets, at least, begin to recover.

Hopefully the ever optimistic real estate agents, developers, and civic boosters will think long and hard before trying to "sell" us on an other unsustainable ride on the real estate roller coaster.

You've Earned It, Now Enjoy It...

Recently, I went to a "resort community" near the border between Washington State and Canada. The focus of the resort is a hotel, Semiahmoo, and two golf courses. Clustered around the courses are housing developments, all behind gates. Along the spit of land jutting into the entrance of the Strait of Georgia, is the hotel and several condominiums. It is an area ripe for extensive real estate development.

And indeed, like ship wrecks washed up on the shore, there are two buildings next to the Semiahmoo hotel which are abandoned and in foreclosure. The Marin at Semiahmoo. With prices averaging in the high 600,000's, because, as the web site says, "you've earned it, now enjoy it." The developers, a couple from White Rock, British Columbia, were recently sued over the loan guarantees they made and the property itself is slated for a foreclosure sale in October. The development was intended to be elegant, a statement of good taste and enjoying the good life.

There is a second development, up near the golf courses, away from the marvelous spit and marina, called Horizon. It was supposed to be a planned unit development, placing over 400 hundred units on former pasture land of 140 acres. Oh, but it was going to be sustainable. On this beautiful piece of property are two more ghost buildings, a preview office and apparently a "show" home. There are hinges on rock pillars where apparently the gates were to be hung, wires sticking up from the ground, and pvc pipe everywhere. The self-described country boy developer apparently was put into receivership by his lender late in July.

Meanwhile, the land is torn up, concrete has been poured, and hulking, empty structures sit, attracting pigeons, sea gulls, and other wildlife.

Between these two projects, lenders are holding onto over 50 million dollars in loans. The two primary banks are relatively small and regional. 50 million must be a lot of money to them. The banks were egged on by amped up realtors and developers who, believed that rich Canadians like "hockey players who want to hide their money in the US," and others who desire the good life of the Pacific Northwest, would buy their projects. Bankers, developers, realtors foresaw millions in profits. They spun stories of quality materials, sustainable housing, elegant details, and rich life experiences if only we would buy their product.

There was nothing sustainable, elegant, rich, or of quality in what they produced. They were, like their brethren mortgages and re-finances, collateralized debt obligations, or derivatives, modern day economic Elmer Gantry's, promising something they could never deliver, believing they would be long gone before anyone caught up with them. Hidden behind limited liability corporations controlled by other limited liability corporations, these real people, probably don't even think they are or were part of the problem.

Meanwhile, the wind in Semiahmoo howls the motto of the past decade through the empty buildings: "you've earned it, now enjoy it."

There Is Something About Foreclosures

And they still keep happening at rates unseen since the Great Depression. Yet, coincidentally, housing starts rose last month. But bear in mind with the foreclosures there will be a glut of housing on the market.

We are fooling ourselves if we think that returning to the hay-day of the real estate bubble is going to solve financial woes. But it seems that is where we are heading. And sighs of relief are coming out of Washington, DC as well as financial master-minds, such as Goldman Sachs.

I'll keep eating my popcorn and watch from the sidelines.

Hammering Home the Cost of The Real Estate Bubble

Fixated on this issue, but the real estate bubble is bursting fast. Yesterday it was the number of construction loans in default, today a prominent local home developer has several projects in foreclosure. Of course, he is protected personally, you know, gets to keep his waterfront home and private helicopter, but what goes up must come down...

Boom and Bust

While we continue to be fixated on the AIG bonuses, which I want to again plead that while it is unconscionable those bonuses were paid, it is still a distraction from issues that really need our collective attention, there was a fascinating and demonstrative news item originally reported a week ago.  In Bozeman, Montana, a gas line exploded, destroying a number of historic buildings on the main street of town.

For those of us who get to Bozeman, this is sad news.  Those buildings were indeed lovely.  Bozeman was one of those places that was seemingly immune from the economic nightmare devastating the country.

But the blast brought attention.  And a realization that indeed, all is not well in Paradise.  The bankruptcy of The Yellowstone Club, the moratorium on Ameya Preserve, (another land based development catering to not only the extremely rich but wealthy people who consider themselves into "sustainable" living by eating only foods "designed" by Alice Waters) along with other wealthy land owners beginning to collapse is causing a ripple effect in the Bozeman/Gallatin county economy.

Why do we care?  Couple of reasons.  More than likely as Bozeman begins to feel the impacts of the depression, many other rural areas will descend quicker and longer.  To come out of a depression in a rural area takes longer.  

But even more importantly, Bozeman is really a case study (as they say in MBA schools) on boom and busts.  Without doing the research to determine when boom and bust economies started in the US, I feel safe to say we have a long history of them.  Think gold and silver mining, and logging.  In fact, early in our history, booms and busts were natural resource dependent.  Come in, strip the area of the resources, make a lot of money, and leave a ghost town.  

We have, over time, managed to level out the booms and busts until the past twenty years.  Now we have dot.com booms and busts, the real estate boom and bust and it's safe to say without changing our economic models drastically, there will be another boom and bust within the next ten years.  

So here is Bozeman, on the rural/small town edge of a showy wealth driven boom and a last gasp of egos slide bust.  Strangers came into town, convinced the locals that these swanky real estate developments would enhance the economy over time, and now hundreds of carpenters, tile layers, ski lift operators, art gallery owners, interior designers, architects, escrow officers, are all beginning to understand what a bust feels like.  They attend bankruptcy hearings where formerly wealthy people who leveraged other people's money try to hold onto control of developments that were never real in the first place.  

There is gold in them there hills!

We clearly need a new economy to make sure we are not constantly re-enacting the creation of ghost towns.  You would think we'd learned our lessons from 1849.  Guess not.

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.