Alan Greenspan Strikes Again!

Apparently Alan Greenspan, the consummate Washington, DC insider, is going to deliver a paper at the Brookings Institute tomorrow.  And he will "admit" that the Fed, under his tenure as chairman, did not predict the severity of the housing "bubble" and subsequent crash.  Ya' think?

But the most disturbing part of his talk is that he refuses to believe that regulatory efforts can at least mitigate these kinds of debacles.  In fact, in his usual "magical" language, he talks about how "central controls" will ruin capitalism.  And that we can not do anything to prevent bubbles, merely analyze them in their aftermaths.

I suppose the millions of people who lost their homes due to foreclosures or are underwater in their loan to equity ratios will be consoled with his thoughts.

Staying Foreclosures...Can We Get It Right?

Looks like the Obama Administration is going to take another swing at this horrible debacle.

What a testament to the mess we put ourselves in that we can not seem to help those folks who are in trouble, much less clean up the problems.

Mortgage Industry Redux

Normally I don't like to re-post, much less from Huffington Post, but here is a great article about what went wrong in the mortgage industry.

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."

The Obama Foreclosure Plan Is Not Enough

The numbers are disappointing. No, the numbers indicate failure on the part of the Obama Administration in addressing the foreclosure nightmare.

And part of the reason for this failure is the dismal response by the Administration to the proposal to change current bankruptcy law allowing "cram downs" of loan modifications (now, remember, bankruptcy judges can cram down loan modifications for corporations in bankruptcy or for your second home, but not a primary residence). The lack of this leverage, I think, is allowing banks to dilly-dally in modifications.

But allowing foreclosures diminishes property values in an economy of already souring real estate. The diminishing values, in other words, the amount of equity already lost, will apparently pay for the health care changes the Obama Administration wants.

Hmmm. Once again, isn't it time to stop these foreclosures?

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...

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.

Brave Judges

With all the talk about possible Supreme Court appointments, there are several judges in South Carolina who just did a brave thing.  They signed an injunction against foreclosures.  Over 5,000 foreclosures in that state were suspended to give home owners a chance to apply for federal programs which may help them keep their homes, stay in their neighborhoods, allow their children to stay in their schools.  

So, US Senate, what, again are the reasons you didn't want to help homeowners by making simple changes in the bankruptcy laws which are, by the way, available to corporations and owners of second homes?  

The Dangers of Accounting Changes, Part 2

A week ago Thursday, I wrote about the dangers of removing the Enron enacted accounting rules called mark-to-market.  How removing those rules would enable banks to puff up their books, even though the value of the assets (loans) had not changed, and in fact, may be declining on a daily basis.

Yesterday I read an interesting article linking the changes in the mark-to-market rules and the Latin American "debt crisis" of the 1980s.  While there were some incorrect statements in the article (the author believed the accounting rules were "regulations" which they are not, they are rules promulgated by a private organization, however that does not mean Congress and the Obama Administration do not pressure the Financial Accounting Standards Board (FASB) into changing it's standards) linking the recent changes to how the Reagan Administration handled the Latin American debt crisis is interesting and enlightening.

Compressing a lot of history, large multi-national banks, primarily led by Citibank, loaned billions and billions of dollars to countries like Chile, Argentina, Brazil.  The mound of debt finally succeeded in crushing the countries' ability to pay and Citibank found itself close to insolvent, holding onto "toxic" assets on its books without cash payments coming in the door.  Sound familiar?

But if Citibank declared those assets worthless, the bank itself would be bankrupt.  Instead, it continued to value the assets at the face amount of the loan plus interest owing, and instead of realistically negotiating with the countries for a reasonable debt repayment, the banks, International Monetary Fund, and the US Government hammered for interest payments, more interest payments, and yes, even more interest payments.  

The result was crushing to Latin America, which took years to get back on it's feet, meanwhile Citibank turned around and used the same business plan here in the United States with homeowners and businesses.  Not to pick on Citibank, but remember, it is the owner of Household Finance, a rather well known predatory lender who has been fined a number of times for violating many different states' consumer protection laws.  

The changes in the mark-to-market rules are an inducement for banks to NOT re-negotiate with homeowners on their loans, rather to hold firm, hammering for more and more payments.  And the results will more than likely be similar to what happened in Latin America, the housing market will take longer to stabilize, people's lives will be hobbled and crushed, and our economy will continue in this tailspin.

But hey, the banks' ledgers will look good to stockholders and isn't that what it is all about?

Meanwhile, Real People Are Being Foreclosed

Yesterday was spent with friends who have purchased their dream lot.  Right on Puget Sound.  The view is breathtakingly spectacular.  In a year, maybe two, there will be their house.  Rock fireplace, nice wood beams, wood garage doors.   It was quite wonderful, almost like spending a few minutes in a bubble, to talk with them about their plans.

But the reality for many Americans is still stomach churning.  Layoffs beget delays in paying bills, a monthly juggling act that keeps anyone awake at night.  Frequently, the bill that does not get paid is the largest, the mortgage.  And so, while my friends enjoy their dream, many people's homes have become their nightmare.

And, so far, nothing effective is being done to stop foreclosures.  The fear is that with these recent and soon to be more layoffs, people who lose their homes will also not have sufficient money to rent or find other housing.  And thus, this country begins to spiral into a greater disparity of homelessness, the haves and the have nots, the wealthy and poor.  We may worry over Mexico becoming a failed state, but from where I sit, we may become Mexico in the gap between rich and poor.

While our policy makers jet about, dealing with auto manufacturers, trying to patch up failed financial institutions, and engaging in the elegance of international dialogue, real people, your neighbors, your cousin, a family friend, is staring at a Notice of Foreclosure.  His or her stomach is in knots.  Many tears have been shed.  Fear gnaws at them.  Every day they receive letters from predators telling them they can help them out of their problems when really, letting them in the door will only make matters worse.  Greed and corruption know no bounds and no one is doing much to stop this nightmare.  

It's time for a moratorium.  If the White House can ask Rick Wagoner of General Motors to quit, they can tell the financial institutions to stop foreclosures all together.  Just stop.  Let's gather our wits, not trying to apply band-aids, but rather find solutions for every single one of these foreclosures.  We can do it.  Yes we can.

Corporate America

As we begin digesting the Obama Administration's financial industry bail-out plan, I am struck by the lack of debate concerning the relationship between government and private investors.  Certainly there are discussions about the large guarantees and actual cash the Federal Government is contributing in order to lure private money (something like 9¢ on the dollar, in other words, the government is contributing  91¢) in buying the so-called "toxic assets" off the financial institution's books.  But there is scant discussion about the new partnership that is created.  In other words, the United States Government is now partners with private investors who will be eagerly trying to maximize their profits.  

Aside from the distaste of how those profits are going to be maximized (assume that some of those toxic assets are mortgages which are "submarined" or that are secured by real estate worth far less than the face value of the promissory note) by foreclosing and selling people's homes, developer's half baked projects, and overly-leveraged businesses like Donald Trump.  But there are real people behind those toxic assets, with real homes, kids in neighborhood schools, struggling to afford a loan sold to them on dreams and more than likely fraudulent practices.

In the middle of these discussions, about how do we want corporate America intwined with our government, we also should look at corporate "solutions" to other issues.  For instance, in yesterday's New York Times I noticed a full page ad from IBM.  The ad gave a litany of food problems: mad cow, salmonella, e. coli.  And, IBM touted it's solution, of tracing food from production to market as a way to trace and track problems.  Of course, this tracking would require Federal legislation and regulation.  Interestingly, many proponents of local foods, people in the slow food movement, oppose tracking system because, ah-ha, it benefits the conglomerates who can afford the IBM systems!  It will, essentially, put the small producers out of the market.  

And then we have the in vogue with transportation planners, congestion pricing.  IBM is running commercials, which have to be expensive, on the NCAA basketball championships, regaling viewers with how much time we waste stuck in traffic.  How European countries have solved this problem (cut to happy Norwegians) with congestion pricing.  Of course, IBM is all to happy to sell you lots of expensive technology to solve this "problem."  

Let me tell you how IBM sales work.  For years they sold main frames to Boeing.  And they were so in bed with Boeing, that IBM sales force had offices in Boeing corporate offices.  Same thing with Nordstrom, selling them point-of-sales machines.  You just know IBM marketing folks are wining and dining transit planners, agriculture, food, and drug regulators, and of course, Congress, to legislate "solutions" to "problems."  

We have to remember, these corporations have lobbyists.  Lots of them.  They are good at what they do.  Many of these lobbyists used to be Congressmen, Democrats and Republicans.  They are friends with the current Administration.  When they yell "fire," everyone is conditioned to listen, even if there is no fire or a small flame easily extinguished.

So, we then must wonder...what are these toxic assets that we have to so urgently buy?  What is the problem that corporate America is whispering to our "leaders?"  And is it a good thing we are now partners with the very investors who were so eager to make a buck off of sub-prime mortgages?  What, really, is this fire?

How Big Dealers Deal With Foreclosure

In fairly remote areas (at least for this kind of money) wheeler-dealers began breaking ground on high end investments.  From McCall, Idaho to Big Sky, Montana, developers created special enclaves for the wealthy like The Yellowstone Club (Bill and Melinda Gates own property there) and Tamarack, in Idaho.  The Yellowstone Club boasted that you could only become a member if your net worth was over several million, then of course you had to spend hundreds of thousands every year in fees, much less what it cost to design and build your faux McMansion Log Cabin.  

These resorts carved golf courses, private ski areas, ponds, re-shaping the physical landscape as well as the economic topography of the regions.  Enormous wealth quickly sprung up in small towns across the Mountain West, such as Bozeman and McCall, where carpenters, plumbers, and log home contractors became instant celebrities and luscious magazines like Western Interiors tripped over themselves to show the world that the West was finally on the map with taste and wealth.

But as we know from physics, what goes up must come down, almost every one of these resorts are now in bankruptcy.  And the only ones making money are lawyers, expensive bankruptcy lawyers who fly in from New York, San Francisco, Chicago, to represent the lenders trying to figure out how to satisfy the investors who actually hold the promissory notes on the loans.  In other words, litigation is flying all over the place.  Of course, "the help," the carpenters, plumbers, and even the log cabin builders, all who are unsecured creditors, are left figuring out how to pay their own bills much less hire attorneys.

Meanwhile, these fancy resort bankruptcies show one thing.  While Congress continues to debate whether to reinstitute the ability of  bankruptcy judges to modify the terms of individual home owner's loans (called cram down provisions) which would help individuals maintain their homes, allow lenders to continue making a profit, these high powered borrowers have always been able to have judges modify their loans.  Why?  Because they are not individuals.  Corporations and owners of second homes do have the right to seek modifications.  But not an owner of a primary residence!  

Are you choking on your coffee, yet?

So instead of lessons about moral hazard which lenders argue is the problem with allowing individual cram downs, perhaps we out to be looking at the lessons of when the so-called wealthy file bankruptcy.  Where is the moral outrage?

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.

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?