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.

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?

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?