Sometimes as I walk through a house with my clients, I see a little ethereal transparent cash register hovering above me which helps me keep track of the cost of bringing the house up to snuff.
Gut the bathroom…start over completely….$16,000….cha-ching
Is that asbestos?….probably safe asbestos clean-up…hmmm…..wow uh…$15,000?….cha-ching
Hmmm…that roof looks…..uh…missing…..$12,000….cha-ching.
It can easily get beyond the asking price of the home and I realize quickly that no amount of money would be well spent as it might exceed the end-value by an infinite degree. Sad as it is, the only wise thing to do at a certain point in many cases is knock it down and start over. In their own right, these buildings may be irreplaceable in their architectural uniqueness, their historical significance, but the commodity value of these properties is the consideration by which value is judged, and to that end, you can’t justify the cost, much less get a loan to do it.
More often than not, it is worse than that though. There is no architectural uniqueness. There is no history. There is nothing but the wasting of money on poor-quality work that was probably the result of would-be developers watching one-too-many HGTV flipping shows, or poorly constructed monstrosities built by “professionals” that will do the world a favor by being obliterated.
Whichever the case, in my experience, a disproportionate number of these homes are foreclosures, REOs (Real Estate Owned), short-sales, etc. If I go out with clients to see 10 properties based on price point, type and area, anywhere from 3 to 6 of them will be REOs or short sales these days. Almost invariably they will be the worst properties we see on that day. It is nearly without fail. Why is this?
It is because the decision makers at the financial institution are looking at the internal math to price this house. If I may offer a piece of advice I often give to my clients….
Nobody gives a shit about your math.
Banks seem to be the least-knowledgeable about their property’s value and they are more interested in covering as much of the existing debt as they can, regardless of whether that number is insanely disproportionate to the real value of the property. In other words, they are the worst judge of their own assets. They do not want to realize how bad a bath they have taken no matter how overwhelming the evidence. This is why we see 300 days on the market. Ten, fifteen price drops, all that nonsense. Consistent efforts by over-extended servicing lenders to reduce commissions paid on the sale, and to get as close to their debt obligations as possible are abundant in their examples. This is what those that had the money before knew how to do….cut costs, pinch pennies, etc. and it isn’t helping. You can’t worry about cutting costs of water in the midst of the fire. You just need it. But these are the guiding forces of these bloated bodies that have successfully been absolved of their crimes and absorbed into behemoths that if others were too big to fail, the size of the financial institutions the government has helped create should scare the shit out of you. If that doesn’t, the cost of financial transactions in the future sure will.
A soundly run organization would do with its real estate holdings from mortgage foreclosures what it does with more calculable assets, such as paper. Namely, one determines whether it stays in the portfolio or not. If not, the soundly run organization succumbs to the reality of its worth and pays a professional to aid in its sale for that amount. If it feels that it has the wherewithal to suffer through a downturn in order to allow the asset to return to value, (as they are suggesting the American people should do by shouldering the bail out), it attends to their asset….in the case of housing assets, it means one repairs it….rents it out….waits it out.
They don’t do this. They seek the cheapest commissioning agents to sell it who put in turn minimum effort into selling, not even bother to grant access to see the property, return calls. They let the property slowly rot away as small problems become huge ones, until it becomes a property that can never be returned to normal without an astronomical investment that will not be returned.
It therefore pains me when I have otherwise knowledgeable people and friends express particular interest in these homes as if this is where the bargains are. The foreclosure market is the new flipping market and it is very bad news. I realize that the bargains are out there, but it is like scuba diving for chum in a section of ocean churning with sharks. Why would you want to do that? There are perfectly lovely homes in less duress to choose from that are pressured by these homes to conform to a realistic value. I can honestly not believe some of the low prices I am seeing on conventional sales, so for buyers that can buy without the burden of selling out of a tough recent purchase, it is amazing how great the options are for non-duress properties.
It is my opinion that the next big backfire will be the foreclosure marketplace tha t is developing, and tis can only grow as more people get further behind the eight and government acts in the worst possible way to worsen the struggle.
I find all of this perfectly analogous to the mess we find ourselves in with the $700 Billion bailout plan and the sudden realization by our economic leaders that unlike what they said weeks ago, things are in dire straits. This is a land where “fundamentally sound” two weeks later means INORDINATELY FUCKED.
Let’s call it what it is…..Fuckedonomics.
The passage and proposal of the bailout shouldn’t really surprise us. The leaders of this plan are members of the system that they regulate. Would you trust the Chairman of Exxon to govern our energy policy?
That is what we have with Henry Paulson, the architect of the $700 billion bail-out. He is the Treasury Secretary, but he is also the former CEO of Goldman Sachs with a net worth of over $700 million according to Forbes magazine in 2006. His plan was summarized on a completely tone-deaf three-page letter to include the specific recommendations that the government would grant the Federal Reserve and the U.S. Treasury expanded powers and $700 billion to:
1. buy non-performing assets in the housing equity derivatives markets. This is another way of saying the loans that are failing or failed
2. they need unfettered control of this. This is another way of saying no oversight.
3. They needed all the money. And right now.
It quickly became the assertion of the President and an alarmingly large number of people in both major parties that this was the only possible course of action and it had to be immediate. It is pretty amazing isn’t it? They’ve been guiding the ship for so long, and they’ve been telling us how it is great, ok, not as bad as it looks, pretty good actually, not that bad, bearable, fundamentally sound, and now, it is economic Armageddon unless you do what we say.
And right now.
Makes sense. They’re the experts. People like Paulson. People Like Ben Bernanke. You see he is an expert. He is a studied academic in the ways of Milton Friedman, the flow of free markets, and most specifically, the Great Depression. Who better to be in charge at a time like this?
“Hey I know all about the Great Depression….Look, I’ll show you.”
Uh.
Thanks.
Let’s not forget Christopher Cox. While I certainly find McCain’s ignorant call to fire Cox hysterical, (given his constant stance even further to the side of deregulation than Cox), I would still agree that Cox is a complete cancer to our economy.
(By the way, he does not serve at the pleasure of the President. He was nominated by the President, approved by Congress, and is the head of an independent regulatory body that can’t be fired by the President.)
Plus Bush has Cox’s back…..for now. This is what President Bush said about him when he nominated him to be head of the SEC three years ago:
“As a champion of the free enterprise system in Congress, Chris Cox knows that a free economy is built on trust. In the years ahead, Chris will vigorously enforce the rules and laws that guarantee honesty and transparency in our markets and corporate boardrooms. He will be an outstanding leader of the SEC.
Today the American economy is the envy of the world. Our economy is growing faster than that of any other industrialized country. We have added over 3.5 million new jobs during the last two years. The unemployment rate is down to 5.2 percent. More Americans are working today than ever before, small businesses are flourishing, families are taking home more of what they earn. To maintain the confidence that is the cornerstone of our economic system, we must ensure the honesty of American business, and the integrity of the capital markets and stock exchanges. Investors must have confidence that the information they use to make their investment decisions is fair and accurate.”
Since then, Cox has denied additional funding offered to him by Congress to fight corruption and aid in enforcement, refused new powers to regulate as offered by Congress saying instead that Congress had already “struck a perfect balance” with existing laws. He enacted a self-regulation system for investment banks that he recently admitted was key in the failure of the SEC to properly oversee and prevent the failure of Bears Sterns. In fact, he called his plan “fundamentally flawed from the beginning.” Thanks for owning up to it though.
Just to show you how serious he is, he has called a stop to this practice, now that all of the major investment banks are extinct. In his first year in his position, he allowed the five major investment banks, Bears Stearns, Goldman Sachs, Morgan Stanley, Lehman Brothers and Merrill Lynch to increase their risk holdings ratio from 10 to 1 to 40 to 1.
That turned out well too. Then they instituted “mark to market” accounting rules which required them to account for Currently the only two former investment banks that are not extinct or absorbed have recently applied to be banks since they are about to be regulated like banks anyways.
See, I know I have been sounding like a grumpy Gus for some time, but it isn’t as if things haven’t been heading in a profound and deliberate trajectory in a hand basket to all but the most oblivious or unaffected. Now that enough noise has been made about the doom that will befall us if we didn’t pass this bill, it has passed.
And it was a terrible, horrible, awful idea.
The problem is we are taking advice from the people that caused this mess. They are the believers in the free markets. They are the champions of small government and obscure accounting and self-serving tax cuts and deficit spending and deregulation, until it fails.
Then they are very much in favor of the socialization of the risk they begot. They also want to make sure it returns to the free market, because operating it through the government, well, you know, that’s socialilsm.
It is idiotic to think that we can then rely on these same free market forces to propel us into a time of unbridled lending. All of the attempts to do so by the monetary leaders of the country have had the effect of trying to push water through a broken pipe. While the money flowed into the companies with earlier attempts, it never flowed out because the system was already broken, so it just got washed away through the broken pipe, never coming out the other end in the form of new loans.
Do you remember the economic stimulus checks? Neither does the economy! $150 billion went out the same type of broken pipe just in time to give us the worst back-to-school numbers EVER. Great job. This was another great Paulson idea by the way.
Similarly, trying to give banks a chance to lend again by socializing their debt is more money through the same broken pipe. Why doesn’t it flow to the other side, so the value of the principal balances on the corresponding mortgages are reduced? There is not a single reason that anyone should believe that banks will begin to unfreeze these markets, because there is no condition for them to do so, just as there hasn’t been for any of the earlier opportunities given to the various banks. One attempt was to allow securities firms to trade at the same desk and rates as normal member banks. It didn’t spur new lending because it was cash used as liquidity, reserves, to stem other losses, to cover obligations they couldn’t not meet, until of course, they didn’t meet them.
Then they allowed the trade-in of mortgage backed-securities against Treasury debt. This was no small consideration, rather it was unbelievable access to give Financial Institutions the ability to unload this albatross bad paper once the market place had essentially evaporated in exchange for highly valued Treasury bonds. Again, this was to incentivize lending, and it was only three short months ago. The money went out the same broken pipe.
Lending rules have only gotten tighter. Lending has only gotten harder. Banks don’t trust each other anymore, so the rates they charge one another have risen rapidly and will be passed to the consumer. Now that there are fewer banks, with greater reach and size, the opportunity to fight this will be severely curtailed.
The latest plan is again to unfreeze the markets, and again it relies on tired economic policies of Reagan era failed thinking. A person can be brilliant, and also be wrong. That’s why all of these people went to Harvard and Princeton and whatnot. They are scholars in wrong thinking. It is easy for someone to be brilliant in the realm of self-interest, and that is the agenda of the modern administration, as it has been for the era of the modern Conservative.
It is important to note I am referring to the modern Conservative. The Reagan Republicans and onward. The Neo-con mindset, not a real Conservative, which I capitalize with respect. These are not true Republicans, and true Republicans should be mad that their party is controlled by a mindset antithetical to their roots. Do you really think Roosevelt would be a Republican in today’s Republican party? He railed against the politics of greed and corruption. Close your eyes and try to imagine Republican in the modern era saying
“…the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of that restoration lies in the extent to which we apply social values more noble than mere monetary profit.”
Not even remotely possible.
How about Lincoln? Do you think he would be a Neo-Con? He fought a fucking war to preserve the Union and he’s going to be a member of a party that constantly pleads for state’s rights? Or that he would be interested in eliminating affirmative action, or restricting immigration or opposing equal rights after issuing the Emancipation Proclamation? For those that don’t know their history, back then, a Radical Republican was one that criticized Lincoln for moving to slowly to abolish slavery. Hardly the vision we get of the “Radical” right we have today.
Anyway, back on track….the idea that we would let the folks that steered us this far, take us to the next step under the premise that this, finally will unfreeze the markets, and everyone will start lending again is the basic premise of this masterpiece. Again it is without a requirement that they do so, which is purely trackable. The government currently tracks Lender’s lending habits in lower economic census tracts in their footprint through the Community Reinvestment Act, so it is no less possible to require them to lend with the money they are able to save with this giant bail out.
It is important to remember that this is again, money borrowed from the reserves of the Social Security in the first year of the baby boomer’s retirement. Good thing that it happened for them before Republicans had successfully convinced the world to trade in the security of company pensions to be free to invest in the free market.
Just so you don’t think I am without ideas on how to fix it, here are some logical things that could be done, some of which is moot since the bill is law, and now with ridiculous additional costs for unbelievably unrelated matters. Still, here it goes. My Dear Obama list as it were:
1. The government should not refuse asset or equity participation, it should insist on it. The idea against this is preposterous. That being that the risk and debt should be public, but the profits should be private. Puh-leese. These companies should be taken over by the government and run to compete with existing businesses. By no means should the likes of Paulson and Bernanke try to refuse an opportunity to return the squandered billions to the treasury and repay our debts. An example of a system like this would be Kiwi Bank in New Zealand, which is state run, and has been awarded repeatedly as an excellent bank, one that turns a profit for the government, and keeps the free market banks in New Zealand’s rates lower to stay competitive with the government backed entity. Don’t think it could work? Despite how much people bitch and moan about the Postal Service, can you imagine the cost of regular mail delivery if you had to work through a private courier like DHL, UPS, FedEx? Some things are best done through a governments’ inherent backing and size. If they aren’t well run, it is again, up to us to change it. Warren Buffet and the mega financiers of our time are seeing the opportunities out there, but they are getting their ownership stakes for their bailout, and we the public, should do the same. Clearly the argument that these failed institutions can do a better job than the government will is flat and dumb.
2. Release the notion of banks doing the right thing as a part of your thinking. It doesn’t work. You must insist on it. So it becomes, “you can have money to lend at this unique rate, but you must prove that you are lending with this money”. Simple oversight that the powers do not want to exert because it intrudes on the free markets. Hey buddy….$700 billion is not a free market. The lending rules simply do not allow for most of the people that need to refinance to do a damn thing, since there isn’t a large market of borrowers with great credit, income and assets that haven’t already taken care of themselves to the degree that the market can assist them. If you don’t make them lend, they won’t, to any but the most well-heeled borrowers, further worsening the asset allocation in this country.
3. Reconciliation should be system through. You can’t absolve folks at the top of the value chain without passing through the value depreciation to the bottom, but that is exactly what they are doing. The idea is that while financial institutions are able to unload this debt and a percentage on the dollar, that is where it stops….the mortgage values stay the same, even though the debt has been written down. Unbelievable.
4. Repeal the Glass-Steagall Repeal. In a nutshell, this is a depression era law that required a financial institution to decide whether it would be a form of a commercial bank or investment bank and could not be both. In the repeal of Glass-Steagall, the massive entities that were spawned became increasingly deregulated and profit driven. The fact that they could package garbage loans as triple-A rated debt is the end result of thinking that diversification and less oversight would insulate the public from risk, though admittedly, it has worked out great so far for Citigroup, USB, etc. We are going in the exact opposite direction right now.
5. Massive incentives for first-time buyers. This is something that could cost far less than the $150 billion economic stimulus garbage, and go a long way to returning a marketplace to an overstocked housing market. A dollar per dollar match for borrowers down payments would encourage a marketplace, return values to better levels faster than anything currently proposed, and set up return of equity to those frozen in their homes and their loans.
6. Relax the LTV restrictions on non-cash out 30 year fixed refinances. The simplest plan is to allow a lender or broker to make no more than 1 point in yield, and allow all borrowers that qualify to standards employed when they got the loan in the first place to refinance into a single 30 year fixed, no points, fully escrowed mortgage. Values determined at over 80% would have appropriate mortgage insurance issued like FHA mortgage insurance at .50% coverage, and indefinite. To the degree that they wouldn’t qualify off of standards that applied when they got the home in the first place, it was one they couldn’t afford. What can you do? You have to let them go, but they have to go. This fix cannot be designed to help people live beyond their means, but it must help them live within them.
7. We need to be out of Iraq. $10 billion is a lot of money to spend every month on a war whose supporters say we are winning. They define winning as staying in a country that 80% of its inhabitants want us out of while a similar percentage of Americans want us out of. It is indefinable what we are actually accomplishing, so winning seems to be a parable for “dying a little less” while we piss away money that don’t have, further erode our position in the world and continue to enrich and defend the indefensible war profiteers at the expense of all.
8. Enforce monopoly laws. Instead of engineering these takeovers of giant corporations by even more-giant corporations, let’s get back to the idea of nationally owned companies for nationally fronted dollars and let these companies compete with the banking equivalent of the Post Office.
9. Vote. It is literally, the least you can do.
10. Finally, don’t vote for the morons that put us here. Even if they can field dress a moose and avoid a direct question like they are covered in sweet crude.
It is a crazy world, to be sure. It is almost too much to comment on, and certainly too much for one article, so this rant will be continued over days on my blog at www.plugandplague.com.
In the interim since I wrote last, the world has changed significantly. Personally, the world changed for the better when our daughter Zoe was born last week. She is so fantastic. Pictures and updates are available on Zoe and Jackson’s blog at http://www.jacksonsdailyupdates.blogspot.com/.
Thanks all….
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I will be continuing this rant there shortly, but if I don’t get this out now, I never will.
The next (and last of the season!) Chicago Neighborhood Bike Tour is on Sunday October 26 at Jefferson Park, 4822 N Long, Chicago, IL at 1:00 PM. Stay tuned for details.
Details and older tours are availabe at:
http://www.bigshouldersrealty.com/things/tours.php
_________________PS – Please encourage everyone to stop using sentences with “Wall Street” and “Main Street” for Pete’s sakes. More annoying than air quotes.
