Friday, October 8, 2010

Thinking about the foreclosure crises

What's so unbelievable about this crises is that foreclosure truly is an example of the preservation of archaic traits.  The moneylenders are foreclosing on homes because that is what they always have done when loans go bad.  And when foreclosure is an isolated incident where someone in an otherwise healthy economy and normal housing market gets into trouble, foreclosure probably even makes sense.  But that is NOT the conditions of today--the economy has serious problems and the housing market is the worst it has been since they started keeping records.

Think about it--in this market WHY would any bank want possession of a house? Houses, contrary to what the scamsters want us to believe, do not appreciate. They wear out just like your car and everything else. They have to be maintained. Taxes have to be paid. etc. Looking after a portfolio of foreclosed houses has to be a monumental headache.

Add to this is the fact that the ONLY assets a bank has are PERFORMING loans. If a homebuyer with a teaser loan was able to make payments but cannot once the interest rate is reset, that person has the potential to keep performing on his loan. Now, because of some expectation of higher incomes through higher interest rates, the greedhead banker winds up with a house that is deteriorating by the day--his performing loan has become a money pit.
Christopher Whalen makes a remarkably convincing case for why we’ve simply kicked the can down the road and why the banks could be in for a repeat of their 2008 nightmares in 2011. If Mr. Whalen is right the banking sector is in for a whole new round of government intervention, takeovers, likely nationalizations and general disaster:
The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.
Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy. more
As nearly as I can tell, it is in the banker's best interests to institute a moratorium on foreclosures until some semblance of a normal market for houses can be restored. And what is a normal market?  A normal market is when average people with average incomes can afford an average home.  Since household incomes average around $50,000 per year, the most such a household should spend for a house is around $125,000.

What this means is that most of the existing housing stock is still absurdly overpriced and these prices are being artificially held aloft by oversized mortgages that increasing numbers of people cannot pay.  And unless some orderly way is found to reduce the price of the housing stock so the next generation can afford to buy a home, there will be utter chaos.

Not surprisingly, in the current and very disorderly scramble, rules have been bent.  But this is real estate--there is a LOT of settled case law out there.  Thorstein Veblen went so far as to say, "The laws of the land were written in the interests of the petty real estate speculator."  The holy grail of real estate is holding a clear title.  Rule bending  tends to muddy titles.

I have some first-hand knowledge of these matters.  When I was young and idealistic, I thought that rebuilding the inner cities was an expression of virtue.  Some friends and I bought a nearly destroyed dwelling for the purposes of fix-up and reuse.  Not only had it been condemned by the building department, the health department had listed it as unfit for human habitation.  But its screwed-up title was probably worse than the building itself--after a month of preparation, it required 4 and 1/2 hours to close and everyone was trying to be cooperative.

Getting clear ownership of this mess was one of the largest chores of the rehab.
Old Republic Will No Longer Insure JPMorgan and GMAC REOs
10/05/2010 BY: JOY LEOPOLD 
Questions about the legality of foreclosure proceedings have prompted Minneapolis-based Old Republic National Title Insurance to decide it will no longer insure titles to homes foreclosed by JPMorgan Chase and GMAC Mortgage.
Chase and GMAC both halted foreclosure sales in 23 states and are reviewing legal filings that they say may have been signed without a notary’s presence or without verifying the supporting documents.
Most lenders will not issue a mortgage for a home without title insurance, which means even more homes will be sitting on banks’ books, empty but unable to be sold.
In addition to Chase and GMAC, Bank of America announced last week it will also stop foreclosures and examine documents in the 23 states that require court approval.
If it is shown that the servicers did not follow the law in preparing foreclosure documents, problems could arise from evicted homeowners claiming they still own their home even after someone else has bought the home. more
the difference between a property losing value and one gaining value is usually a matter of investing a LOT of time and resources


  1. Even if most businesses strive in the current economic situation, real estate business remain stable though it's not perfect but people are expected to look for a place to stay (basic human need.)

  2. Stable? Oh please. I live in this country and I have been around the real estate business since the 1970s. It is, by FAR, the business MOST addicted to bullshit. The things those folks must believe to even get out of bed would curls your ears.

    This market is SO overbuilt it would require YEARS to sell off the existing inventory even if interest rates were low and incomes were rising. Yes it is true that everyone wants shelter and the desires of people for large and well-appointed spaces is nearly infinite, but "nearly" is the operative world. I find it amazing how quickly one's "need" for a 6000 square foot home diminishes when the economy turns.

  3. Veblen was famous for postulating that the basic rule of pricing for the business enterprise was "charging what the traffic will bear." I read somewhere (Dorfman?) that he also said that business men would always get into trouble because they wanted to charge "more than the traffic would bear." I think we can take the master's point.