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No. of Recommendations: 28
Bankruptcy court protection lite
In recent testimony Alan Greenspan remarked on how the ease and availability of mortgage debt is supporting consumption. He went on to highlight the growth in Mortgage loans. Freddie Mac has Grown their loan Portfolio by 28% in 2001, and by adding 33 Billion in Loans achieving a 7% growth rate (in the quarter ending March 31, 2002), and then there is the matter of the number of loans separate from the dollar figure growth, Mortgages serviced have grown 19% at Countrywide, and total originations have grown 92% (FY2000 vs. 2001). Suffice it to say those ads you see on Bus Stops, Taxicabs, Billboards, Newspapers well just about everywhere are having an effect. Countrywide reports 4.395% of the loans in their portfolio are “non-performing”, yet it is a highly suspect figure. Barrons recently reported that Freddie and Fannie have “adjusted” their workouts for “non-performing” and voila! they are no longer non performing. Bitter medicine is well,..bitter.. consequently the rise of “debt to support consumption” is simply a form of “bankruptcy court protection lite”. Liquidations are gruesome affairs, so much more palatable to postpone them under the veil of more debt. The rate of residential foreclosure in the northern California County in which I reside, has doubled in the past 18 months. When we examine the “life cycle” of so many Defaults or Trustee Sales we find a great many are “cured” by yet another loan(s).. you might term this “The Brazil Model”. Many are “forestalled” and do not result in scheduled liquidation simply because the homeowner secures additional loan(s) in some cases just for the amount of the current delinquency. it's called pulling a rabbit out of the hat. One of the hidden problems is the sheer number of loans and amount of debt against the collateral as the debt burden expands EVEN AS THE FINANCIAL CONDITION of the borrower DETERIORATES, aided and abetted by the willingness of lenders to continue to lend far after the patient is off life support. When Web Van bought those fancy refrigerated trucks at $60,000 apiece there was a great deal of excitement and fanfare, huge parties attended by the financiers and investors with caviar and champagne flowing like a river, but when they sold at auction for pennies it was a sad silent solitary somber affair. So too the liquidation phase of the Trustee Sale is an equally grim episode, the realtor, title agent, loan agent, escrow agent, doc processor, termite inspector, home inspector, mold inspector, insurance agent. PMI agency are nowhere to be seen on the set of this episode. Pre-occupied with a new shakedown racket, hungrily talking up victims, too chatty to concern themselves with that former client drowning in debt. I have never in my life seen a single person who carted off their obscene “fees” and “commissions” ever appear and witness this final outcome of their efforts, if they had any decency it would be painfully shameful. It's just me, the judge and a cashiers check that does all the talking. Would conscious move these folks to return those towering fees so “conveniently” rolled up in that now expiring loan, some monies to help defray the cost of scotch-guarding the cardboard box their ex-client now lives in, unfortunately conscious is a term they invariably interpret as cons-for-us.

Riding on the rim
There are ingrained practices and a coordination of systems to artificially distort the housing market. Primarily the credit markets distort the market by providing financing to bankrupts who should be prevented from borrowing or maybe even in jail (see below), but other elements work in tandem to reduce supply and increase demand, subtle elements whose impacts are not seen for the fraud they are, or the impact their reduction or God Forbid removal might bring about. In California we have a property tax system that-as a centerpiece- provides an economic benefit of enormous proportions to long-standing owners, effectively preventing supply. It is identical to the rent control model and both systems appeal to the simple minded. Just as one apartment may rent for $300 and an identical apartment will rent for $2500 so too identical properties may have tax bills up to 20 times greater than one another, there is no logical way to explain this ghastly failure of equalization, ostensibly the fundamental duty of taxation. A recent study on rent control in San Francisco discovered that the economic subsidy granted to long-term tenants results in… you guessed it … they stick around forever (even to the point of forfeiting; marriage, better neighborhoods, job re-location opportunity, or property purchase- we are talking about a huge subsidy here). We discover that over half of rental units are occupied by folks who have been in the same unit for decades (far in excess of typical turnover, and way beyond averages for other cities), by virtue of them staying put far fewer units are available to younger new arrivals, thus producing even more astronomical rents for new occupants, paradoxically exacerbating the distortion. Sadly we find that rent control has actually impacted the demographics of San Francisco. I do not need to tell you folks that rent control is like fixing a flat tire by hitting the accelerator, sure it keeps the car from slowing… initially. If we agree that housing is “scarce” obviously hitting the accelerator (by subsidizing it, or piling on endless benefits to long-standing entrenched participants) though the knee-jerk reaction of simpletons, it is the worst reaction possible. The property tax bill on a recently purchased median home in this northern California county would calculate out to not less than $9,000 to $10,000 annually, however existing homeowners oftentimes pay a tiny fraction of that amount (due to that rent control model codified in the tax code, granting them a huge economic benefit to stay put), consequently … you guessed it…they just do not sell irrespective of other factors. This greatly reduces supply thus producing even more astronomical tax liabilities for new buyers, and likewise paradoxically exacerbating the distortion. The federal tax code (regarding gain) also prevents homes from being sold as the tax consequences are significant (though somewhat mitigated by various sections of the tax code). At the recent business summit in Texas Charles Schwab made mention of the double taxation of dividends and capital gains tax- he remarks “It's effect artificially prevents the sale of stock”, he cited this as an element in the stock market bubble inflation process, I agree with Chuck 100% and that distortion he notes applies to RE equally. The Federal mortgage interest deduction also serves to distort the market, in effect inverting our system of graduated tax rates, and counter-intuitively providing a huge government benefit to those who consume the most house via debt, various studies have concluded that this massive welfare program for large debtors, a targeted subsidy to motivate folks to borrow far more than they otherwise might, this subsidy explains in part, why our nation suffers from the effects of suburban sprawl, high levels of energy consumption, auto dependency, (with per capita annual consumption of gasoline at 400 gallons per man woman and child) as the amount of house consumed in America is so much greater than in any other industrialized country. For example the average size of a single family home in the US is 2300 sq ft. Just like federal flood insurance and too many welfare programs to list here it is a transfer from the poor to the rich- all under the guise of “good”. Recently Congress has been moved to examine the Federal flood insurance program but the howls from Boca, The Cape, and Del Mar were deafening. However, the sacrosanct mortgage interest deduction has indeed been capped. You may scoff at that $1 Million Dollar ceiling but many thought it an impossible reform, and as someone who lobbied hard politically to get it through some tough headwinds I am proud of this change in the right direction. Currently with a 200 billion dollar deficit perhaps more political will is building so the abomination known as the mortgage interest deduction can be scrapped completely! Moreover Freddie and Fannie enjoy the implied backing of the Treasury as a GSE, thus lowing their cost of capital, everytime you see one of their ads the taxpayers are paying for a message that further increases demand. By both artificially lowering the cost of capital, and by subsidizing the true costs with taxpayer money we have created a growth machine that eventually must collapse, it's demand on the economy relentlessly expands far beyond equilibrium, just as all welfare must collapse so too must this one. Each initiative to “help” consumers consume more and more square footage beyond reason, inexorably, increases demand and oftentimes reduces the supply too, thus artificially juicing the market higher. The “fix” paradoxically exacerbates the distortion, and as scarcity grows it urges policy makers to come up with more “fixes”. This is not a free market, the heavy hand of a well meaning government means that the amount of GDP devoted to housing is far greater than it would be without so much “housing welfare”. It is impossible for housing to continue it's upward spiral unless we find more quarters hidden in the couch cushions to drop in the “housing welfare” jukebox.

The saturation point.
In my mailbox I recently received a check for what would seem to those of you in “flyover country” a very large sum, but in these parts it's just monopoly money. All from a firm called Secured Funding (www., attached was a letter:

“You are qualified to receive cash of 150% of the value of your home. Our low interest mortgages require No Equity Whatsoever and in fact, you can complete the entire application with an easy 5 minute automated phone call to activate your check, all from the comfort of your home or office.
There are absolutely no fees, your funds are available immediately. No representative will ever contact you or visit you! Special features of our loan programs:
*No Equity
*Apply by phone
*Tax deductible
*Bad Credit, Foreclosure, Bankruptcy- OK
*No income verification
*Consolidate debt
*Pay your delinquent taxes
* 1st, 2nd, 3rd, 4th , 5th Mortgages available”

Of course this went into the rubbish, unfortunately so much funny money is having a destabilizing effect and there is going to be an ugly hangover. After reading this letter I couldn't help but ask myself WHO WOULDN'T GET APPROVED???

Is there any cash in these deals? We have an army of folks who are in effect the “Mary Meekers” of the Real Estate financing game, we have collateral that can be leveraged to 150% with a cost of capital approximating zero (I could show you various loan programs at 2%)
What do you think?
The Current culture of advancing debt against collateral simply has no parallel; Fresh off their success at destroying wealth in another game known as the stock market they are ready to ply their savvy in RE, the perusal of the buying or selling a home board is anecdotal evidence on a world gone mad on a debt binge. Just like corner liquor store in the South Bronx it features junkies trying to find an available vein and pushers with dirty needles….. all in one convenient location:

“I'm a first-time home buyer, and I don't have money” Post #46308
“there are guidelines that prevent me from getting what I want…. I just don't understand why I can't get some money out of my equity…I am willing to bet that an S&P index fund will way out-perform an interest rate of 5% in the next 5 to 7 years.” Post#46298
“The broker said that if we have payments, it's a good idea to take the escrow money and add it to our mortgage balance. I owe about $20k on my car. I'm also wanting to remodel my kitchen, and could use the money” Post # 46273
“I have been just offered a refinance on my house. He called it a 100%”Post # 46262
“are there any lenders who would not require an appraisal” Post # 46255
“I thought I would be stuck with PMI because I won't have…a down payment” Post# 46217
“The market has been insane here in Washington DC and we have been so frustrated in the houses we've lost” Post# 45706
“if you structure an 80-10-10 mortgage can you then ALSO take out a HELOC.. I also need some discretionary borrowing for appliances, etc.” Post # 45634
“I live in Boston and with our combined salaries my wife and I are unable to afford the Down Payment on a home in this area. Are there any organizations/banks that offer special mortgages”Post # 45648
“Is there any special program to help me” Post# 45266

and these are just from August

The opportunities are going to be more pronounced as the lenders recognize that lending against RE is a catastrophe, currently they think it the last bastion of profitable lending.
I would expect this liquidation process to take years
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