Friday, August 16, 2013

Underwater reclamation projects

As best I can tell, the big banks shadow holdings of homes are untouchable to them.  It's a little like China's big wad of US dollars they have squirrelled away.  As soon as you start spending it/selling it, it comes crashing down in value.
In my neck of the woods, rental companies have bought up a fair amount of the excess stock at the more moderate pricing range (which in Central North Carolina means less than $300,000) and because the region is still growing, seem to be able to keep them somewhat filled up.
But in areas where the economy is shakier, I am guessing that that is harder to do without winding up underwater on you original loans.  And if you realize the loss on too many loans, too quickly, you wind up insolvent.  Thus they keep kicking the can down the road.  And of course since they are all about plundering, rather than long term business investment, any cash made by the free money handed out by the Federal Reserve will be taken as bonuses.

To Rescue Local Economies, Cities Seize Underwater Mortgages Through Eminent Domain
Peter Dreier, The Nation, 12 July 2013 (hat tip: Big Picture)
In Richmond, California, home prices plummeted 58 percent since their peak. Now the city is trying out a new way to help homeowners refinance—and halt the slide into foreclosure.
In 2005, Rodney Conway and his wife, Vicki, paid $340,000 for their 950-square-foot two-bedroom home in Richmond, California, a blue-collar city in the Bay Area. Today the home is worth about $140,000. But the couple still owes $320,000 and makes monthly mortgage payments to the Bank of America. “We’re basically renting this house for $2,000 a month,” said the 52-year-old Conway, who was disabled while serving on a Navy ship in Lebanon in 1983.
Since 2006, when the speculative housing bubble burst, home prices have plummeted; homeowners have lost more than $6 trillion in household wealth. Many now owe more on their mortgages than their homes are worth. Despite rising home prices in some parts of the country, more than 11 million American families—one-fifth of all homeowners with mortgages—are still underwater, through no fault of their own. If nothing is done, many will eventually join the more than 5 million American homeowners who have already lost their homes to foreclosure.
Granted the silliness of people taking out these kinds of loans on housing is a contributing factor, but it is not clear to me why it is the banks that should be getting a free pass.  So using the power of eminent domain to help out local residents, as opposed to the more common practice of using it to seize land for property developers doesn't seem particularly wrong headed.
Of course there is a fairness issue.  We don't have a huge loan on my home, and we were very careful to buy within our means.  So as is typical, the thrifty and prudent will subsidize the foolish.  But if I am going to subsidize someone, I guess I would rather subsidize someone in a 900sf house, than a financier.


James M Dakin said...

There is the whole issue of Being Stupid Enough To Live In California. But I guess if they keep their stupidity in-state I can't complain.

PioneerPreppy said...

I wouldn't say it is the silliness of the people taking out the loans but more the silliness of the government forcing the banks and such to give them loans.

As for imminent domain what they are doing is illegal no matter who we would rather see pay. It was never suppose to be used as such a tool. Ever.

As a side note I checked your blog twice today and never saw this post until this evening. Oddness

russell1200 said...

James: I assume it is reported in California first because that is a big media center.

Pioneer: It is not illegal if the Supreme Court says it isn't and they have already leaned pretty far into this territory with the Kelo case.

I know that Fox news and Co. promotes the idea that the banks were forced to make the loans, but I was there reading the SEC filings when the banks were grabbing up every bit of subprime paper (~2005-2006) they could get, and even making synthetic (imitated the real thing but with no actual mortgages in place) subprime paper using derivatives to create more bonds.

And Fanny and Freddie can't be blamed for that particular fiasco because the very meaning of subprime (by legal definition) is a loan that is sufficiently deficient that they could not purchase it.

It is one of the biggest lies that big finance has been able to pull off on the general populace.