Monday, 17 January 2011 08:03

I Warned That Banks Will Soon Be Forced To Walk Away From Homes... Guess What!

About 4 months ago, I claimed that In summary:

Without an economic incentive to foreclose, it would not be in the bank shareholders best interests to pursue foreclosure even though borrowers clearly defaulted & owe money to the lender. The economics of distressed assets in mortgage and commercial banking are quickly changing. I am quite open to discussing this in the mainstream media if any are interested in hearing the “Truth go Viral!” I want all to keep this in mind when pondering the release of reserves by the banks.

This was taken by many readers as sensationalist and unlikely. As a matter of fact, much of my writing is taken in a similar way, most likely due to the fact that I have an uncommon proclivity to state things exactly as I see them, sans the sucrose patina. This is not a pessimistic (bearish) outlook, nor an optimistic (bullish) outlook. It is simply called, the TRUTH! Realism! Something that is increasingly hard to come by in these days of media for a purpose and embedded agendas.

You see, the United States, much of Europe, and China have sever balance sheet issues that are ravaging their respective economic prospects. The media, analysts, and investors are gingerly mozying along as if this is not the case. Well, no matter how hard you ignore certain problems, no matte how hard you try to kick the can down the road - the issues really do not just "disappear" on their own.

With these points in mind, let's peruse this piece I picked up from the Chicago Tribune: More banks walking away from homes, adding to housing crisis blight: the bank walkaway.

Research to be released Thursday, the first of its kind locally, identifies 1,896 "red flag" homes in Chicago — most of them are in distressed African-American neighborhoods — that appear to have been abandoned by mortgage servicers during the foreclosure process, the Woodstock Institute found.

Abandoned foreclosures are increasing as mortgage investors determine that, at sale, they can't recoup the costs of foreclosing, securing, maintaining and marketing a home, and they sometimes aren't completing foreclosure actions. The property, by then usually vacant, becomes another eyesore in limbo along blocks where faded signs still announce block clubs.

"The steward relationship between the servicer and the property is broken, particularly in these hard-hit communities," said Geoff Smith, senior vice president of Woodstock, a Chicago-based research and advocacy group. "The role of the servicer is to be the person in charge of that property's disposition. You're seeing situations where servicers are not living up to that standard." City neighborhoods where 80 percent of the population is African-American account for 71.1 percent of red-flag properties, according to Woodstock.

Don't fret, this is definitely not an "African American" thing. As a matter of fact, the reason that this is concentrated in this primarily "African American" community is that this is one of the demographic groups that have been heavily targeted by predatory lenders. You will see other demographic "concentrations" start to show similar attributes and behavior from the banks - lower income, lower educated, higher LTV, lower mean rental income, lower property value, higher mean time to disposition from commencement of marketing areas, etc.

In some cases, lenders might be skirting city rules for property upkeep even after they repossessed properties.

This is where, if the cities and municipalities are on their Ps and Qs, local governments can successfully hit the banking industry for revenues. Charge and fine the banks heavily, just keep the charges below the level of what it will take the bank to maintain the property. Then use the properties for public housing facilities and/or raze the properties.

Woodstock found that as of the end of September, 57.1 percent of the estimated 4,468 single-family, likely vacant homes that became bank-owned from Jan. 1, 2006, to June 30, 2010, were not registered with the city as vacant, as they are supposed to be. "The whole concept of charging off creates this limbo land," said Dan Lindsey, an attorney at the Legal Assistance Foundation of Metropolitan Chicago. "There's still a lien that can follow the borrower."

In November, a U.S. Government Accountability Office report on the frequency and impact of abandoned foreclosures noted that Midwestern industrial cities, including Chicago, seem to bear the brunt of bank walkaways, leaving neighborhoods in deeper distress and cities left to shoulder the associated costs of dealing with unsafe, often unsecured homes. The GAO report, derived from information provided by six loan servicers, found that servicers nationally charged off loans on 46,000 properties from January 2008 to March 2010, with 60 percent of the charge-offs occurring before an initial foreclosure filing was made. That report listed Chicago as having the second-highest number of servicer-abandoned foreclosures nationally, behind Detroit, with 499 properties charged off during the foreclosure process. An additional 361 properties were charged off without a foreclosure filing.

For its report, Woodstock culled data from the city's vacant properties registry, as well as buildings identified to the city as vacant by municipal departments, foreclosure court filings made from 2006 to the first half of 2010, foreclosure auctions and property transfers. Some of the 1,896 properties flagged by Woodstock as likely walkaways could, in fact, still work toward a resolution in the foreclosure process, but 40 percent of those homes had been in the foreclosure process for more than 18 months. Woodstock believes its projections are conservative because lenders also decide to write off their investments in properties before filing initial foreclosure actions. For only those 1,896 homes, Woodstock pegs the cost to the city, if it needed to seize, secure and demolish them, at $36 million.

And here is a list of the favored banks...

In Chicago, the mortgage servicers and trustees most often associated with the properties flagged by Woodstock are Bank of America, with 314 properties; Wells Fargo (234); U.S. Bank (185); Deutsche Bank (178); and JPMorgan Chase (165). When asked to comment generally on bank walkaways, several banks either declined to comment or did not return phone calls.

Why should they comment? The banks are reporting record [accounting] profit increases as release their bad credit reserves back into the net earnings category. Good times are hear to stay. See As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves. and After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????

Neighborhoods on the city's West and South sides seem to be most at risk of bank walkaways. The city's Roseland neighborhood, on the city's far South Side, is one example. In 2007, some of the pictures of the homes taken by the Cook County assessor's office showed properties that were reasonably well cared for by homeowners.

A little more than three years later, the number of eyesores has grown. Windows are broken, fences are missing and plywood covers some of the broken windows. Even if the houses look secure from the front, back doors are sometimes missing or open. Public records show that foreclosure actions initiated were never completed and titles to properties never transferred.

Now, let's run through this Chicago nightmare scenario from the BoomBustBlog analytical perspective, excerpting

About a week or so ago, I posed a controversial question, Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two! In that missive I warned that the recovery rate on many of the repossessed properties was not only at a historic low, but actually approaching zero, save a few blips from .gov bubble blowing and shenanigans by banks in the form of kicking cans down the road. I also said that the time may very well come when there may be no economic incentive for banks to foreclose on certain properties, and that pool of properties may grow larger than many could imagine. I know it is difficult for many to come to grips with this, but the math really ain’t that hard.

Even Tyler Durden, whose controversial ZeroHedge site I read and contribute to with a passion, is being too optimistic. Yeah, that’s right! You know things are bad when ZeroHedge is too optimistic! In his post “Quantifying The Full Impact Of Foreclosure Gate: Hundreds Of Billions To Start, he assumes there WILL be something to foreclose upon. I assert that in increasingly more common instances, there will be no economic interest to foreclose upon. It is starting at the fringes and the margin, but it is moving closer to the center faster than many think. And the longer, and deeper “Fraudclosure” investigations continue, the closer and faster to the center it will get.

Well, since I penned this piece, new developments have arisen. In particular, the likelihood that banks will be set back even further as they face additional legal pressures and foreclosures are judicially rolled back and undone. See Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB!

This is, of course, not even considering the fact that all of this investigating and shining the light in dark corners will reveal the true elephant in the room (and it is not hastily signed affidavits that can be quickly fixed) which is that many, if not most, high LTV mortgage originations were fraudulent to begin with. That means that not only would it not be cost effective to foreclose, but everybody and their momma will be scrambling to put the fraudulent loans back to the originating banks – see The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! for my realistic take on the situation and the expenses that it entails. Yes, the elusive recovery rate is going to be pushed that much lower. Long story short, bank expenses will skyrocket, along with efficiency ratios, which were already increasing to begin with at the same time housing sales economic activity and prices will drop and credit losses will spike. Oh, what fun we have in store.

Here is an excerpt from Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two to refresh your collective memories and then I will run through an example that clearly shows a high LTV property in Nevada that the lender literally has no economic incentive to foreclose upon if there is litigation to be had.

As you can see, the charge-offs on 1-4 family residential housing skyrocketed nearly 1,500% (yes, that is a lot) from the bursting of the bubble in ‘06.

Both recoveries have increased and the charge-offs decrease, giving us an increase in recovery rates over the last two quarters. Now, before we get all giddy about the improvement in the credit situation in residential real estate finance and blow out all of our provisions, let’s take a more careful look at the chart. For one, although the recoveries have increased very slightly, it is the drop in the charge-offs that has served to boost the recovery rate. So, that leads us to ask “What has changed so positively in the market to cause such a drop in charge-offs?” Well, for one the Case Shiller Index has shown a rise in prices. Of course, BoomBustBloggers don’t really go for that, because the Case Shiller Index rise fails to capture many of the elements that are causing aggregate housing values sold to fall on an economic basis. See Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading! then reference this chart below.

I will make the analytical model that created this chart available to all paying subscribers in my next post on this topic, which will drill down on why a lagged, highly filtered price model (no matter how sophisticated, and they did do a good job on it) will often mislead you in regards to the true economic direction of assets as such as housing. You must measure sales activity (which has slowed to a level that nearly approximate 1963 levels) as well as sales prices – and those prices have to capture all aspects of housing. The CS index excludes the most distressed categories, which causes it to have an optimistic skew.

So, if it is not the rising prices of indicated by the Case Shiller index that caused the drop in charge-offs, then what was it? Well, I believe it was something much more old fashioned and mundane. It’s called LYING! See

Why are Banks Hiding High End Residential Real Estate? Courtesy of the Real Estate Channel:

  • Without the FTB tax credit, the housing market is receiving artificial demand and price support from the FHA loan guarantees and banks sitting on mortgages of homes once valued at $300,000
  • Banks in areas that were severely damaged by the downturn in domestic real estate (Cook County, Illinois, Miami-Dade County, Florida, Orange County, California) have significant inventories of homes worth more than $300,000 that they will not put on the market, even after foreclosures lasting more than 2 years

If that doesn’t get you going, reference “They ARE trying to kick the bad mortgages down the road, here’s proof!” and “More on kicking that housing can down the road…“.

Now, taking the above into consideration, let’s run through an example of a high LTV single mortgage home purchased in Nevada.

Sales price Loan, expenses Equity
$ 250,000 $ 312,500 $ (62,500) Starts off with negative equity
Current retail value $ 100,000 $ 300,000 $(200,000) prices drop
Distressed value $ 64,000 $ 300,000 $(236,000) distress discounts
Carrying costs/maintenance@5 m, taxes/utilities@24 m $ 12,480 $ 312,480 $(248,480) can’t hold the property for free!
foreclosure costs $ 6,000 $ 318,480 $(254,480) cost to foreclose
Broker costs@6% $ 3,840 sales costs
Recovery to bank if sold withing 4 months and not drawn into litigation $ 41,680 net recovery in a perfect world
Recovery if marketing period=12M ~35000 recovery if sales continue to slow
Recovery if litigated (win or lose?) $ - If there is a legal battle (there cropping up all over the place), the bank is better off letting it go.

This example is not far fetched, and can take place in condos in Florida, California and New York where extra costs can drive down recovery, or the humid coastal regions (ex. Florida) where humidity can drive down recovery over time, or cold weather states, or high crime areas (theft, vandalism), etc.

Methinks it is time to start rethinking the dynamics of distressed real estate, foreclosures, REOs, and recoveries for the economics are definitely starting to morph on the margin and that morphing can quickly spread to the more mainstream.

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It is imperative that my site's paying subscribers review this blog post in light of the shadow inventory study that I released late last year. This is the key to how deep this mess will get, and it will get very deep. All readers should read the following post, subscribers should download the pdf and read it, then re-read it. I will be issuing an update this weak.

The 3rd Quarter in Review, and More Importantly How the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies! Wednesday, November 10th, 2010 by Reggie Middleton

I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: File Icon Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel – Shadow Inventory.

Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!


More Reggie Middleton on residential real estate:

  1. The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
  2. As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves
  3. The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
  4. The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
  5. Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
  6. Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium.
  7. Is the US Government About to Forgive Mortgage Debt? Let’s Crowdsource Our Way Through a Scenario or Two!
  8. Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
  9. More Doom and Gloom: Homebuilders Making Better Money as Hedge Funds than Home Builders
  10. Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
  11. Even at Marquis Trump Properties, Your Lyin’ Eyes are Belying the Real Estate is Bottoming Mantra
Last modified on Friday, 21 January 2011 09:25


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  • Comment Link steve Friday, 11 March 2011 22:03 posted by steve

    Your 45 yrs old, gay and live alone in your Mom`s basement dont you?

  • Comment Link lucas jackson Thursday, 24 February 2011 17:40 posted by lucas jackson

    It IS predatory lending when mortgage originators fraudulently package loans and falsify incomes knowing the borrower cannot repay. If prices rise the note holder has virtually no risk and will eventually recoup all costs plus fees. Plus they have the awesome advantage of offloading this crappy security to others, while skimming a tidy origination fee in the process.

  • Comment Link Joe Emmet Thursday, 24 February 2011 15:36 posted by Joe Emmet

    Hi Reggie,

    Love it when someone tells the truth! Keep up the great work.

    Wall Street, the global banking industry and governments attract some of the brightest people on the planet, yet they keep making the same "mistakes" over and over again. From my perspective, people are asking the wrong questions. They shouldn't be asking, "Don't they know better"? The answer is, "Yes they do." And if that is the case, why do they keep doing what they are doing?

    People might do themselves a service if they google "Victory in Defeat." Read it. I can not say it is all true; however, it answers a lot of the questions that intelligent people should be asking, and will probably help them formulate better questions in the future.

    It will help them understand what is at the core of the banking (central that is) industry's motives.

    From what I have learned, the roots of everything we see happening financially all began in Florence, Italy in the 1500s with the Medici family. Given its long history of corruption and "influence", it is probably why Thomas Jefferson was able to provided a most insightful warning:

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”

    We are in fact seeing the fulfillment of this warning today.

  • Comment Link Synoia Wednesday, 26 January 2011 15:20 posted by Synoia

    Taxes are necessary for roads, police, fire, schools and other commons. What tax do you propose to pay for these?

    You state taxes destroy wealth. Wihtout taxes, rule of law and the commons there would be no wealth. Your statement is stupid on its face, and stupid becuse you appear to believe that residents should receive city services bu others, not yourself.

  • Comment Link John Ryskamp Monday, 17 January 2011 21:00 posted by John Ryskamp

    "It isn’t “capitalism” when a city or other government imposes its edict by force. That is my real beef…"

    Keith, I suspect that you are the only one who believes he fully understands what you wrote. Get a life.

  • Comment Link Keith Weiner Monday, 17 January 2011 20:00 posted by Keith Weiner

    John: I suspect that you are the only one who believes he fully understands what you wrote.

  • Comment Link Keith Weiner Monday, 17 January 2011 19:28 posted by Keith Weiner

    What is it that makes "us" able to understand the borrower's situation, and at the same time presume that the borrower doesn't understand? This is, in my humble opinion, overweening arrogance. It used to be that one was presumed an adult at 18, and that's that.

    Today we have regulation (enforced by a gun, as always) to protect people from themselves! If this isn't the road to dictatorship, I don't know what is.

  • Comment Link John Ryskamp Monday, 17 January 2011 14:22 posted by John Ryskamp

    By the way, I also said a few weeks ago that the purchase of sovereign debt will soon be restricted to central banks. That's what's going on here (below). Mellonesque liquidation proceeding according to plan. Did I say Dr. Goebbels? What about the inimitable Dr. Schacht? Mefo bills next!!!!

    By the way, the point of restricting monetization to central banks is that it greatly facilitates fascist cartelization. Labor cards soon. Then travel cards. And then...away with those minorities!! Why, they're just job-stealers!

    "The reverse dutch auction model for Europe's insolvent countries is dead. Earlier today Spain announced it would cancel its planned bond auction for January 20, and instead plough ahead with syndicated issuance. For those unclear with what this means, Spain is essentially saying the market pricing mechanism on its debt is too transparent and adds "volatility" and therefore the country would rather have banks underwrite the whole issue i.e., take the issuance risk on their books, thus spare Spain the embarrassment of a failed bond auction. And Spain is just the start: Portugal and Belgium have followed suit, in an action that is sure to stretch the already frayed nerves of European sovereign bond investors as this kind of last ditch effort is always taken before something is about to go "snap." From the Irish Times: "Spain's Treasury, facing a volatile market as it looks for ways to keep its debt costs under control, cancelled a bond auction planned for Thursday and said it would issue a syndicated bond over 10 years. Belgium is also seeking an opportunity to place debt with a syndicate of banks and Portugal also plans one for the first quarter, as fiscally stretched sovereign issuers elsewhere in Europe also seek to cut spiraling financing costs." And lest readers get the impression that this is purely a European development, China just announced that it is suspending its sterilization bill sales for the balance of the week. Did the European bond market suddenly die?"

    Yes, I killed it. In a conference call with Angela, Ben, Barry and Nicky, I said, "Don't you realize that you can simply order all sovereign debt to be purchased by central banks, and then you don't have this ridiculous 'yield' embarrassment"

    Angela, the darling, said, "Ja."

    Nicky wasn't listening--he was imitating Charles Aznavour.

    Ben wouldn't let go of his Lego.

    Barry said, "Let me talk to Tony."

    Honestly! Today's children! SO difficult!

  • Comment Link John Ryskamp Monday, 17 January 2011 14:08 posted by John Ryskamp

    Well, anyone who knows American homeownership knows that it has ALWAYS been a Ponzi scheme. The suburban homeownership model is flawed from the get go. It is INHERENTLY a loss--housing? profitable? yeah right--not in a real economy! NO ONE would invest in it without government backstopping. And that has been true since the U.S. government signed off on suburban development.

    So anyway, here we are. And I told you several months ago that the U.S. had ALREADY forgiven housing debt. Just pencil it out including all this ridiculous accounting flummery and now banks draining reserves--Uncle Sam knows this and has been proceeding accordingly. I told you banks now have Treasury officials AT THEIR PREMISES controlling EVERYTHING.

    Housing is a social welfare agency now--anyone who doesn't know that, is comatose.

    The problem is, what is happening NOW? Various low-profile changes tell me that Mellonesque liquidation has just entered a new, particularly brutal phase. Meaning? Meaning we are about to see an even sharper decline in economic activity. Surprise!! Just when everyone thought it was increasing.

    No matter, Mellonesque liquidation is ALWAYS about induced decline in economic activity. Economic decline--to the extent it doesn't scare the horses--allows looting all along the economic route. What this next downturn will mean is that--surprise!!--unemployment suddenly spikes in the Bachelors-plus category.

    If you follow this index (the only item which matters in the world economy), it is Table A.4 released by BLS with the unemployment figures every month. In January, it actually showed a DECLINE in this category from 5.1% to 4.8%.

    This is why I say that the recession is not over--because it has not yet begun. Our grossly overpaid clerks are still slaphappy. Slime!! Well, they're about to wake up. Because even though this figure is manipulated (like all BLS data; the true underemployment figure in this category is about 12%), it is about to spike. That will send a shudder through their iPads!! Ready, my chickens? You have to understand that I grew up in Livonia, Michigan (America's whitest city), the quintessential suburbia. I know ALL about these creatures and what makes them run.

    The powerful hate suburbia. They hate homeowners, they hate workers. They are, indeed, exactly like that mean old man in "It's a Wonderful Life." They want everyone to be slaves.

    But HOW to do it? Well, you have to do it in a very gingerly way, juggling lies and massaging economic collapse very carefully so that you come out like an Indian or Chinese billionaire. THAT is the model for our American oligarchs. You're rich, they're starving, you're smart, they're stupid stupid stupid.

    Nasty, isn't it? But let me tell you, Reggie, the Olin Foundation and the Scaife Foundation and all these rightwing hothouses, have a LOT more money than you, are a LOT better connected, and above all they can WAIT.

    They have just made their next move in the chess game of power, as our dear Dr. Goebbels called it. Surprising very bad news on the economic front quite soon. I mean, who knew??

    By the way, don't knock sucrose patina. Here's a recipe I serve to economic optimists:


    1. Pluck middle class until crow
    2. Baste with sucrose patina
    3. Bake until it glows
    4. Feed to emperor wearing no clothes (the emperor, that is).

  • Comment Link Indy Monday, 17 January 2011 13:31 posted by Indy

    The predation occurs at closing when the broker, loan officer, and bank all get to skim their money immediately on a loan that they know[or should know] is defective and will eventually default. The borrower often not understanding that they have entered into a contract that they are unable to perform.

    While the title remains in the name of the borrower, they are responsible for the taxes, fees, fines - the bank walking away before they foreclose and gain title keeps them off the hook, and leaves the government debt and fees to pursue the borrower, as only governmental fees and levys can.

    There are more Detroits to come.

  • Comment Link Keith Weiner Monday, 17 January 2011 11:59 posted by Keith Weiner

    The term refers to something that did not happen: banks hurt consumers to profit. As you note, the party who got hurt is the investor.

    I don't think there should be a central bank and I certainly don't think anyone should bail out either the foolish banks or the foolish investors who bought this toxic waste!

    Nor do I think that cities should punish property owners. What else is a tax but a punishment on productivity (income) or wealth (property and other assets)? Instead of looking at it as a subsidy to the banks because they don't have to pay taxes, look at it objectively. An assets tax is the worst sort of taxes (none of them are good, or even neutral). An assets tax says you have an asset that the government claims is worth $X so you must pay $Y per year. What if you don't have the money? As bad as income taxes are, at least the taxpayer has the income.

    And the crux of the issue is: what if an insolvent entity is creditor on a large number of properties that are overvalued on the books? Property taxes make the problem even worse. The lender does not want to become the owner of record because that means the city regards the bank as the new milch cow. So the result is predictable: the bank does not want to foreclose. The neighborhood becomes blighted. And the city is revealed as not being a value-creator but a value-destroyer, if not so great a destroyer as the Fed, the FDIC, their moral hazard subsidies, falling interest rates, the Community Reinvestment Act, Fannie, Freddie, etc.

  • Comment Link Keith Weiner Monday, 17 January 2011 11:53 posted by Keith Weiner

    It isn't "capitalism" when a city or other government imposes its edict by force. That is my real beef...

  • Comment Link Pieter Monday, 17 January 2011 11:39 posted by Pieter


    I don’t understand your reasoning. I have hardly any knowledge of financial matters but I consider “predatory loans” an excellent name. These loans were fraudulent overvaluing lenders and properties to rip off pension funds and other investors. The money earned has disappeared so the taxpayer had to step in to save the banks. And now the cities have to go easy on the banks by eliminating taxes and fees they should pay?

  • Comment Link Reggie Middleton Monday, 17 January 2011 11:13 posted by Reggie Middleton

    The banks lost capital because they could no longer sell their loans off to unsuspecting buyers, not because they made bad underwriting decisions. The banks never thought many of the loans could get paid back, and they didn't care. Their business was in moving loans wholesale, regardless of quality, not making loans to people with the expectations of profiting from debt service. I understand your perspective but it is much too idealistic.

    The banks have sunk costs in many of the properties that prevent them from adding more costs to the pile, the cities can offer them a way out. You can call it preying, but that's what many do in a capitalistic society.

    I agree with your point about rent control in the city, no argument here. The banks should not be allowed to skirt the same taxes that you and I pay though. I have to pay property taxes and I never received a trillion dollar bqilut, and defitnitey don't pay myself billions in bonuses for the privilege. Why should banks be given special privilege?

  • Comment Link Keith Weiner Monday, 17 January 2011 10:06 posted by Keith Weiner

    Reggie, great thesis for this article (as with most of your articles). But I really got stuck when you tossed in the term "predatory lending". This is a sloppy term that people use to refer to the alleged conflict of interest between companies and their customers. In this case, it implies that banks profit from losing their money and the people who put no money down, and lived rent-free for a year or two got hurt by the process.

    In reality, as you keep pointing out, the banks lost precious capital--perhaps enough to make them insolvent. They certainly do not come out as "predators" more like fools who took too much risk...

    Then you propose how cities can levy fees against banks, which *is* preying on them. If the property is worth less than the costs to process and turn it (forget the face value of the mortgage, which is irrelevant) then banks will not step in. This is the same problem NY City faced, particularly in the Bronx, when rent control forced numerous apartment buildings to be submarginal. High inflation pushed up the costs of running the buildings but rent control boards were inflexible. The result was urban blight.

    And that will be the result if cities try to force anyone--particular people who are insolvent!--to pay to keep up submarginal properties.

    On the other hand, if cities were to eliminate property taxes and fees, the best thing could happen: someone would buy the properties at whatever price they are really worth and move in.

  • Comment Link Reggie Middleton Monday, 17 January 2011 09:12 posted by Reggie Middleton

    Yes, you are. Several places on this site is a graph that tracks the S&P 500 with the mark to market changes over the last few years. It is scary!

  • Comment Link Ian R. Campbell Monday, 17 January 2011 09:06 posted by Ian R. Campbell

    Reggie: I find your commentaries to be excellent 'food for thought', and frequently link my Subscribers to, a resource stocks research website, to them. Two years ago I wrote multiple times on FASB and SEC working together to change the 'mark to market rules' on the theory that the then falling real estate prices were a 'market aberration'- and hence giving bankers to apply 'subjective values' to the real estate they held debt against. I was very negative on those 'mark to market' changes at that time, and of course still am. I assume that 'mark to market' change underlies your comments, and that in the end your views are premised on your believe that currently the reserves of many banks are significantly understated, with those bank's balance sheet equities being significantly overstated. Am I correct in this?

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