Foreclosure by the Numbers

It isn't readily available in the near-coastal areas of Gulf Breeze and Pensacola Beach but the Santa Rosa Press-Gazette, published in the north-county town of Milton, can be found on-line. Something good has happened to this small town newspaper in the past couple of years.

With limited resources, The Press-Gazette has been doing a bang-up job covering local and even national news from a local community perspective. The latest example: Jeni Senter's dispatch on the impact felt by local renters caught up in the snowballing housing crisis. (Be generous and forgive the awkwardly worded headline, which might have been intended to read "Renters Feel the Squeeze of Foreclosure Pinch.")

The lede smartly encapsulates the story: "Renters across Florida are being evicted because their landlords aren’t paying the mortgage." The essence is, a lot of apartment dwellers and house tenants are being evicted even though they pay the rent on time. The reason is their landlords are defaulting on their own mortgages.

Many unscrupulous landlords will continue to collect their tenant’s rent payments, even though they know eviction is inevitable and just a few weeks to months away.

"For those tenants, the shock of being forcibly evicted combined with the apparent loss of their security deposit and last month’s rent money, causes anger, embarrassment and rudely disrupts their lives," says [lawyer Karl] Klein.

Senter also does foreclosure by the numbers. And those numbers are shocking:

In Santa Rosa County alone there are currently over 35 apartments in foreclosure. This does not include the single residence homes being foreclosed. Although many of these single family homes are lived in by the owners, others are rented to tenants.

The foreclosures of all these homes and apartments are resulting in a new class of homeless families. And now more than ever, these homeless families don’t have the funds required to put down deposits and other associated costs with moving into a new home.
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According to Family Promise of Santa Rosa County, in 2005, 39% of renters in Santa Rosa County were unable to afford a two-bedroom unit at fair market rent. Families in the county had to work 72 hours per week at minimum wage to afford a two-bedroom rental unit.

And, there is this: A local homeless advocacy group, Family Promise of Santa Rosa County "estimates the daily homeless count in Santa Rosa County is 7,363 people."

That is huge for a county of Santa Rosa's size; nearly twice the total part-time and year-round residential population of Pensacola Beach; or, for another comparison, somewhere around 65% of the total population of Gulf Breeze.

Reporter Senter also discovered that foreclosure lawsuits in Santa Rosa during the first five months of this year are being filed at a pace double that of last year and more than three times that of the year before:

According to the Santa Rosa County Clerk of Court, in 2005 there were 201 foreclosures in the county. In 2006, this number dropped to 196 foreclosures. However, this trend took a sharp climb because in 2007, the Clerk’s office reports 370 foreclosures in Santa Rosa County. The economic situation throughout the country appears to be in crisis and Santa Rosa County is following closely. As of Wednesday, The Clerk of Court has over 301 foreclosures listed for the county, not even six months into the year 2008.

As we mentioned a while ago, ["The Clerk's Tale"] foreclosure filings in neighboring Escambia County reportedly have increased by similar percentages. The raw numbers of renter evictions and homelessness in the Pensacola area must be tripling here, too.

It's common wisdom that, nationwide, things are only going to get worse. Experts, as Bloomberg News reports, foresee no improvement until 2010 at the earliest.

We've spoken with local real estate brokers who've been quoted publicly as saying the local housing market is improving. But privately, they tell us a recovery in the Pensacola area is likely to lag two or three years behind any national upswing.

Maybe so, maybe not. One useful indicator could be had if newspapers tracked the number of foreclosure filings by the week or month. Put 'em next to the weather forecast.

Unless, of course, the press for some reason wants to shield the public from news that actually affects their lives.

Did You Pick the Wrong Week?

Did you pick the wrong week to pay off that mortgage?

The Name Game

If you manage to slog through the entirety of Sara Rabb's front-page Sunday News Journal report on the failed 2,718 acre "Jubilee" housing development in nearby Pace -- an area distinguished primarily by an abundance of fundamentalist churches, chemical plants, and cows -- what you might be left with is the impression that a lot of grown men were playing kiddie poker using toothpicks for chips.

That didn't stop them from making 10, 20, and 30 million dollar bets with each other and dreaming of "a glorious new community with more than 500 homes valued at up to $1.5 million."

But this is Northwest Florida. They needed Other People's Money to make it seem like real life.

Enter Barney Ng, son of Walter Ng, founder of RE Loans, LLC. He claims to have invented "a new product, a six year first trust deed that could be used for both residential and commercial property alike."

Mr. Ng is no stranger to strange investments. One of his companies just unloaded the dry-docked Queen Mary which, weirdly, has been serving as a Long Beach "ghost hotel" while the California bankruptcy court sorts through the wreckage. He also recently foreclosed on the failed Olympian Brewery in Tacoma.

Now, there's a poker player everyone wants to see come to the table late in the evening! And, indeed, it seems that Mr. Ng has been left holding the bag -- again.

Ng said he never intended to be more than an investor in the project, and now, he realizes he has inherited a development that is many, many millions of dollars over budget, and now, he realizes he has inherited a development that is many, many millions of dollars over budget.
* * *
Ng said he is in the midst of sorting through the project's financing, trying to determine which bills have been paid and which are still owed.

Reporter Rabb has some fun ticking through the various names the home town boys gave to their game. They went from "Governor's Club" to "Arcadia Mills" to "Jubilee" and now, apparently, "Contrada Hills."

Gosh, being a developer must be fun! You get to think up neat names and make 'billboards featuring boys, rabbits and girls' and stuff like that while waiting for the money to roll in from ... well, from somewhere or another.

Ng is now hoping "to get approval to create a community development district for the project, which is the subject of a hearing to be held Feb. 28 at the Santa Rosa County Courthouse."

Clearly, it's time for another name change. How about Potemkin Village?

The One Sentence Solution for the Housing Crisis

The Housing Crisis

Every day new foreclosure suits are being filed in Northwest Florida -- not to mention harder-hit areas like Tampa Bay and, for that matter, across the nation. Anyone who subscribes to a courthouse filings service or foreclosure-watch web site can attest to the trend.

The daily mortality toll already is approaching bloodbath proportions. According to investment banker Peter Siris, "In 1982, foreclosures represented 3.6% of all homes for sale. Now they represent a staggering 38%."

At the moment it looks like "'at least' 1.4 million homeowners will lose their properties to foreclosure in 2008, according to the U.S. Conference of Mayors. And that's the optimistic view.

The Phony Solution

But George Bush has a plan called "Hope Now", right? It might save as many as a hundred thousand or so (less than 10%) of those unfortunates, right? Not.

Via Digby, we were directed earlier this week to an article by San Mateo, Cal. attorney Sean Orlender in the San Francisco Chronicle:

It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud -- and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value -- right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

Economics professor Paul Krugman made much the same point a few days ago when he wrote that the Bush administration's plan --

is entirely focused on reducing investor losses. Any minor relief it might provide to troubled borrowers is clearly incidental. And it is does nothing for the victims of predatory lending.

Disaggregating Mortgages to Create New Markets

What led to this crisis in the first place was the effort by investment bankers to create a brand new trading market for what is called "mortgage-backed derivate securities." In a nutshell, investment banks began to buy up multiple mortgages from disparate lending banks and locales. Then, they cross-cut these mortgages, as you might cut a steak across the grain, to subdivide them into smaller bits of commercial paper consisting of, say, the sweetest meat, some tougher slices, a little gristle and a lot of unwanted fat.

But we're talking mortgages here, not meat. In reality, when you disaggregate a mortgage what you are doing is separating some of the rights in a mortgage contract from others -- say, for example, the right to collect all interest payments, or all principle payments, or some other "right" that derives from an original mortgage. When you take those separate bits and re-aggregate, you have new packages of "rights," each a different bundle consisting of "derivative" rights ready to be sold to others.

Ultimately, as we know now, the investment banks got carried away by their own greed. They diced and sliced mortgage-based derivatives into subordinate rights, "rated" the new bundle of rights for investment purposes, then re-diced and re-sliced those derivatives again into yet another kind of commercial paper... and sometimes again... and even again. Each time, the newly created "mortgage-based derivatives" were sold and re-sold and re-re-sold until even the bankers couldn't be sure who owned what, which of the investors (if any) had the right to negotiate with the borrowers, and even who had the right to foreclose if homeowners stopped making payments. Now, many of those bundled securities are nearly worthless.

Hair of the Dog

So, the Bush administration's "Hope Now" program is nothing more than a mirage for most homeowners. And, the investment banks have made such a cocked-up mess of things that no one can be sure just what, if anything, their little share of the once-whole steak is worth, if anything.

However, there is something Congress could do that would bring immediate relief to millions of distressed homeowners and at the same time renew hope that the most troubled mortgages retain value. We call it a "hair of the dog that bit you" solution.

Like the famous nostrum for curing a hangover, it mimics to a degree the original cause of distress. Just as the root of today's crisis lies in the efforts of investment bankers to create a whole new trading market into which they could sell bundled mortgage-based derivatives , so now the solution is to create another housing market.

Check that. Not "create," exactly, and not a "new" market. More accurately, we mean re-create. And it wouldn't be a "new" market, but an old and honorable one that worked exceedingly well until Congress, itself, killed it a few decades ago at the behest of the banking industry.

Creating a 'New' Contract Market
What we are thinking of is the private contract housing market. Time was, in many states, that home owners with an outstanding mortgage could freely sell to willing and able buyers via a private contract. In at least 14 states, local law prohibited the courts from enforcing any "due on sale" clause in a mortgage on the grounds that it interfered with freedom of contract rights and was in any event against public policy.

In those states that either barred "due on sale clauses" or refused to enforce them, instead of requiring every buyer of a mortgaged home to take out a new mortgage loan, the seller and buyer were free (if they wished) to negotiate their own deal. Sometimes, those deals involved the buyer making agreed-upon payments to the seller while the seller continued to make mortgage payments to the bank. Other times, the parties might agree that the buyer would formally "assume" the mortgage and make the monthly payments himself.

For most of our nation's history, private contracts for home sales with freely-assignable mortgages sustained a healthy and vigorous housing market in many states. But then something happened to kill that entire market insofar as homes with outstanding mortgages are concerned. As Robin Paul from California explains on his web site

One trend in the mortgage industry has been the virtual disappearance of assumable mortgages. This is unfortunate for homebuyers, since an assumable mortgage allows them to retain a below-market interest rate and avoid many closing costs, such as a credit check and appraisal. Except for certain FHA and VA loans, almost all mortgages now contain a “due-on-sale” clause which require that the mortgage be paid if there is a change in ownership.

Typical “due-on-sale” language states that, “the Lender may, at its option, declare immediately due and payable all sums secured by the Mortgage upon the sale or transfer, without the Lender’s prior written consent, of all or any part of the Real Property, or any interest in the Real Property.” A reading of the language shows that the term, “due-on-sale” is misleading. In fact, the mortgage may be called in if there is any transfer of any interest in the real estate, and not just a sale of the property.

Back to the Future: Reviving an Old Law as the Solution

The "disappearance" of the assumable mortgage was the direct result of a one-sided piece of legislation engineered in 1982 by the Reagan administration and a cowed (or bought and paid for Congress.) A banking industry-friendly federal law was enacted that effectively killed the "freedom of private contract" rights of mortgagor-homeowners nationwide.

12 U.S. C. 1701j-3 states in pertinent part:

Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.

What Congress hath taken away it can grant again. It only remains for some courageous congressman, senator, or presidential candidate to propose a one-sentence solution.

Due on sale clauses are contracts of "adhesion," as the lawyers would say. They are forced on mortgage debtors, not genuinely bargained for. Whatever should it matter to a lending bank (or holders of the mortgage-based derivatives) who makes the mortgage payments as long as they are made? Besides, as Atrios has explained, "The people who actually own the loans aren't in the mortgage business anymore than stockholders in Apple are in the IPod business."

As a matter of economics, due-on-sale clauses also unreasonably restrict the housing market available to sellers. Now we know, too, that they only exacerbate a credit crunch like those we're seeing now.

In the new era of "mortgage-based derivate investments" when the lender you owe is not the lender you know, due-on-sale clauses have outlived their usefulness, if they ever had any. They should be declared unenforceable as a matter of national policy.

AMPLIFICATION DEPT.
12/14 PM

Email responses from some readers point out that making due on sale clauses unenforceable (once again) would not completely solve the credit crisis brought on by imprudent mortgage lending or borrowing practices. Nor does it directly address the problem some homeowners are facing if they've already paid the mortgage but want to sell in the present market.

True enough, as far as that goes. But eliminating due on sale clauses would significantly expand the market of potential home buyers. That's the point. More buyers means greater demand. To that extent, every homeowner benefits whether he has a mortgage or not.

Another reader points out that "due on sale" reform does nothing for foreign or domestic inventors -- like the Florida Local Government Surplus Fund or the city of Narvik, Norway -- who are already stuck with bad commercial paper sliced-and-diced into existence by careless investment banks.

That's only partly true. As and when demand for homes rises, the portfolios of investor institutions like Florida's LGS Fund and Narvik should improve. In any event, it should be plain enough by now that the Bush administration is not principally interested in benefiting homeowners. It's the investment banks they want to protect from the consequences of palming off bad paper on unsuspecting customers.

Finally, another reader grumbles that the real winners of due on sale reform would be wealthy speculators seeking to invest in home purchases on the cheap. They wouldn't necessarily have to go through a bank; the seller becomes their 'lender.'

Our answer to that is those speculators are out there now. Like the poor, we shall always have them with us. Indeed, a good many seem to be gathering at the Canadian border, strongly-appreciated loonies in hand, just waiting for the U.S. housing market to bottom out.

They'll be buying, sooner or later. Wouldn't it be some relief to distressed homeowners if it was sooner, rather than later?

The Bank You Know...

... may not be the bank you owe.

On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.

Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: "The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate."

* * * [T]he inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.

Adds one mortgage securities specialist, "There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools."

Yikes! If Wall Street investment banks don't even know that the mortgages they think they own are also being claimed by others, who's to say Wall Street arbitrageurs aren't double- and triple-counting even the ordinary investment assets they think they own?