Bite Size Bad News 8--Housing Capital

As of June 30, housing prices in the US are down 15.8% from one year earlier. This is being reported as the destruction of $3.25 trillion worth of value.*

Well, sort of. The capital the business press says has been destroyed has both a fictitious and a real character.

The fictitious aspect has come to the fore because the legendary “newer sucker” of capitalist theory has failed to show up. As long as you could actually sell your house to someone for more than you paid for it, everything was copacetic. You didn’t even have to sell. You could borrow against that increased value and have real money in your bank account (and, alas, owe the lender real money too, plus real interest). Once you can only unload that house at a fire sale rate, if at all, it becomes clear that a lot of that “value” wasn’t very real at all.

But the destruction of very real concrete physical capital is ramping up, though it’s nowhere near $3 trillion worth yet, That’s actual houses which are being abandoned, and will fall into ruin and never be occupied again.

Some of this is hard to weep salt tears over, of course, like the ghastly exurban developments so recently marketed under banners like “affordable luxury.” Now they are being dubbed “ghost towns with granite countertops,” as rising oil prices have helped highlight the downside of living a long, long drive from work or even shopping. Many of those finished or nearly completed in the last year or so will never be inhabited.

Most of it, though, is houses people need to live in. Buffalo, NY is a good example. The city is among the local governments that have initiated lawsuits against big banks like Citicorp and Wells Fargo and other lenders who have foreclosed on properties or where mortgage holders have walked away, unable to afford their payments.

Buffalo sued in February for $2 million to cover not upkeep which had been neglected but the actual cost of demolishing 57 abandoned properties. 21 had already been torn down. And these are far from the only foreclosed houses standing empty in Buffalo. "It’s our first strike in a wave that would obviously focus on more,” said Alisa A. Lukasiewicz, Buffalo’s corporation counsel.

Demolition is a “lagging indicator” of the housing crisis. Houses can stand abandoned and decaying for a long time before anyone gets around to dealing with them.(or even figuring out who owns them with so many mortgages parceled up into CDOs)

And a lot of what’s been foreclosed on in the hardest hit states—fast growth areas like Florida, California and Nevada—was built relatively recently. And that’s more bad news.

These developments aren’t exactly built to last. Even the ugly but pricey new McMansions you see occupying nine tenths of a lot in wealthier suburbs are crap—nice-looking flooring laid over cheap plywood, paper-thin wood veneer on those pre-made kitchen cabinets, foam-core or hollow doors, drywall keeping the place upright as much as or more than the flimsy 24” o.c. frames.

They aren’t going to last the way old Iowa farmhouses or Philly row houses or even NYC tenements do. With no maintenance, never mind squatters, they’ll crumble fast.

And billions more in real capital will be destroyed, while those who created this mess—the predatory lenders, the executives at the big banks, the money market honchos, and the government economists who hailed it all—will not only make out just fine, but are already waiting to invest and profit when the housing market does finally bottom out.


*And that's not including the losses in value of the CDOs, the collateralized debt obligations whose collapse triggered the credit crisis (no one has any idea how much), or in the bear market in stocks which has resulted from the credit crisis ($2.3 trillion just in the U.S. S&P 100 so far).

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Judge Boyko's Snowball Starts Rolling Downhill

A bright note in the gathering foreclosure crisis.

U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies:

"This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest."

In November, Federal District Judge Christopher Boyko walked into his Cleveland courtroom and into the news. He made the mainstream media in a small way and the blogosphere in a big one (and Fire on the Mountain was on the case). You may remember Boyko—he knocked the attorneys for the US unit of global giant Deutsche Bank for a loop. Their lawyers were in court as the subprime mortgage mess unfolded, trying to evict 14 families and seize their homes for non-payment.

Boyko asked to see the mortgages.

"Umm, the mortgages," mumbled the lawyers, pretending to pat their suit pockets. "The mortgages...Gee, nobody ever asked us to actually see them before, the mortgages per se, that is. But trust us, Deutsche Bank really does hold them."

Boyko was unimpressed and told the lawyers that until the paper was forthcoming, forget about foreclosure and repossession.

The physical mortgage notes had, no doubt, been tucked someplace while the mortgages were sold and sold again and bundled in tranches of mortgages of varying types and shuffled into mortgage-backed securities which were traded far and wide, until the bottom fell out last fall.

Now, asserts an article by Bob Ivry for Bloomberg News,

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages.

Read Ivry’s nifty piece to get a sense of the worry this development is causing in the world of high finance, and why. About one mortgage in five, $2.1 trillion worth, is currently packaged in these securities. Maybe half of them are registered and transactions involving them recorded, at least in theory, by a tracking company set up by mortgage companies (and that information doesn’t necessarily say where the physical mortgage is). The other half? Don’t ask.

By law, in every transfer of a mortgage, the seller must sign over the notes to the buyer. How much of that do you think actually happened in lending, buying, selling, bundling, repackaging frenzy of the last six years? A lot of these mortgages look to be still technically held by one of the 100+ mortgage companies that stopped making loans, closed or were sold last year.

One of these, amusingly enough, is a NY state firm called American Home Mortgage Investment Corp. which filed for bankruptcy last August. They complain that warehousing their loan paperwork is costing them $45,000 a month that they don’t have and they've petitioned the Bankruptcy Judge to let them dump the lot!

There’s more good stuff to be found in Ivry’s article and by googling some of the instances he cites, but this post is plenty long enough already.

But, and this is a big, big but, before I sign off, there is one thing I want to make sure everyone who has read this far knows and understands and spreads the word on. Most foreclosures are still going smooth as silk, even with no paperwork in sight. In many cases banks are submitting "lost-note affidavits" as a matter of course. If you or anyone you know winds up facing foreclosure, your lawyer has to challenge the bank and the bank’s attorneys and not just pray that you have a Judge Boyko or a Judge Bufford on the bench.

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Judge Asks Deutsche Bank: Where's the Mortgage?

Let's hear it for Cleveland, Ohio.

No?

Okay, let's at least hear it for Judge C.A. Boyko of the Federal District Court in Cleveland and for Cleveland blogger Bill Callahan.

Before the current sub-prime mortgage meltdown, Cleveland had the highest foreclosure rate in the country. I don't know if it's hung on to this dubious honor, but the foreclosure overhang is getting worse all over the US, as the adjustable rates on sub-prime mortgages soar and the economy threatens to tip into recession.

Which brings us to Boyko. In a recent case in Cleveland, Deutsche Bank National Trust Company was moving to evict 14 families and seize their homes. Boyko asked a simple question: Okay, where are the mortgages?

The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta if not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

DB's panicky lawyers argued that no one had ever made them do this in all the foreclosures they have pushed through in recent years. Boyko was, to say the least, unimpressed:

The Judge then declared that the banks “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,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.

Now these documents are someplace, and eventually either the banks will bring pressure to bear to overturn Boyko's decision in a higher court, or Deutsche Bank's US subsidiary will lay hands on 'em and proceed with turfing out the poor folk who went for the okey-doke when the mortgage brokers came knocking.

In the meantime, though, this precedent will be raised not only in Cleveland, but in foreclosure cases in Federal District Courts around the country. If upheld, it will slow both the flow of broke folk out of their homes and the shedding of bad paper by banks which are desperate to put the whole mess behind them and reverse their cratering stock prices.

Even if Boyko's decision is overturned, it has already intensified the spotlight being shone on the criminal greed of the big banks whose massive, and still incalculable, losses have made a joke of their every effort to bury their role in this mess. The mechanisms of this massive scam have been explained in detail in the press of late, but the one of the clearest I've seen is by Bill Callahan in his blog Callahan's Cleveland Diary. In an article titled "What’s this Boyko / Deutsche Bank thing all about, anyway?", he takes a case study, this house, four blocks from his, and shows what has happened to it since the couple who owned it made the mistake of refinancing in 2003. Read it and weep.

[In a future FotM post, I hope to dig into the question of what this sub-prime meltdown means for the Black community and other communities of color in this country and tie it in to the "sundown town" posts that appeared here earlier this year.]

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