Month in Review: April 2007
[Previous months in review available here: March 07, Feb 07, Jan 07; Dec 06,]
With the spectacular implosion of subprime lender New Century, Breaking the bank: New Century files bankruptcy, I devoted a lot of pixels to the subprime problem, starting with a primer, Subprime lending: the dramatis personae and offering some gratuitous advice in What’s a delinquent borrower to do?
I’m getting no love from my bank — what now?
Conclusion: outrun the bear? The old woodsman’s joke is of the two hikers who come upon an angry bear that makes to charge. One reaches for his rifle; the other puts on his track shoes. “Why?” asks the first hunter. “You can’t outrun the bear.” Answers his companion, “I don’t have to outrun the bear. I just have to outrun you.”
One of us is in trouble
To a borrower, default is all-consuming, a unique and emotionally wrenching experience, but to a lender, it’s all in a day’s work, one of dozens or hundreds or thousands of case files.
Yes, I have your case right here
Every morning, the lending officer chooses whom to attack, whom to cajole, whom to ignore, and whom to accommodate. She picks, in large part, by whether the borrower is part of the solution, or part of the problem.
Be part of the solution. As Churchill said:
Beyond that advice to borrowers, I gave journalists and legislators a Cliff’s Notes on The subprime story: the right policy questions, examined the role of escrows in Subprime borrowers: the rainy-day fund, and highlighted a refinancing program being sponsored by Citigroup and Bank of America in Subprime loans: a helping hand, Part 1 and Part 2:
In a similar vein, borrowers who took out subprime loans to climb their way into homeownership who have hit difficulties, benefit from a financial helping hand across the gap, and as reported in the Washington Post, one such is now being offered:
Neighborhood Assistance Corporation of America, an 18-year-old housing advocacy group, yesterday announced it would commit $1 billion to refinancing the loans of lower-income people at risk of losing their homes.
Bruce Marks thinks national
Bruce Marks, NACA’s director, is a controversial self-promoting credit hog, and here it takes only one sentence to put my back up.
NACA is in fact doing nothing on its own, rather it is committing other people’s money:
The financing will come from CitiGroup and Bank of America, which have been lending money for years to borrowers screened by the nonprofit group.
That post promoted the following email from a perceptive and long-time AHI blog reader:
Regarding Bruce Marks - what do you think of this metaphor: He is selling indulgences to the Banking Industry and providing at least partial absolution for their sins. I remember he made a pretty big score with Fleet when it was doing a lot of questionable lending directly - the banks (and others in financial services) have tried to put some distance between themselves and the more abusive of the subprime lenders; but providing lines of credit to the companies who play fast and loose with loan underwriting makes them accessories in my book.
Contributions and political credit to my non-profit — free passage through CRA.
Along similar lines, I spent a great deal of the month focusing on lower-income households and how their lack of capital leads to a lack of market leverage, and poor housing alternatives. Working upwards, I demonstrated how Slums are a wealth-extraction machine:
So for a slum, what we see is squalor, as shown by the definitions in the Free Dictionary (”A heavily populated urban area characterized by substandard housing and squalor”) or Wikipedia (”A slum is a district of a city or town which is usually inhabited by the very poor or socially disadvantaged”) — but these are only the manifested symptoms. Slums reconstitute themselves, seemingly without effort,
Keep trying to kill me, baby, and see where it gets you
restoring themselves to their previous squalid state. They do so because they are economically rational, and their economic reason is wealth extraction. Slums are a giant wealth-extraction machine, distilling human beings to their financial essence and pumping that value off-site. To understand this, imagine that money glows green and people are merely shades and phantasms, as if we are all seeing with X-ray eyes:
Think of it as money and it all becomes clear
Each of us is thus a faintly gray form with a bright rectangle on our hips (wallets) or by our ribs (handbags). Follow us from above on fast-forward throughout our days and weeks, hovering over a slum, and what do you see?
I detoured into the realm of public housing, reporting on a lawsuit settlement in State-funded public housing: truce?, and then explored Mobile home parks, how they got here, in four parts:
All together now, anna-one, anna-two
Part 1, before World War II, Part 2, neither homes nor mobile, Part 3, the communities mature, and Part 4, the financial blockage:
The biggest advocates for mobile home owners were thus not the owners themselves — who are the logical and politically most potent voice — but mobile home manufacturers and vendors. Here we have another incongruous dysfunctionality of sundering land from property, and improvement from ownership:
I think you won’t be very functional after this
I finished up with a brief exposition on Reverse mortgages:
I see my equity going backwards
In economic terms, all insurance is a curious bet: you bet that something bad will happen to you, the insurance company bets it won’t.
I’m betting something bad will happen?
Because they make economic sense, reverse mortgages are popular, and likely to become even more so as the population ages:
Reverse mortgages increased 77% in 2006 to 76,351, compared with 2005, according to the National Reverse Mortgage Lenders Association.
For the lender, the reverse mortgage is very much an insurance bet: the lender bets that the home’s inherent equity, plus its appreciation, will exceed your cash outflow over your remaining lifespan. The lender is betting you’ll vacate before the equity drains out.
Given enough time, we can perform a complete cash-ectomy
In search of education, Sherlock Holmes’s friend Dr. Watson made a pilgrimage to the City of
“My dear sir, as a fictional character yourself, you know how we characters love to expound.”
Mycroft smiled broadly. “Let us consider the bank.” The cigar in his waving hand traced smoke whorls toward the City. “As we have seen, it is merely a money store, and every time we bring in money, via deposits or otherwise, we must find ways to put that money to work, by putting it out — debt, equity, hybrids — to people who need cash now and have promising streams of future income with which they can pay our huge and hideous yield requirements.”
I pondered this inversion of all that seemed logical: a bank desperate for people to come needing its money. “What then is securitization?”
“A product ahead of its time, one I have sought my colleagues to embrace but I fear will not flower until late in the twentieth century. The distillation of risk and the extraction of risk premium. Allow me.” Two white-gloved servants wheeled in the largest, and most exquisitely clean blackboard I had ever seen, together with a broad array of perfect sticks of colored chalk.
During April I covered three geographies: my home state of
Good for one correct policy decision (void if prohibited by law)
In
Ms. Wu and her brother know the value of performance art: withdraw so as to keep your skull unclubbed:
With the street so choked with onlookers that traffic began to back up, Ms. Wu’s brother, Wu Jian, began waving a newspaper above the crowd, pointing to pictures of Ms. Wu’s husband, a local martial arts champion, who was scheduled to appear in a highly publicized tournament that evening. “He’s going into our building and will plant a flag there,” Mr. Wu announced.
But win the video moment:
Moments later, as the crowd began to thin, a Chinese flag appeared on the roof with a hand-painted banner that read: “A citizen’s legal property is not to be encroached on.”
Images drive words, and words drive politics, and politics drives laws.
By the rude bridge that arched the flood,
Their flag to April’s breeze unfurled;
Already Ms. Wu’s example is being repeated elsewhere.
Words are important.
Those who passed the law may find they have hatched a dragon.
Here once the embattled farmers stood;
And fired the shot heard ’round the world.
[Update: Ms. Wu’s home has been demolished.]
The month ended with my return from
Even granting that this was a seminar for the entire real estate sector — including tourism, shopping centers (Turkey’s infatuated with them, they’re all over the place), hotel and retail — it says something about the state of housing policy that my panel, on the second day, was divided equally between two speakers on “acquisition of real estate by foreigners” (the speakers were for it) and “affordable housing” (the speakers were for that too).
“Here’s how you make the pie higher.”
April also saw GSE reform clears the first hurdle and the month opened with a special weekend posting, an AHI exclusive, Fannie Mae renounces its government charter:
“Ever since we reported multi-billion-dollar writedowns,” said CEO Daniel Mudd, “we’ve been under a cloud with Congress. We’ve been on our best behavior, not misbehaving at all, but despite two years of contrition, we still cannot produce an audited financial statement. Allegations of ‘false signatures’ persist, the government is suing our former CEO, he’s suing us for wrongful termination and back pay, and suing our regulator too — and we’re paying his lawyers to do so! — we are suing our former auditors for not having stopped our former CEO from smoothing earnings with financial tricks, and our stock has taken a pounding. Congress has been endlessly debating what to do about us: whether to limit our balance sheet, impose a strong regulator, strengthen OFHEO powers and its funding, or do something else. Others question why we fund subprime lenders instead of competing with them.”
Contrariwise, we might be a duopoly.
Asked about Fannie Mae’s move, a Freddie Mac spokesman said, “We are absolutely not a duopoly. We’re canceling our charter too.”
Upon hearing the news, President Bush exclaimed, “Dang! And after leaving them vacant throughout my Presidency, I was just getting ready to select the Presidential nominees for Fannie Mae’s board.”
Promptly after I posted, Slate’s Mickey Kaus wryly added a postscript:
David Smith with an April 1 solution to the ongoing Fannie Mae problem. … P.S.: He left out the part where Dem bigshots Jim Johnson and Frank Raines give back the money! … 12:36 P.M.
“Frank, show me the money!”
Finally, a big thank-you to readers. In April, the AHI blog turned 2½. In that month, to my astonishment and pleasure, the blog averaged just under 5,000 unique visitors a day. Nobody pays me money to write the blog, but you pay me with your attention, and though only a few of you have emailed me, I consider this readership a bond of trust. That I’m still at it is due to you, the readers, for who writes if not to be read?
For you, it’s my job to provide clear exposition, helpful illumination, insightful interpretation, and unvarnished opinion. That’s a job I take very seriously. So to all of you who read this, and especially those of you who have made it part of your daily or weekly routine, I say Thanks. You’re really appreciated, and you’re the reason I keep churning these things out.
Thankyouverymuch!
