Thursday, March 27, 2008

This is a good idea?

According to the Wall Street Journal's real estate section, Fannie Mae and Freddie Mac are about to be unleashed. With the US Treasury's assistance, the Federal Housing Finance Board has cut the pair's capital requirements and told them to go buy mortgage-backed securities. The same mortgage-backed securities that no entity not backed by the US taxpayer will touch with a ten-foot pole. This is supposed to restore confidence in MBSIs. What it really does is allow a bunch of banking and investment houses to unload garbage and leave John Q. Taxpayer holding the bag.

Does anyone remember back to that dim and distant time 18 months ago when the capital requirements were raised? Fannie and Freddie, through a series of stupid maneuvers, were in trouble, overleveraged and threatening to founder. It would have required a bailout amounting to a serious pile of tax dollars. Instead, the regulators reined the pair in and increased their capital requirements to reduce leveraging.

That was then. Now, apparently, things are so bad that leveraging federal revenue (i.e. our taxes) is the least evil option. Frankly I find that hard to believe, simply because this looks too much like a straightforward bailout of the people who created this mess in the first place. If they can get Fannie and Freddie to buy their toilet paper for 50 cents on the dollar when its only worth 5, they make out like bandits and move on to their next publicly funded scam. If this be capitalism, Wall Street is definitely making the most of it.

It Keeps Spreading

Until now the real estate bust had only been hitting us mortals. Those with the lifestyles of the rich and famous seemed to be unfazed.

And then this morning, the Trib reported about Promontory Ranch. Promontory Ranch is development near Park City consisting of two golf course and 200 luxury vacation homes. It is also in default to Credit Suisse to the tune of $288 million. And it has no way to repay it or even to manage or further develop the property. In other words it's holed below the waterline and going down fast.

Credit Suisse's response has been predictable. It has filed suit in Summit County seeking a appointment of a receiver to manage the property. If you have a claim against the developers or if you own property or a security interest in the development, you need to lawyer up. Now.

Whatever the "experts" may be saying, it looks like real estate may not have hit bottom yet.

People, people, people...

...when are you going to realize that buying a house is not like buying a bunch of bananas?

Paul Rolly's latest column in the Trib tells of James Royle, who bought an Ivory Home in the Valley Fields Subdivision, apparently without reading the covenants, conditions & restrictions (CC&Rs). CC&Rs? Yes, those thick books of "thou shalts and shalt nots" that just about every developer records these days and that control just about everything you can and can't do in your new house. And that buyers routinely ignore until it's way too late.

According to the article, Mr. Royle had some construction defects that needed corrected, but it wasn't happening. His response was to put a protest sign in his window. The next thing he knew, he was getting a nastygram from Ivory's attorney informing him that he was violating the CC&Rs. Mr. Royle noted that Ivory had apparently not enforced the provision before that, but I guarantee that makes no difference, because there is a clause somewhere in those CC&Rs that reads something like, "Failure of the developer to enforce any provision shall not constitute a waiver of its right to enforce said provision."

When you buy a house, you have to live with the house, the neighbors, the local government, the homeowners' association, and the CC&Rs. Do yourselves a favor and hire somebody like me to help you review those stacks of documents they hand you. Believe me, you'll be held to them whether you understand them or not.

Tuesday, March 25, 2008

Rates of Sink

Utah home sales have plunged, and apartment rents are rising as demand goes up. But the Pollyannas continue to find rays of sunshine. The latest "good news" is that Utah isn't sinking as fast as the rest of the country. I have some news: If the bow is under water, the mere fact that the stern is in the air doesn't mean you're poised for an America's Cup victory.

Gus Faucher of Moody's opines that foreclosure rates aren't bad here and that Utah will avoid the recession. Remember that Moody's is one of those rating houses that kept telling us that all those bogus investments were just fine. I consider Mr. Faucher's analysis to be just as reliable. First, it depends on the cherished myth that Utah is still its own economic island, which it is not, not by a long shot. What happens with mortgages elsewhere will reach here. Second, it ignores the peculiarities about Utah's social and financial structures that do exist and that allow a substantial number of distressed properties, particularly in south Salt Lake County and north Utah County, to mask that distress (not to mention the alarming number of houses that aren't being foreclosed on because they're locked up in civil and criminal fraud investigations, but I digress).

Sorry folks, there isn't anything so "special" about Utah that market cycles skip over us, and the mere fact that we aren't as bad as Michigan or Florida can't be considered terribly good news. Unless you redefine "cold drizzle" as "sunshine."

Land Use Follies

In the last session, the Legislature in its infinite wisdom passed SB53, restricting challenges to land use decisions. The Legislature itself isn't too clear about what it passed. Sen. Brent Goodfellow of West Valley claims it's just a clarifying amendment; noted land use attorney Jeff Owens of Strong & Hanni says, "Bollocks." I agree with Jeff. What the new law does is effectively freeze the public out of what ought to be a public decision-making process. The law was obviously written to preclude a public outcry such as delayed Walmart's Sandy Gravel Pit development from ever happening again. Given the power real estate developers have in the Legislature, SB53 should come as no surprise, but one may still fairly ask if it's a good idea. Given the power large landholders are permitted to exercise at public expense (currently being highlighted by the State's complicity in Kennecott's cover-up of the weakness of the retaining walls of its holding ponds), land use decisions need more sunshine and public participation, not less.