That's Just Crazy Talk

Another topic Mary, Marci, and I discussed at lunch was how loony the rhetoric is getting in the foreclosure mess, from all sides.

First, an example from the lender side.  I realize that the Wall Street Journal is little more Rupert Murdoch's gift of an in-house organ for the banks and the brokerages, but even by that low standard, Robbie Whelan's column yesterday is a high in low.  He basically blames the whole fiasco on lawyers who dare to defend homeowners and demand that banks actually produce evidence to support their claims before they take someone's house away.  Even by Wall Street standards, such a claim takes a lot of chutzpah, since the claimant has to ignore all the lender fraud we're finding shot through the system.  This claim might actually surpass the lie the banks originally spun to us (A lie that our wholly owned Treasury Department and regulatory agencies continue to treat as reality.) that the mess was the result of those nasty, greedy borrowers and that banks were just victims (sniff, sob, sad-puppy-dog-eyes).  I think the new shovel-load surpasses the old simply because the banksters are now so desperate they're trying to blame the one, remaining profession capable of punching them square in the mouth: we eminently killable lawyers.  That's desperation to the point of madness.

As an aside, the "blame it on the borrower" line has recently had another hole blown in it, hopefully below the water line.  Professors Adam Levitin or Georgetown and Susan Wachter of Penn recently published a paper showing that the credit bubble was largely generated by excessive supply of capital, with the demand being ginned up by ruthless marketing to provide a place to dump the supply (and generate lots of commissions and fees).

The borrower side has its own dubious tales, but at least someone who's about to be thrown into the street has an excuse for desperation verging on madness.  Nevertheless, I consider it better to plan from within reality, so here goes.

Perhaps the most popular Kool-Aid tale on the borrower side is that this mess is so big that mortgages will be canceled and people will keep their houses for free.  There are a lot of scam artists, some of them lawyers, encouraging this belief.  I'm here to discourage it.  With extreme prejudice.  The mere fact that your lender securitized your loan no more invalidates your note and mortgage than a commercial landlord's pledging a rent stream as collateral for a loan invalidates the lease.  Sorry.  The mere fact that those securitization parties hedged their positions with credit default swaps that were train wrecks from the start has no effect on the validity of your loan either.  Sorry again.  And the mere fact MERS can't produce your note doesn't mean there isn't somebody out there who actually holds it and who will one day come knocking on your door.  Sorry a third time.  And what I tell you three times....

To sum up, lenders can't blame borrowers for their own mistakes, and borrowers can't ignore payments and expect to keep collateral.  There's a new Harry Potter movie coming out, but the magic wands don't work on this side of the screen.

Real Estate Strangeness

Lunch with a couple of great people today, Marci Jackman and Mary Olsen, both of Keller Williams South Valley Realty.  We hashed over a lot of points, but the two biggest were saved for last.  First, none of us could figure out why there has been an up-tick in housing starts.  The market is awash with inventory, fire-sale prices are the norm, the move-up market is shriveled because so many are upside down and can't move up, and too few people have a steady enough income to support a 30-year risk.  Why build more?  I don't know.  I suspect it's a combination of irrational optimism over what the current, historically low mortgage rates might produce (People must start borrowing at these rates.  Of course someone still has to be willing to lend, but don't sweat details.) and force of habit.  The old shark thinks that if it just keeps moving forward, everything will be alright.  I think not.

Then we kicked around why, after picking up the loan mod pace for a few months, have all the banks gotten back on the snail train.  This one I think is pretty simple.  All the way through HAMP, they sat on the applications for the same reason they sat on the foreclosures: As long as they stalled, they could carry the paper at book value instead of marking it to market.  It was extend and pretend.  Then HAMP started winding up, and they pushed through the applications they really wanted to push through.  Now HAMP is gone, it's a new program, and it's back to extend and pretend.  I also think that's why banks are pushing for deficiency notes on mods and short sales.  So long as they hold paper for the balance of the loan, however unproductive, they can keep pretending book value is reality.  What a world.