Category Archives: housing

President Cheapskate and the Amazing Non-Appearing Wedding Gift

One can only hope the gift is “in the mail” as we speak, but I am definitely not going to hold my breath.  As we might expect, the newlywed Duke and Duchess of Sussex ask for charitable donations in lieu of wedding gifts.  Some national leaders donated to local charities promoting causes related to the young people’s interests, others were more creative, and some responses were just heartwarming —  an abused Indian bull rescued, a couple of namesake koalas in an animal shelter with accompanying donations for habitat maintenance, and so on.  And, then there was Donald J. Trump:

“White House spokesperson Lindsay Walters said last week the Trumps will make a contribution to one of the seven charities on the royal couple’s list but did not specify which one. Neither Trump tweeted about the wedding.”  [USAT]

We’ve seen this movie before — and thanks to the intrepid reporting of David Fahrenthold of the Washington Post, we know that ‘the movie’ is an entire series, with more versions than Star Wars and Planet of the Apes combined.   So, the contribution will be made to “one of the seven charities.”  Which one?

“The couple have chosen charities, which represent a range of issues that they are passionate about, including sport for social change, women’s empowerment, conservation, the environment, homelessness, HIV and the Armed Forces. Many of these are small charities and the couple are pleased to be able to amplify and shine a light on their work.” [eonline]

Sport for social change? How likely is it that Trump will donate to a sport for social change charity while he’s busy vilifying professional athletes who are protesting police brutality toward ethnic minorities?  Women’s empowerment?  A donation from a man who has at least 16 public allegations of unwanted sexual conduct against him? Who faces legal actions from Summer Zervos and Stephanie Clifford?

Conservation?  A donation from the father of two trophy animal slaughtering sons? A man whose administration allows the hunting of hibernating bears and their cubs? Allows the killing of vulnerable animals swimming in Alaskan rivers? Who allows the killing of wolf cubs?  Probably not.

The environment?  A donation from the man who won’t fire the egregious Scott Pruitt from his well protected perch at the EPA? From the man who promotes pipelines across sacred lands? From the self-same person who wants to roll back fuel efficiency standards?

Homelessness?  A donation from a man whose administration is cutting funding for programs to help homeless people? [Newsweek]  Whose administration is on track to make the situation worse? [WaPo]  Not much chance for this category to make the cut.

HIV?  Remember the interview with Bill Gates who describes two meetings with the President:

“Both times he wanted to know the difference between HIV and HPV and so I was able to explain that those are things that are rarely confused with each other.” [NBC]

Gates is being entirely too kind,  almost NO ONE confuses the two diseases.  Most people who don’t know, understand the difference when it’s explained ONCE.

Armed Forces?  “Cadet Bone Spurs™”  As he was so aptly described by Senator Tammy Duckworth (D-IL) seems content to lie to newly minted Navy officers about pay increases [MilTimes] and to insure there’s funding for his parade.  Other military and veterans’ issues not so much.

In addition to his endemic lack of interest in social change, empowerment, ecological, and real military issues Fahrenthold’s discoveries should be kept in mind.  Trump will make grand promises.  He will then:

  1. Try to get someone else to come up with the coin of the realm to actually pay for the donation.
  2. Try to avoid payment until there’s so much publicity he can’t stand the spotlight any longer.
  3. Stall until he doesn’t have to actually pay up at all.

Therefore, the best unsolicited advice for the young Duke and Duchess might be to enjoy their honeymoon and not worry about whether the ersatz leader of the US political system will cough up for a wedding gift donation — he probably won’t, and if he does you can be just as amazed as the rest of us.

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Filed under conservatism, ecology, homelessness, housing, Politics, troop pay, Women's Issues, Womens' Rights

While We’re Ducking and Dodging

While we’re ducking, dodging, and otherwise attempting to avoid damage from the GOP, they’re still busy with legislation to make our lives just a bit more difficult.  Cases in point:

The House leadership has delayed, but hasn’t promised to discard, a bill, HR 367, to allow the general sale of silencers — which the proponents tell us will mitigate hearing loss for gun owners.  Pro Tip: A nice pair of headset style ear protectors will set you back about $30.00 (if the foamies will do you can buy’em for about 12 cents each in a bucket of 200) as opposed to spending $1300.00 on a suppressor for your AK/AR-some number or another.

The GOP tax cut legislation, which somehow is being titled “reform,” is a walloping giveaway to the top income earners in the U.S.  Not sure about this? See the Institute on Taxation and Economic Policy, that tells us those in the bottom 20% will see 1.3% of the tax benefits while the top 1% will enjoy 67.4%. Bringing this closer to home, the top 1% of income earners (which amounts to about 0.4% of our population) will get a 70.7% share of the tax cuts. For all that chatter about the Middle Class, the plan doesn’t really help middle class Nevadans:

“The middle fifth of households in Nevada, people who are literally the state’s “middle-class” would not fare as well. Despite being 20 percent of the population, this group would receive just 4.6 percent of the tax cuts that go to Nevada under the framework. In 2018 this group is projected to earn between $38,900 and $60,600. The framework would cut their taxes by an average of $380, which would increase their income by an average of 0.8 percent.”

Just to put this in context, a family in Nevada’s middle income range would see a tax cut of about $380…meanwhile back at the home mortgage, if that family is in Reno where the average home loan is about $187,000, the monthly payments are about $855 per month.  Congratulations Middle Class Nevadans, you may receive an annual prize of 44% of one month’s mortgage payment.  Color me unimpressed.

The GOP passed its version of the FY 2018 budget on a 219-206 vote.  Representative Mark Amodei (R-NV2) voted in favor of the bill; Representatives Kihuen, Titus, and Rosen were in Las Vegas attending to their constituents in the wake of the massacre at the music concert.   The AARP was quick to notice that the Republican plan calls for $473 BILLION to be cut from Medicare over the next 10 years.   Expect a cap on the Medicaid program funding; it wouldn’t be too far off to estimate cuts of about $1 TRILLION in that category.   Beware when Republicans speak of “entitlement reform,” that simply means cutting Social Security benefits and Medicare.  When they say “welfare reform,” they often mean cutting Food Stamps, Housing Assistance, and Medicaid.   Representative Amodei might want to explain why he supports cutting Medicare by $473 billion over the next decade?

Those in Nevada’s 2nd Congressional District can reach Representative Mark Amodei at 202-225-6155 (Washington DC) 775-686-5760 (Reno), or 775-777-7705 (Elko);  the office addresses are — 332 Cannon Building, Washington, DC 20515; 5310 Kietzke Lane #103, Reno, NV 89511; 905 Railroad Street, Ste 104D, Elko, NV 89801.

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Filed under Amodei, Economy, Federal budget, Health Care, health insurance, housing, Medicaid, Medicare, Nevada, Nevada economy, nevada health, nevada taxation, Politics, Republicans, Taxation

Quick Bucks and Long Term Losses: The Benzer Debacle and Nevada HOAs and COAs

Chicken Roosting Leon Benzer is worried about his family’s future, perhaps he might have given some thought to those prospects before launching his “sprawling conspiracy” in Nevada?  Another bunch of chickens comes home to roost:

“His sprawling conspiracy left a trail of ruin in its wake, including HOAs with substandard repair work, defrauded mortgage companies, defeated HOA homeowners with diminished property values and dozens of Benzer’s family members, friends and employees ensnared in his web of criminality,” prosecutors wrote. “Indeed Benzer by himself caused a (more than) 40-person crime wave in the Las Vegas Valley between 2005 and 2009, perpetrating crimes including mortgage fraud, election fraud, threats of violence and intimidation, abuse of the judicial process, tax fraud and obstruction of justice.” [LVRJ]

The conspiracy was a tangle with a simple objective: “The goal was to gain control of HOA boards through election rigging, obtain construction-defect litigation contracts for Quon and, ultimately, construction repair work to Benzer’s company, Silver Lining Construction.” [LVRJ

The result for Benzer was a 15 1/2 year sentence from a Federal District judge, plus 5 years supervised release, and $13.4 million in restitution. [LVRJ]   Mr. Benzer also played fast and loose with NRS 116.31105-7.  In Nevada, HOAs must have executive boards of at least three members, and the board members must be owners of units within the HOA.  So, from August 2003 until February 2009 Benzer and his associates:

  • Identified HOAs which could bring construction defect cases
  • Engaged real estate agents who would identify units available for purchase in the targeted HOAs
  • Enlisted straw purchasers for the identified units who would carry out Benzer’s scheme to get construction defect litigation contracts
  • Secured financing for the straw purchasers
  • Insured the straw purchase members were elected to executive boards of the HOAs (fraudulently)
  • Worked with the fraudulently elected straw purchase executive board members to manipulate property management, claims of construction defects, and to secure contracts for Mr. Benzer’s company. [DOJ Benzer]

Civic Duty

What would make HOAs such an inviting target for this kind of felonious manipulation?  First and perhaps foremost, the HOAs have an advantage in that multiple buildings or units can be conveniently lumped together, unlike having to deal with multiple individual owners.  The very nature of community interests can be twisted into an advantage for the unscrupulous.  So, if the sidewalks are 4.5 ft wide instead of the required 5 ft. then it’s obviously easier to get a large contract to improve pedestrian walkway easements on private property, or to encroach on landscaping, or whatever needs to be done to meet the local building codes and standards.

Secondly, we might want to consider the owners’ interests.  One of the HOA/COA advantages is that one can have some lawn or exterior landscaping without having to do the maintenance.  Just the thing for older residents who don’t have an interest in shoving the lawn mower around every weekend.  Or, perhaps, just the thing for younger residents who aren’t ready to invest in the lawn mower, week whacker, and other appliances of landscape management.  Or, can’t afford to hire landscapers themselves? The same applies to maintaining communal items – roofing (in connected buildings/units) or parking areas, walkways and other communal areas.  The advantage is that the individual owner isn’t responsible for the roof, or the parking, or the sidewalks – the disadvantage is that the HOA, being responsible is also a prime target for the likes of Mr. Benzer and his merry gang.

Third, and nearly always the case in relatively small operations, is the problem of finding people to participate in the management of an HOA/COA. This would seem a small issue if only three people are required for Board membership, but this doesn’t mean the problem goes away.  There are those who own HOA/COA properties who are not residents – they may be those who once resided in the community but have moved on, while still maintaining ownership of the unit.  They may have never resided in the community, but maintain the property as a rental.  It would seem that an HOA or COA with a high percentage of absentee owners could be an inviting prospect for the Benzer style take-over scam.

From the psychological speculation side of the issue, those people who moved into an area managed by an Executive Board and the property management firm because they didn’t want to bother with ‘community issues,’ may not be the type to get actively involved in the management and executive decisions related to the property or properties. The “Let George Do It” perspective is a powerful force in modern life.

Therefore, we might be left holding the banner for the old saw: 10% of the people will do 100% of the work.  How often the executive board work gets done is specified in the by-laws – by law the Board must meet “least once every quarter, and not less than once every 100 days and must be held at a time other than during standard business hours at least twice annually.” [NRS]  Let’s speculate that the more often a board meets the more oversight it does of property management, and that the board which meets only four times per year (two of which must be in the evening) has pretty much let the managers take over the subject.   Here, too, is an opening for the unscrupulous.

Legislative Duty

Given the extensive nature of Mr. Benzer’s highly questionable operations, it would seem the Board Scam would have drawn some legislative attention. It didn’t in the early days, the 2003 session of the State Legislature didn’t pass any legislation regarding Chapter 116.  In the 2005 session, the legislature enacted SB 325 which address management and fiscal issues.  In 2007, AB 396 required: “a member of an executive board who stands to profit personally from a matter before the board to disclose and abstain from voting on the matter.” Governor Jim Gibbons vetoed the measure.  His objections were, (1) the act might increase assessments; (2) there could be “dramatic changes to common areas,” and (3) it was a late bill and the legislature should have given it more consideration.  [DB 5/2009]  It would be November 2007 before Scott Canepa, a construction defect lawyer, brought information to the federal investigation into Benzer’s scheme. [LVRJ]

The next session in 2009 , did give the entire Chapter (116) much more consideration: SB 68; SB 182; SB 183; SB 253; SB 261; SB 351; AB 129; AB 350; and AB 361 were enacted. [NVleg] The provisions in AB 350 helped fill a void in management ethics, boards were admonished as follows:  “and shall act on an informed basis, in good faith and in the honest belief that their actions are in the best interest of the association.”   To its credit, when the details of the Benzer Scam-A-Rama unfolded the Nevada Legislature did act to curtail this kind of behavior.  And, perhaps had former Governor Jim Gibbons not been so allergic to the expression “solar energy,” AB 396 might have helped alleviate some of the damage back in 2007. 

Oversight and Information

The Nevada Legislature did what legislatures generally do best – enact legislation to criminalize crimes already committed. The prevention of any replication of Mr. Benzer’s operations is laudable.  However, before castigating the Legislature it should be noted that it’s impossible to legislate away problems before the information is available.

Members of HOAs and COAs, and member of the general public, might want to know  the status of an HOA or COA with particular attention to those factors which might render it a potential target for disreputable and downright criminal elements.  What oversight is in place for examining the activities of Executive Boards?  For examples, are there HOAs or COAs which have a relatively high percentage of absentee owners?  Let’s speculate that the higher the number of absentee owners the greater the chance for illicit behavior such as those straw buyers.  What kinds and to what extent is financial and management information available to owners and prospective buyers, and can we make improvements in the amount of information and access to it?

Caveat Emptor

There are some things owners and potential buyers can do to protect themselves.  The first might be to read the provisions on NRS 116.  It’s long; it’s wonky, and it’s in legal-ese, but it does define terms and set forth the fundamentals of HOA/COA operations.  If there’s no appetite to read the entire thing, then a person would be well advised to read  sections NRS 116.3075 through NRS 116.31107 on “meetings and voting.”

The second would be to ask questions such as: How many owners are absentee? What’s the percentage of proxy ballots? Again, the assumption is that the further removed the direct oversight, the greater the potential for problems.  Or, when and where are ballots counted in Executive Board elections?  What are the provisions for “spoiled” ballots or other ballots which might be rejected? And, what are the grounds for rejections?

What are the terms and term limits of executive board members?  Too long and there may be problems with “old boy” connections; too short and there’s the loss of “institutional memory.”  What percentage of the board members are residents?  What is the process by which property management firms are hired?  What is the process by which contracts are let for maintenance, construction, and rehabilitation?

NRS 116.31175 requires the availability of “books, records, and other papers of the association” for review “at the business office of the association or a designated business location not to exceed 60 miles from the physical location of the common interest community…”

las vegas 60 mile radius As the map indicates, that’s a fair portion of Clark County, and an owner or potential buyer might well want to know where, and how accessible, is that location with those “books, records, and other papers.”

Mr. Benzer will be a guest of the Federal government for the next 15 and one half years, with supervision for an additional five, however that doesn’t mean that there won’t be others who will apply their intelligence to those endeavors which will enhance their wealth without worrying about pesky ethics issues.  In the mean time it seems advisable to have some Legislative attention paid to:

  • How well protected are current HOA and COA owners in Nevada from potential scam artists similar to the Benzer group?
  • How well informed are potential HOA and COA buyers in Nevada, and are there steps we can take to better protect their interests as consumers?
  • Are there further steps which might be taken to insure that banks and other mortgage lenders don’t become involved in straw buyer, and similar schemes?

In order to prevent future Scam-A-Ramas of this ilk may require a combination of Caveat Emptor and Quis Custodiet Ipsos Custodes?

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Filed under consumers, Economy, housing, Nevada legislature, Nevada politics

Playing Risk: Nevada and the secondary mortgage market

Risk game boardThere are some topics which engender eye-rolling and extended yawns, and the secondary mortgage market is one of them.  That peril acknowledged, Nevada’s housing market is precariously balanced on the edge of this subject, so it’s worth risking another foray.  Let’s start with an article in the Las Vegas Sun,  concerning the implications of the Obama Administration’s decision to wind down the Mortgage Twins — Fannie and Freddie — in the backwash of the Mortgage Meltdown.

Blue BookA Quick Review

The focus of the article concerns the (1) possibility of increased mortgage rates in a fully privatized secondary mortgage market, (2) pressures on first time home-buyers which could be exacerbated by a privatized mortgage market, and (3) problems with establishing home values.

What is the Secondary Mortgage Market?

Here’s the standard definition:  “The market where mortgage loans and servicing rights are bought and sold between mortgage originators, mortgage aggregators (securitizers) and investors. The secondary mortgage market is extremely large and liquid.”  [Investopedia]

The mortgage originators (banks & other lenders) sell their home loans to “aggregators” who securitize (package the mortgages into bonds) and sell them to investors.   The second sentence in the definition might well qualify for inclusion in the Understatements Of The Century awards.

The idea behind this “large and liquid” — or Big and Squishy — system is to minimize RISK.  The bankers don’t have to keep all their loans on their own books, thus reducing their exposure to defaults, and the aggregators can re-package loans in ways to attract investors who want yield without too much RISK.  We’ve already covered all those intriguing and creative “financial products” (swaps, etc.) manufactured to further reduce RISK — which in some circumstances (read 2008) can create even more RISK.

Risky Business

There is one crucial point in the Sun article which should point us toward the critical problem with immediately  privatizing the secondary mortgage market:  What’s the value of the property on which the mortgage is based, and is the foundation for the securitization in the secondary phase?

If home values stabilize or increase the homeowners are more likely to be able to pay and not default on the loans.  When home values decline, as we learned to our peril, “underwater” home-owners are more likely to default which, in turn, de-values the aggregated and securitized ‘packages’ sold to investors.

Blue Book

The Rules of the Game

While those interviewed for the article use the term “guidelines,” let’s call those The Rules of the Mortgage Market Game.  One of the functions of the “Mortgage Twins” is to establish basic rules for home loan lending.  The Congressional Budget Office analysis explains:

“They purchase mortgages that meet certain standards from banks and other originators, pool those loans into mortgage-backed securities that they guarantee against losses from defaults on the underlying mortgages, and sell the securities to investors–a process referred to as securitization. In addition, they buy mortgages and MBSs (both each other’s and those issued by private companies) to hold in their portfolios. They fund those portfolio holdings by issuing debt obligations, known as agency securities, which are sold to investors.”

The two essentially risk reduction elements are in the first part of the explanation quoted above. (1) Fannie and Freddie have mortgage lending standards.  (2) Fannie and Freddie operate as aggregators who will re-sell the mortgage packages to investors.

When the banking system collapsed in a heap in 2008, the Mortgage Twins ended up holding most of the bag.

“…in 2009, the two GSEs owned or guaranteed roughly half of all outstanding mortgages in the United States (including a significant share of subprime mortgages), and they financed three-quarters of new mortgages originated that year. Including the 20 percent of home loans insured by federal agencies, such as the Federal Housing Administration (FHA), more than 90 percent of new mortgages made in 2009 carried a federal guarantee.” [CBO]

Not to put too fine a point to it, but when the banking system took on too much risk during the Housing Bubble, the explicit federal guarantee for the secondary mortgage market backstopped the home loan lending process in this country, and in this state.  That’s the good news.  That doesn’t mean there aren’t still some intrinsic problems with the Mortgage Twins.

The Backstop Effect:  Little encourages more risky behavior than the notion that someone else will end up holding the bag.  As long as the federal government assumes responsibility for the home loans, then the bankers can see the system as one that privatizes the profits and socializes the risks.   This rationalizes the practice of offering exotic home loan products to people who might never have qualified otherwise.

The Quis custodiet ipsos custodes?  Factor:  Who was watching the watchers before 2008?  Before 2008 the Mortgage Twin’s regulators lacked the authority to increase the capital requirements for Fannie and Freddie.  Nor could the regulators place the Twins in receivership as the government could in the instance in which a bank went under.  No one should have been surprised when the Twins were placed in conservatorship in the wake of the Housing Bubble deflation.

There’s little appetite from most quarters to leave the current system in place.  However, the next step in the reform process must address some difficult questions.

Blue Book  “Students are required to provide their own 8½ x 11 bluebooks. Do not use the smaller sized bluebooks. Bluebooks are available at the University Bookstore. The exam proctor will also always have some emergency blue books available.”  [Law.Wash.EduAnd the test questions are:

#1.  What configuration for the secondary mortgage market will best ensure a stable supply of mortgage financing?   Consider the consequences of a fully public model, a hybridized public-private model, or a fully privatized system.

#2. How are the underlying assets to be valued? Your answer should give consideration to (a) the standards by which the quality of the underlying loans are to be evaluated, (b) who should establish the standards for this evaluation, and (c) how the housing finance structures might be affected by the needs of the banking sector, the construction sector, and the needs of middle income prospective home-buyers.

— Good Luck —

For a fuller look at some possible answers, see Congressional Budget Office, ” Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market” December 22, 2010.   New York Times, “Washington Steps Warily on Housing,” August 6, 2013.   New York Times, “Obama Outlines Plans for Fannie Mae and Freddie Mac,” August 6, 2013.   Federal Reserve Bank of Atlanta, “Financial Market Update, Volume 14, No. 1: Fannie Mae and Freddie Mac at work in the secondary mortgage market.”  University of North Carolina, Center for Community Capital, “Fannie, Freddie, and the Foreclosure Crisis,” September 2010.

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Filed under housing, Nevada economy

Bubble Bubble Here Comes Trouble? REO to Rental Securitization

Three WitchesBubble: The real estate experts in Las Vegas, NV were happy to report the Shadow Inventory of foreclosed homes in the region wasn’t as high as expected as of January 20, 2013. [LVRJ]  Nevada’s anti-robo-signing law (AB 284) is part of the reason, and some homes are still on the market because they aren’t in salable condition.  Before we get entirely too pleased with ourselves…

There are homes that will be included in the Shadow Inventory in the next two years; homes which will be in default and Nevada may be able to circumvent the foreclosure statistics  increases by using short sales.

Bubble:  There are several motivations for purchasing real estate, one of which is to transform unsold residences into rental properties, as in the following example from last December:

“Home prices fell 62 percent from 2006 to early 2012—the steepest drop in any U.S. metropolitan area—yet Vegas is again enticing buyers. The number of homes listed for sale has dropped to a 1.5-month supply, down from the four-month stock that’s typical in the area, says Jeremy Aguero, principal at Applied Analysis, a Las Vegas research and advisory firm. One reason for the inventory squeeze: Investors such as Blackstone Group (BX), GTIS Partners, and Haven Realty Capital are buying deeply discounted homes in bulk to rent out at a profit.”  [BusinessWeek]

The good news is that (a) more rental properties are available, (b) some of the excess inventory is off the market, so that (c) home prices could rebound and those “under-water” on their mortgages might see a bit of relief.   Again, before we become too cheerful, there’s another reason to invest in foreclosed properties which if not carefully monitored could lead to another Bubble.

Toil: There’s more to the story than Blackstone’s interest in getting into the rental business in Nevada.    Blackstone’s also been active in southern California:

“In all, major investors have raised between $6 billion and $9 billion to buy single-family homes, according to a recent analysis by investment bank Keefe, Bruyette & Woods. The goal is to bring corporate scale and efficiency to what has historically been a mom-and-pop, single-family-home rental business.” [LATimes]

What we have here is Wall Street moving in on Main Street.  Renting residences used to be primarily a Mom & Pop operation.  But, Mom & Pop don’t have between $6 and $9 billion to buy up residential real estate.  Now we tread into “market efficiency” territory.  There are some variant perspectives on what “efficiency” really means.

When we speak of efficiency as a component of Economies of Scale, the Black Rock venture looks like the application of operational efficiency to the old Main Street individual homeowner model of residential rental markets.  There are Internal economies of scale (the company is so big that it can buy in bulk usually at a discount not available to smaller concerns) and External economies in which the company is so big it can get preferential treatment from governments or outside sources to reduce taxation, get roads and utilities provided, etc. in an environment in which a small business or individual cannot successfully compete.

The initial view is that Blackstone is taking advantage of its capacity to be operationally efficient — it can buy up residential real estate in Nevada and southern California at prices heavily discounted by foreclosure processes or perhaps even short sales.

Trouble: What we don’t need is a real estate market which is “operationally efficient” to such an extent that we create yet another Bubble.  So, let’s read further into the Los Angeles Time’s article:

“These firms are also exploring ways of packaging rental income streams into securities, similar to the way mortgages were bundled during the boom years. Those mortgage bonds — often packed with risky home loans that produced mass defaults — turned into the toxic assets that helped bring down major banks during the financial crisis.”  (emphasis added)

There are some breaches in this model.  Real estate is a labor intensive business, if we think in terms of home maintenance, home marketing, and all the associated jobs which must be performed to rent and receive income from a block of home purchases.  Profit margins depend on rental income, and will the rental income stream support acceptable levels of profitability given the labor intensive nature of the housing market?   What happens to the business model if high competition for properties drives prices up beyond the  original cost estimates?  What happens if the profitability margin in the “revenue stream” doesn’t meet expectations?

Now we have to consider the other “Efficiency.”  The rental income will be securitized.  Packaged into bonds. The bonds will be sold in financial markets, and the efficient capital market theory tells us “the price of an asset reflects all relevant information that is available about the intrinsic value of the asset.” [EconLibrary]  What determines the value of the bonds?

What’s “relevant information?”  Do we include the rating assigned to the bonds by the rating companies?  We’ve seen this movie before and it didn’t end well.  In fact, the ratings companies seem to have gotten a bit of religion on the subject of slapping high grade investment ratings on questionable products:

“Ratings companies began commenting last year on how they would approach assessing potential securities backed by rental homes, a market fueled by the foreclosure crisis they helped create by granting inflated grades to mortgage bonds.

Moody’s said in August that items including a dearth of historical data on the business could make it difficult for issuers to obtain the grades they seek.

In its report today, Moody’s said it wouldn’t offer its “highest ratings” to deals backed by “equity” structures, rather than individual mortgages, also because they would offer less protection against “unauthorized sales” of homes and new liens. [Bloomberg, Jan. 2013]

Do we include the timeline in our calculation of the bond value?  Last November Blackstone opined that it had a two year window in which to buy up financially fragile properties, [Bloomberg] so are properties purchased in the 3rd year likely to be less profitable, and thus have a lower return for investors than properties purchased in the first two?  If the bonds are manufactured as they were during the Housing Bubble (mixtures of good and bad loans which blew up when housing demand and prices collapsed) then what is the “intrinsic value” of the assets (bonds)?  Will the bond packages include combinations of rental income from markets in which prices are going up, and from regions where the market is still depressed?   If so, then what is the actual “value” of the bond? How many markets have to see increased home prices before the admixture of cheaper and more expensive rentals in securitized assets gets “top heavy?”

Enter all the usual suspects.  Blackstone got an increased loan from Deutsche Bank this month to “underpin” its long term financing of the new REO to Rental securities.  What we know so far about this:

The new Deutsche Bank loan, upsized to US$2.1bn, includes an
original US$600m warehouse facility in addition to investments
from eight other banks and securities investors.

At least 20 banks and investors looked at participating in
the loan, and some passed because their charters would only
allow them to participate in bond deals and not bank loans.

Securitization specialists with knowledge of the deal said
Deutsche Bank expanded the size of the facility in order to
accommodate Blackstone’s increased commitment to purchasing
distressed single-family homes with the goal of renting them
out.  [ChiTrib]

Think of that warehouse as a paper storage facility in which all those rental agreement are stack up, only to be divided up, restacked, and used to back bonds issued by Blackstone.   We’ve seen this movie before too — it didn’t end well in its last incarnation.

Not to put too fine a point to it — but, are we about to get into the same “valuation” debacle about the actual value of sliced, diced, tranched, and securitized assets we witnessed in 2007-2008?

Double, double toil and trouble;
    Fire burn, and caldron bubble.

If we get ourselves into this mess again it’s going to take more than newt’s eyes, fillets of fenny snakes, frog toes, bat’s wool, and dog tongues to extricate ourselves.

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Filed under Economy, housing, Nevada economy

Reading Roundup

Round UpGood news, bad news — there is only a seven month inventory of bank owned residential properties in the Las Vegas, NV area.  The housing market appears to be leveling out in this region.  Good news for homeowners who’ve been waiting for their investment to appreciate, bad news for buyers.  [LV Sun] [RGJ]

Pure Fiction — the radical right rant in the RGJ on the 2nd Amendment which manages in a couple of short paragraphs to be almost fact free.  Best line? “The Second Amendment states the right to bear arms, not shotgun or long rifles. That means what it says, arms, tanks, machine guns and all other forms of arms so that the people would be on a parity with the government.”   May we ask, where in the city of Sparks do you intend to park your aircraft carrier?

Nevada Progressive discusses the Senate Judiciary committee hearings yesterday, complete with video of former Representative Gabby Giffords’ brief but poignant testimony.  ICYMI, Vegas Jessie looked at the NRA’s newly discovered interest in mental illness, as a distraction from the real issues.  TPM traces the new nullification efforts by radical conservatives.

Lady’s Day — Good reading at The Sin City Siren about the Feminist Files: If you aren’t outraged you aren’t paying attentionArkansas joins the ranks of Republican legislatures determined to keep women pregnant and in the kitchen.   And, then there’s Lawrence O’Donnell’s take down of the conservative lady who ardently believes that we should be defending our children with assault rifles.

Energy — Green tech firms, especially those seeking to increase our use of wind and solar power are seeking tax relief benefits from Congress, similar to those granted to the fossil fuel giants. [DealBook]  While the Chinese are gasping, the U.S. is learning that metal mining is responsible for 46% of “toxic releases” in our environment. [Earthworks] 15% is from power generation.

Unhealthy Ideas — a GOP legislator in our neighbor to the north (as in Idaho) compares the Affordable Care Act to the Holocaust — thus demonstrating she doesn’t understand either.   Meanwhile there’s the problem of the Unlucky Ducks and Medicaid.

Chart of the Day:

Public Sector employment chartOnce more we repeat with fervor: Austerity Doesn’t Create Prosperity.

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Filed under Economy, energy, energy policy, Gun Issues, Health Care, housing, Nevada economy, Women's Issues

If You Aren’t Pulling The Wagon, Don’t Complain About The Load: Foreclosures in Nevada

Another day, another glossy flyer from Grover Norquist in my P.O. box reminding me that the President supposedly promised to staunch the foreclosure flood in Nevada.  Better information and analysis can be found in the Las Vegas Sun article on the faltering foreclosure reduction plans in the Silver State.  The article makes some important points, and falls nicely into the Must Read List.

One of the advantages of blogging is that there is no length limit to articles, and some areas can be explicated in greater specificity.  No surprise, here come’s additional information on the securitization issues related to the foreclosure processes.

Wonk Alert

Not only were banks administratively unprepared to deal with failing home loans, the system devised in the Securitization Boom wasn’t helpful either.  The New York Times produced some of the better graphics to illustrate what was going on during the Housing Bubble.

At this point we should recall that those mortgages being pooled were not being held by the banks that issued them.  First, some weren’t even properly registered.  The MERC mess was created by bankers who didn’t think county recorders were working fast enough to satisfy the financier’s demand for more mortgages to pack into the pools.  [DB]

“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Mr. Schneiderman said. By creating this “bizarre and complex end-around of the traditional public recording system,” Mr. Schneiderman’s lawsuit asserts, the banks saved $2 billion in recording fees.” [NYT]

It might have saved the banks some $2 billion in recording fees, but when it became obvious some of those hybrid adjustable rate monstrosities were going into default, one thorny question arose — Who owned the mortgage? When trying to determine how to re-negotiate an individual mortgage it is helpful to know who owns it.  On the other end of the scale, investors who purchased mortgage backed securities were told that all the loans were just fine and dandy — some, specifically Bear Stearns, told investors the firm would repurchase defective loans — that wasn’t what happened. [NYT]

Now let’s look at the next step in the diagram.  The mortgage backed securities shown in the first part of the diagram were used to create another layer of investment products called CDOs.   This isn’t as much of a problem for the homeowner facing the possibility of robo-signing and ‘who owns the mortgage’ MERC related issues, but it does illustrate how the faulty or defective  mortages contaminated the system when pumped into Wall Street Casino.

One Size Doesn’t Fit All

In addition to the problems associated with the Securitization Boom, homeowners faced a situation in which not all regional housing markets were created equally.  David McGrath Schwartz’s article mentions this crucial point.  One map from 2010 illustrates the point:

The “hottest” real estate markets in the Housing Bubble were those most likely to see the creation of the now infamous no-doc hybrid adjustable rate mortgages which were designed from the outset to encourage refinancing NOT repayment.   However, federal statutes must address national problems, so the initial programs were devised with the national — not the Nevada — issues in mind.

HAMP:  “The program was built as collaboration with lenders, investors, securities, mortgage servicers, the FHA, the VA, FHLMC, FNMA, and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.”  [source]   Problems for Nevada emerged immediately.  Many home loans in the state weren’t part of any of the eligible agencies.  Some didn’t meet the first lien qualification standard.  How to calculate the >31% of available income became problematic.   Worse still the American Bankers Association in conjunction with the Mortgage Twins (Fannie & Freddie) were adamant in their objections to any mention of reducing the principal of the loans to prevent homeowners from going any further underwater.  [ Examiner]

The notion of bankers being unwilling to accept any reduction in the principal in order to prevent foreclosures doesn’t seem to make sense, unless we remember that the banks didn’t have enough skin in the game.  Too many banks securitized too many mortgages while retaining too little ownership of them.

HARP:  The Home Affordable Refinance Program — “To be eligible, you must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, sold to those agencies on or before May 31, 2009. The current loan-to-value ratio on the mortgage must be greater than 80 percent. Having a mortgage that was previously refinanced under the program disqualifies you from the program. Borrowers cannot not have missed any mortgage payments in the past six months and cannot have had more than one missed payment in the past 12 months.” [WaPo]

Here we go again — if the loan was owned or guaranteed by one of the mortgage twins, then a homeowner would be eligible.   If not — good luck.

“This is a big deal because, although the Fannie Mae-Freddie Mac-FHA triumvirate controls more than 90% of today’s new mortgage originations, that wasn’t the case from 2001-2007. Last decade, non-GSE lending was a major part of the U.S. housing market.

For example, Alt-A mortgages accounted for 27.5% of mortgage originations in 2005. Today, each of these homeowners is locked out from HARP. HARP 3.0 would allow these Alt-A customers to (finally!) refinance their home loans.”  [TMR]

HARP 3.0 is still on the drawing boards.  The situation as of June, 2012?

Although at least one Senate Republican shows interest in a plan to expand the Home Affordable Refinance Program, the outlook for Congressional action remains doubtful and House Democrats are pushing the Federal Housing Finance Agency to make further HARP changes administratively. During a Senate Banking, Housing and Urban Affairs Committee hearing last week on legislation to expand HARP, Sen. Bob Corker, R-TN, said he was open to the proposal. “I hope that we’ll have a real mark-up on this bill,” he said.”  [IMF]

A HARP 3 bill was introduced by Senators Boxer (D-CA) and Menendez (D-NJ) in September 2012.  S.3522 “Responsible Homeowner Refinancing Act of 2012,”  was placed on the Senate’s legislative calendar on September 12, 2012 and no action has been taken since.

In short, the two major programs have been limited because (1) of the opposition of banks and the mortgage finance industry to any suggestion that the principal of the mortgages be reduced; and, (2) the fact that a full 27% of the mortgages issued during the Housing Bubble were not from government guarantors over whom the Federal government has any current jurisdiction.

Instead of bemoaning the slow pace and limited reach of home mortgage modification in Nevada, we should be demanding that the 112th Congress take action on bills like Menendez’s S. 3522 which would expand the reach of federal services to those holding non-GSE  or FHA loans.

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Filed under 2012 election, banking, Economy, financial regulation, Foreclosures, housing, Nevada economy, Nevada politics