Page 1 of 2 Credit still at the wheel By Julian Delasantellis
In 1977, the Swedish pop band Abba sang Knowing Me, Knowing You, a
lover's lament over once-vibrant rooms and a home now being vacated by
passion's demise.
These old familiar rooms, children would play,
Now there's only emptiness - nothing to say.
Walking through and empty house, tears in my eyes
Here is where the story ends - this is goodbye.
But
that's probably not where the story ends - at least if the break-up took place
in the United States. It's a lot more likely that it concludes at one of the
thousands of court-adjudicated distressed home and property auction sales going
on all across America, like the one I recently attended outside Seattle.
Before the deluge, before the CDOs and the CDSs, before AIG
and Lehman Brothers, and the TALF and the TARP, were the homeowners who
borrowed and bought more house than they could afford. The nightmare that their
American dream turned into was the match that lit the powder keg of an
overleveraged world.
According to Realtytrac, a real estate statistical service, 2.5 million
American homes entered the foreclosure process in 2008, a number that had
tripled just since 2005. For the first six months of 2009, foreclosures are
running 15% ahead of last year's record, a torrid pace.
In 1942, Austrian economist Joseph Schumpeter, in his book Capitalism, Socialism
and Democracy, extolled capitalism's virtue in regularly promoting what
he called "creative destruction", that is, the ability to build new, successful
capitalist enterprises on the wreckage of those that have failed. In many ways
here, the auction struck me as a celebration the "creative destruction" of
about 80 families' dreams of a better life.
The auction was scheduled to start at 9am sharp, outdoors, on the plaza in
front of the county courthouse. As I approach the area, I see about 50 people,
all Caucasian, milling about in small groups on the plaza. Others are running
across crosswalks and traipsing through the plaza's plantings to get there
before the proceedings starts; one is vigorously rolling his wheelchair into
the plaza in a manner worthy of an Olympic para-athlete. Something's definitely
going on here.
Seattle's beastly, 40 degree Celsius heatwave has broken in favor of a more
normal early morning reading of about 16, so instead of about 80% of those
present nursing an iced Starbucks, they're all back to sipping their brew from
hot cups with the protective thermal paper sleeves.
Getting closer, I take a better look at the people assembled for the event. In
my life, I've spent a good deal of time with bankers, much of it analyzing
their actions on behalf of clients, but I've never attended a banking or
finance event with people dressed like this. If you come from a time when you
were expected to dress in suit and tie to apply for a loan, you would have been
astounded at the sight; these people would look casually dressed for a monster
truck rally, let alone to see a mortgage officer.
About 75% are men, dressed in jeans, t-shirts and sneakers, or shorts, t-shirts
and flip flops. The women, with the exception of one, were all dressed in
jeans, some in very tight jeans, t-shirts and flip flops. The exception had
jeans, high heels, waist-length cropped leather jacket and highly tousled
bleached blond hair; I thought that after the auction was finished she'd be off
to practice with her Nancy Sinatra tribute band.
Even though there was a whole detachment of constabulary in an adjoining
building, no armed police or court officers were in evidence to show the
state's authority; that first surprised, then later, it astounded me. I came to
learn that, within the about 400 square meters of that plaza were probably US$5
million or more of bank checks, ready to bid on properties.
I pick up a copy of what is essentially the program for the morning's
festivities, a multi-page packet with small pictures and details of all the
80-odd properties scheduled to be sold here. The details are comprehensive,
with information on the soon to be ex-owner's name, house and lot size,
assessed tax value and value of last sale. If that last sale was in 2006, there
was an overwhelming chance that it was for over $500,000.
The most interesting feature of the program was that it detailed for each
property who the " beneficiary" for the auction was. This, of course, referred
to the bank or financial institution to which the homeowner had stopped paying
the mortgage. These would be the ones who would benefit from the sale.
I saw a few names of financial institutions one would recognize, a smattering
of Wells Fargos and Washington Mutuals, yet I had never heard of most of the
beneficiaries. Their names, things like Guarantee Benefit Assurance, or
Aggregated Receivable Escrow Modified Pass Through, sounded like somebody had
rearranged words found in a financial dictionary on a Scrabble board.
These, of course, must have been the mortgage brokers.
Every speculative bubble contains features not seen in previous speculative
manias. It's in those differences that the argument is found that this time
it's different, that the crazy price appreciations really are justified this
time.
During this decade's great real estate bubble, the argument was heard that it
was the real estate brokers, frequently just one- to three-person boiler-room
operations opened up at the far end of strip malls where the Dairy Queens once
did business, which were making the real estate and mortgage markets more
efficient.
These were the people that dived into the subprime end of the pool with both
feet; the big banks may have been turning up their noses at servicing "those
kind of people", with their funny last names and poor credit scores, but the
mortgage brokers devoured them like candy, especially when it was discovered
that, for the ones with workable credit cores, they could be sold higher fee
and profit-margin subprime loans just because these borrowers turned out to be
too intimidated to seek out a traditional, lower interest-rate mortgage from a
standard bank. (see,
Rocking the subprime house of cards, Asia Times Online, March 6, 2007 -
the first article I wrote for this site on the subprime crisis.)
And now, here they were on this bright morning, the fallacies of their subprime
business model on display on each successive page. It's not as if the big banks
were blameless in this. Far from it. The little brokers took their dubious
loans to big Wall Street, who bought them (setting up the financing for the
small mortgage broker's next round of lending) rolled them up, then sliced and
diced them into the complex alphabet soup of mortgage-backed derivatives ( CDOs
RCDOs, MBS, CDS and so forth) on which the ratings agencies gave the securities
totally fictitious investment grade ratings and thus sold away their
reputations and honor.
As I said late last year in my review of Richard Bitner's Confessions of a
Subprime Lender, very few nexuses of American society were left morally
or ethically unsullied by the subprime mortgage phenomenon (see
Subprime - an (im)morality tale Asia Times Online, November 8, 2008).
The presence of the mortgage brokers as the foreclosing party puts paid the
conservative argument that it was the 1977 passage of the US Community
Reinvestment Act (CRA) that lit the slow, the very slow, fuse that blew the
financial world apart two years ago. CRA requirements did not apply to mortgage
brokers; they applied only to large, chartered banks.
The facts that the big banks managed to make good loans even under CRA's
punishing strictures (as evidenced by the paucity of the big banks' loans being
foreclosed on this day), means that conservatism's core argument, that the poor
are such perennial moral reprobates that any government initiative to aid them
is fruitless and ultimately counterproductive, is also a lie.
In terms of the lectures on the moral importance of the repayment of debt,
perhaps the strict scoldings would be better directed at three-time bankruptcy
court alumnus Donald Trump rather than the American poor.
The first thing you had to do if you wanted to do some bidding at the auction
was to undergo the process of "qualification". This involved going up to the
auctioneer, or the auctioneer's assistant, the one with the frayed and faded
Barack Obama campaign t-shirt from last year, taking a business size envelope
from out of your portfolio and withdrawing two-thirds of the way out of the
envelope a bank draft, called in America a "cashier's check", to show that
you've got what it takes to bid on your piece of property.
This is one of the most remarkable aspects of the property foreclosure auction
process - that it's all cash. If you buy something there for $500,000, you've
got to pay for it, all of it, by the time you leave that plaza, or you don't
own it. During the boom, US and much of Anglo-Saxon housing found itself
becoming the unwitting guinea pig for all the Wall Street rocket scientists'
mad dreams of using leverage to turn $200,000 worth of house into $20 million
of liquidity. Here at the auction, it's back to capitalism's first principles -
you buy something, you pay for it.
The auction starts quietly; if you weren't within a few meters of the
auctioneer, you'd hardly know it had started at all. There are three possible
adjudications for the properties listed for auction today: temporary
postponement, failure to meet the bank or mortgage companies' reserve, and an
actual auction.
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