Public Meeting: How to Protect Your Condo Association From Foreclosure Damage

 Many thanks to the Edgewater Community Buzz for announcing this meeting. I thought I'd pass it along, and suggest other area bloggers post it, as well.

Time: Thursday Night, December 9, at 7 PM
Place: Park Tower Condominium Association
          5415 N Sheridan Road- Hospitality Room

The 147 and 151 buses stop at the door, and the Berwyn el stop is around the corner at Berwyn and Winthrop. Parking is available for a fee.

This meeting is meant to assist condo owners and managers of condo associations in protecting their buildings financially from the fallout of multiple foreclosures.

Attorneys Eliot G. Schencker and Kristofer D. Kasten of Michael C. Kim & Associates will advise condo owners on how to protect their condo associations from financial damage due to foreclosures in their buildings. The presentation will include an update on new FHA rules, and Q & A will follow.

Chicago is in the Top Twenty Cities for Foreclosures and REOs: No Shortage of Affordable Housing

Illinois is one of the top ten "scam" states for mortgage fraud and Chicago is among the top twenty cities as ranked by percentage of home sales that are "distressed" sales. Distress sales comprise more than 30% of all home sales in the Chicago area at this time. Click on chart below to blow it up.

So it looks like the rollback in house prices is not over. Rogers Park and other far north neighborhoods are extremely hard hit by foreclosures, in direct proportion to the rash of condo conversions. According to the 2008 report compiled by Lakeside Community Development in 2008, over 3, 600 Rogers Park rentals were converted to condominiums.

Many of these units, which are frankly less than luxurious, are being offered at prices below $50,000, even though financing is not available on many of them and many others are uninhabitable, or are in buildings that are vacant and in boards. Many will be purchased by investors for cash below the prices offered, and fitted for rental. Others will be sold to buyers looking for a bargain-priced dwelling they can afford to invest money and love in without living on Raman Noodles for the next five years. On the city's poverty-stricken south side, the carnage is still more widespread, with many hundreds of beautiful 6 and 8 flats standing empty and in boards, and available to cash buyers for as little as $5000 a unit?

So why are we spending as much a $400,000 a unit for publicly funded "affordable" housing? I have personally counted over 40 units on the multilist in zip codes 60640, 60660, 60659, 60626, and 60645 that are available for less than $40,000 and could easily be made habitable and comfortable for another $20,000. Moreover, I discovered that behind every unit listed lurks a "shadow inventory" or "market overhang" of about 20 units that don't appear on the multilist but sit empty and in default. I personally can't put my finger on the precise number of vacant units, but my rough calculations tell me that we have at least 300 units that are "shadow inventory" between these five areas.

And why are we subsidizing more bad mortgages through FHA mortgage guarantees? Clearly, home ownership is not for everyone, especially in a period of falling incomes and unstable employment, and the government's efforts to re-inflate the housing bubble have so far not prevented prices from falling but have produced another bumper crop of bad mortgages: FHA is now the major subprime lender and recent-vintage FHA mortgages have a combined delinquency and "serious delinquent" or loans-in-default rate of nearly 20%, a really good indication that we're headed for another monster bailout in a couple of years. Bill Zeilinski of Mortgaged Future writes;

 Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves.

Given the continued high rate of default, high unemployment rates and dropping incomes, and huge inventory of unsold housing, does it make sense to force the taxpayers to back yet another wave of soon-to-default mortgages made to unqualified buyers at prices they can't afford?

And given the massive glut of unsold inventory, much of which is available for less that $40,000 a unit and could be made habitable and comfortable for less than $25,000 a unit, does it make sense to drive honest low-to-middle income homeowners, who bought their places honestly, out of their homes by confiscatory property taxes in order to divert tax money to construct more luxury condos in a glutted market and subsidized "affordable" rentals that cost $400,000 or more a unit to build? 

This is really not about the "rich" folks vs. the "poor" folks, or even the taxpayers vs everyone who wants a gift at their expense. What this is really about is the massive misallocation of resources and money that will be very scarce in the near future, as fossil fuel resources continue down the other side of the slope. The money diverted to wasteful projects designed to sustain the unsustainable, in this case an inflated housing market and tax-funded boondoggles  designed to enrich politician's cronies, is money taken away from the systems and industries we will desperately need to maintain our cities at a reasonable level of amenity and comfort, let alone safety and sanitation, and to have an economy that enable the creation of new industries and jobs. It isn't just our money or our houses at stake here,it's our lives.

The Price of the New Housing Mini-Bubble: The FHA Will Need to be Bailed Out

Since I work at a stock brokerage firm, I get to listen to Kudlow and Cramer crowing about the "recovery" of the housing market, and how housing prices have "bottomed", which surely means that we're on back on track to house price Nirvanah... that is, from a current homeowner's viewpoint. Aspiring buyers might view the situation differently.

I have a lot of thoughts when I hear Kudlow & Cramer. Mainly, I think about how many ordinary 'merikuns, mostly male, regard their show as the font of all economic wisdom and how they get paid 7-digit salaries to mouth this crap and don't even have to register as Investment Advisors or Broker/Dealers. So if you lost your ass and are in foreclosure as result of following their idiotic rantings over the past 8 years, you have no redress. I, on the other hand, have to exercise a little care about the advice I dispense for pay because I have securities registrations to protect and can't afford the legal fees to defend myself in the event of a complaint.

 What was before hidden from view and justified as a process of the "free market" is now out in plain view, which is that the current flurry of house purchasing is a result of blatant government manipulation, and it will probably produce the same results as the multiple government manipulations that gave us the mega-rampage of the 2000s.

At least the Democrats have some baseline level of honesty regarding the role of the government in creating debt bubbles and driving house prices to unsustainably high levels, whereas the Republicans who ruled in the past decade unblushingly referred to the Fed manipulation of interest rates, the subsidies provided borrowers and lenders through the FHA and the GSAs (FNMA, GNMA, Freddie Mac, et al), and the bailouts that financiers knew they could always count on, as the "free market". The Dems very openly state that they are trying to elevate housing prices by means of heavily subsidized FHA loans on very easy terms, while talking out the other side of their mouths about making housing "affordable".

The lower illustration is one of the signs we've been seeing on parkways all over Edgewater and Rogers Park. I called the number on the sign, and was told that you come in with a FICO of 680 or better and $500 cash, and receive your $8000 tax credit to use as your down payment at the closing. Given the required down payment of 3.5%, and current underwriting rules that permit a housing expense ration of 40%, a borrower with an income of $60,000 a year can pay up to $260,000 for a place with a $500 down payment out of his own pocket. 

Click on the upper image in order to enlarge it so it can be easily read. What it is, exactly, is the underwriting summary for a recently-issued FHA loan, with the borrower's personal information blacked out. It is not a loan for a new house purchase, but is an ADJUSTABLE LOAN for an EQUITY EXTRACTION of $133, 292 from a home appraised at $193,750.  The LTV ratio for this equity extraction (or Home Equity Loan) is over 67%. The Housing Expense Ratio is 41% of the borrower's gross income. The borrower's total expense ratio is 53%. The stated purpose of the loan is CASH OUT REFINANCE.

How long do you think the borrower will be able to service this loan? Do you think that he will make it past the first reset? Or will the loan recast as the house continues to drop in value? Do you think someone with an income of $60,000 can afford a $260,000 home? Do you think that perhaps many of these loans will become problems early on and that delinquency and default rates on the recent generation of FHA loans will equal those on all the subprime, Alt-A, adjustable, interest-only, and pick-a-pay loans that got us into this mess to begin with?

If you are a renter waiting for an opportunity to buy a reasonable place at a sensible price with a loan you can really afford, do you resent your taxes being used to subsidize more bad loans for more marginal borrowers, just to create another tower of unrepayable debt that the taxpayers will once more have to make good on in a couple of years?

Do you think that the housing "gains" based on this kind of borrowing are sustainable, or do you think that the recent surge in home sales and slight bump in prices is a government-manufactured Bull Trap and that we are poised for another steep leg down in prices, as well as the further degradation of our currency and another tax-funded bailout?Do you think that the FHA can survive a combined delinquency and default rate of 24%?

This time, the Dems will not be able to blame the previous administration for the next wave of defaults or the next round of bailouts. Obama and his advisors own the situation now, and not only haven't done anything to reverse the disastrous fiscal policies of the past 10 years but are reinforcing them and building new stories on top of the tottering tower of loans that will never be repaid. And nobody's questioning team Obama on how you can strive to raise housing prices while making housing more affordable, but that is what the tax-credit-subsidized loans are all about.

Feds Promote Irresponsible Lending

Signs like the one pictured have been sprouting on parkways all over Rogers Park and Edgewater. Looks like we're setting up for another wave of foreclosures after the one just in front of us plays itself out.

If recent FHA loan generations and current FHA delinquencies and defaults can be seen as indications of where the housing market is headed, we can expect another costly home-loan bailout in a couple of more years, in addition to our current soaring default rate and the tottering $3.5 trillion tower of shaky commercial debt. Delinquency rates for recently-generated FHA loans are at 14%.

2nd Quarter Notices of Defaults were the highest ever recorded, and these were for loans that actually defaulted 6 to 9 months before the NODs were issued. Lenders have so large a backlog of delinquencies that many borrowers are in default a year or more before any action is taken against them.

The $8000 tax credit is just about to end, coinciding with the end of the selling season, and we will then see how durable the recent hike in housing sales really is. But it looks from here like the taxpayers will be paying for this recent uptick two ways, first with the $8000 taxpayer subsidy for new home buyers, and then again when these subsidized-down-pay loans start to default. Given that about 80% of all home loans being written now are FHA-guaranteed, that could mean another record-setting wave of defaults and foreclosures.

The Feds always were the most irresponsible lenders of all, inasmuch as the wave of bad lending was made possible by the alphabet soup of government agencies- HUD, GNMA,FNMA, FHA-that either backed or bought the mindboggling array of "creative" loans that got us into our current financial predicament. Now the FHA is THE irresponsible lender, and just about the only functioning home lender.

Proposed Bailout for Mortgagees-Will Middle Class Welfare Program Collapse Us Financially?

The homewner bailout proposed by Senators Dodd and Clinton, and seconded by Sen. Obama and other pols eager to pander to the middle-class homeowner vote, got an additional boost from PIMPCO founder Bill Gross today, who appeared on CNBC to appeal for a bailout for beleagured home-debtors confronting foreclosure.

Additionally, here in Chicago, Mayor Daley is seeking ways to people who are upside-down on their mortgages stay in homes they obviously couldn't afford to begin with.

The bailout advocates are using emotionally loaded language to sell the public on the idea, usually referring to the poor homeowners who will be rendered "homeless" by foreclosure.

Aside from the dubious morality of creating an entitlement program for people who were greedy, deluded, or careless enough to borrow money they knew or should have known they couldn't repay, there is the even more doubtful quest to rescue the enterprises all the way up the chain of greed, delusion, and dishonesty that made it possible for so many underqualified borrowers to assume so many over-written loans. The links in the chain are the developers who are now seeing their construction loans foreclosed, the lenders who approved loans to people they knew were borrowing way beyond their means to pay, the hedgefunds and bond funds who bought the bundles of loans, the rating agencies such as Moody's and Fitches who assigned AAA rating to paper they knew or should have known was junk, and the quasi-government agencies such as Fannie Mae and Freddie Mac, who stood ready to absorb the crappy loans as fast as the mortgage boiler rooms could generate them.

Many people made massive fortunes from the speculative hysteria of the past five years. It paid for $40 MM mansions with 3 swimming pools and heated 10-car garages, paid for by the $100MM bonuses paid to top hedge fund managers and CEOs like Angelo Mozilo at Countrywide, as well as enabling a few million severely math-challenged consumers to live far beyond their means for a few heady years.

If a bailout is engineered, will people like Mozilo be required to fund it? Seems only fair, given that these guys and a few hundred other head honchos of mortgage providers, banks, debt traders, and fund managers were the chief beneficiaries of financial lunacy of the past few years, and the trillions of dollars of imaginary money that the Fed sent sloshing through the economy to fund it.

However, we know that will not happen. What we know is that this is one more situation where the profits are privatized while the costs are socialized, as the taxpayers are once more required to step in, because of the danger the bursting credit bubble presents to the economy.

The people who will help keep homedebtors whole and bail them out of the situations they created for themselves, and will keep people like Mozilo in their mega-mansions, will be the rest of us who did not borrow over our heads, including homeowners who live within their means and neither bought more house than they could afford nor used their houses as ATM machines to fund their expensive cars and foreign travel and outdoor kitchens. Another group who will help the poor, defenseless "homeowners" stay in their overpriced homes will be renters who sat on the curb and didn't chase the car , but waited patiently until they could either afford to buy on decent terms or until prices adjusted back to their proper level. These people will wait that much longer for a chance at membership in the "Ownership Society", while their taxes are jacked to rescue the feckless, the dishonest, and the delusional.

Worse, our national deficit will balloon to unsupportable levels. Given that the misguided and failing war effort has already brought us to the brink of insolvancy, what will four or five trillion dollars worth of bad mortgages accomplish?

It's a choice between bad and catostraphic. If we let a couple of million more homeowners go to foreclosure, the economic consequences will be bad, face it. 40,000 jobs related to the mortgage industry have been lost so far, with many thousands more in related financial to follow, in addition to those in other industries dependent upon the housing market. Consumers will no longer be able to tap house equity because they will no longer have any. House prices will trend steeply lower. There could be a deep recession while the bad debt works itself out and the housing and financial markets regain traction.

However, a federal bailout could collapse the entire country. As it is, we cannot afford to maintain and replace critical infrastructure, or properly fund Social Security. At this time, there is an estimated gap of $63 Trillion* between projected tax receipts and future expenditures; a recipe for financial collapse with everything that follows it: loss of credibility in world financial markets with attendant inability to attract foreign investment; inability to fund day to day operations of the government necessary to maintain national security, let alone critical infrastructure and services; and the bankrupting of an increasingly impoverished population.

If our legislators and policymakers can't grasp the economic implications of a bailout, they should take the temperature of the electorate. Most people are vehemently opposed to the bailout because of the raw injustice of it, which is something the Democratic candidates Clinton and Obama should think about, since notions of fairness and justice don't seem to weigh with them.

A petition against the bailout,Tax Payers Against a Wall Street and Mortgage Bailout, was generated by a man named Thomas Roach. If you are opposed to this new welfare entitlement, you are invited to sign.

* "Drifting Towards Bankruptcy", by Laurance J. Kotlikoff, The Phladelphia Inquirer, October 22, 2006. (Link would not install.)