What Ever Happened to Free Parking?

Over the years I’ve gotten into disposable income arguments with a number of people, most of whom have told me that conspicuous consumption is disgusting no matter how small the amounts involved are relative to your income, and people who spend $800,000 on a car or $200,000 on a bottle of whiskey should just get a Honda Accord and a bottle of some premium brand and donate the other $970,000 or so to charity. I’d like to think that I’m more tolerant than that, although in fairness I should probably just admit that I don’t particularly care how people want to squander their money. I follow the Heinlein school of ethics, which holds that anything you enjoy that does not unnecessarily harm another person is not wrong in an ethical sense – although it may stupid. The case of the million dollar parking space, as reported in the New York Times this week, probably falls into that last category…

Even if you’ve never been to New York City, the concept that parking would be hard to find and very expensive there shouldn’t be too hard to grasp. Space within the city is extremely limited, and as a result all real estate is expensive. Most of the residents don’t even own cars, and a surprising percentage of them will be happy to tell you, at the drop of anything resembling a cue, how wonderful it is to be able to go anywhere you want to go on public transportation, how much money they save every year by not having to make car payments (or pay for car insurance), and why this is further evidence of the complete superiority of their city to anywhere else in the world you could possibly live. I’m not convinced that the existence of a parking space that will cost you as much as $6,600 per square foot supports that contention, however…

According to the story in the New York Times website, the parking spaces are part of a new condo development in a building that will offer three-bedroom units in the $8.7 million to $10.45 million range – or around $3,150 per square foot; less than half of what the parking spots cost based on footage. Or, to look at it another way, each of these parking sports will require financial resources that would be sufficient to purchase a really nice house (complete with multi-car garage) in many other large cities, or four quite large houses in a good part of East Lansing, Michigan, outright. This would seem extravagant almost anywhere, but in a city that prides itself on its public transportation – and which is widely associated with both horrible driving conditions and unbearable automotive expenses – it seems like a complete logical disconnect…

Now, we should probably acknowledge that according to the same story it isn’t that unusual to see parking spaces with a six-figure price listing in New York; the author also points out that the available number of off-street parking spaces has dropped by around 26% over the past 30 years, whereas the population of the city certainly has not. We might also want to concede that someone who is paying in excess of $10 million for a new residence (especially a condominium) might consider an extra 10% in order to park in the same building no more than a minor expense – or possibly an interesting investment, since it will both enhance the value of the condo and also offer a property than can be sold separately from the residence. But it should probably also be noted than anyone who can afford to spend that kind of money on real estate can most likely also afford cab fare…

In the long run a parking space that costs four times more than the national average for a house may seem like a particularly disgusting example of conspicuous consumption, but if the people who buy them end up selling the properties at a good profit in five or ten years it’s hard to imagine what was wrong with this choice from a business standpoint; if the spaces appreciate the way some real estate did in the early 2000s the owners might end up having the last laugh on all of us. The truth is, if I could realize a profit of millions of dollars – or even $200,000 for a nice 20% profit – on buying and selling a piece of property, I don’t believe that I’d care whether it was a 200-unit apartment complex or a 200 square foot parking space…

And I can’t imagine why anyone else should care, let alone give me a whole lecture on conspicuous consumption…

The Ethics of Landlords

A few years back I wrote in this space about a relatively high-rent part of Los Angeles, and how the owners of the retail properties located there were letting the storefronts stand fallow in order to write off the losses on their taxes. I’m not generally in favor of rent control – the system is too easily exploited by the wrong people – but I have to ask if destroying an area’s commercial life for your own benefit isn’t also perverting the tax codes. Recently, however, a different variation on the same question has been called to my attention: do landlords have any responsibility to keep the rent down on their retail spaces so that small businesses can afford them? It’s one of those cases where charging whatever the market will bear isn’t necessarily the best answer, and I thought we should take a closer look at it…

First off, there’s nothing wrong with selling something for the highest price people are willing to pay for it, and that certainly applies to renting and leasing services (and properties) as well. It’s also true that you can’t be expected to rent anything for free, given that there are recurring costs involved in ownership. Any piece of property is going to have a floor level below which you can’t rent it without losing money – add together the property tax, the cost of the bank loans (if you have any), maintenance on the building (if applicable), county or state fees, and so on. And since any funds you spend owning a piece of property are funds you can’t invest in other things, it’s only reasonable to expect to bring in the same amount of income that you could realize if you’d put the funds in the bank, instead…

On the other hand, commercial operations aren’t just customers who are giving you money in return for using your real estate. Any business will have to spend money on supplies, utilities, salaries, and services that will remain in your community; they may also do business with suppliers or resellers in the community, all of which makes the city, county and state more prosperous and raises the amount of money people will have available to spend on things like rent. Most businesses will have to pay fees or even taxes to the local governments, as well, which means that your county and state will have more money to spend on roads, schools, police and fire protection, and other things that benefit you, directly and indirectly. So I think we can say that having a thriving commercial community in your town benefits you as the landlord, as well as you the citizen/taxpayer…

Where we wander into an ethical gray area is in the middle of the spectrum. Clearly there’s an enlightened self-interest in promoting commercial operations in your community, just as there is a basic self-interest in making as much money as possible from your rental properties. Just as clearly, there’s a minimum level you will have to charge for rent to avoid bankruptcy, and a maximum level you can charge beyond which no one can afford to pay you. But assuming that you are meeting all of your own expenses and making a living, do you have any responsibilities to your tenants, to the other members of your community, or to the local or state governments to keep your rent as low as possible? If you have backers, partners or stockholders you may be responsible to them for maximizing profit on their investments, but assuming it’s just property you own, do you have any ethical obligation to avoid bleeding your tenants for your own personal enrichment?

It’s worth thinking about…

The Ethics of HOAs

I’ve commented from time to time about Homeowner’s Associations (HOAs), and how little I care for them from a libertarian (note: not Libertarian; there’s a difference) standpoint, but I’ve never written about the ethics of the situation. The concept is simple enough: when a neighborhood or subdivision is built, the first owner of each property (most often the real estate developer who built all of the houses in the first place) signs an agreement that stipulates how each house and yard will appear from the outside. Alternately, all of the people who live in a specified area may decide to write and sign such an agreement at some later point. The idea is that if every house in the Association is well-maintained, has good landscaping, is freshly painted, and so on, the neighborhood looks nicer and more prosperous, which has the overall effect of raising the property values. On the surface, this would appear to be in the best interest of all of the homeowners involved. Unfortunately, like so many other ideas, this one often gets ruined by people…

The problem with these agreements is that while some people love the idea of a uniform neighborhood, and relish all of the houses being painted, decorated and landscaped alike, other people hate the idea because it stifles creativity, costs them a lot of money, or gives one of their neighbors the power to tell them what they can or can’t do on their own property. It’s easy to get most people to agree that having random junk strewn around the property looks bad; it’s also easy to get most people to agree that requiring every house in the subdivision to look exactly like every other house is unreasonable, or that requiring people to spend large sums of money during an economic crisis is a bad idea. Where this becomes truly problematic is when the residents disagree on how much money constitutes a “large” sum, or how much uniformity of detail is unreasonable – and when some of them decide to settle the issue with high explosives, of course…

A story that popped up on the local television news website in St. Petersburg, Florida, tells about one HOA president who sent out a warning letter to the members about mailboxes. It would appear that this particular HOA had a provision in their contract requiring everyone to have those large, brick mailboxes, and a number of people in the neighborhood had been refusing to comply with this requirement. The president of the HOA warned everyone that “appropriate action” would be taken against anyone who did not shell out the money and upgrade to an approved mailbox. Unfortunately, it would seem that someone in the HOA took the letter as a threat, or perhaps a personal attack, and retaliated by blowing up the HOA president’s own brick mailbox…

Now, for the record, I don’t approve of violence or vandalism as a means of resolving this sort of difference. But if you read the comments left by other viewers at the end of the online story, there’s about a 12-to-1 ratio of people who apparently support the unknown bomber’s actions. So I suppose we really need to ask: does the fact that you signed a contract agreeing to submit to specified authorities regarding what type of mailbox (or landscaping, or paint, or whatever) you can have on your house mean that you have an ethical responsibility (as well as a contractual one) to comply with that agreement? Does it matter if the requirement is beyond your means? What if compliance will cost more than you can afford, force you to attempt to sell the house, or if you can’t, declare bankruptcy? Is your answer different if you need to live in that location for some reason (e.g. work, school, family, other obligation) and can’t avoid the HOA agreement and its attendant expenses?

By the same token, is it reasonable to allow one (or a few) homeowners to lower the property value of the entire subdivision because their property looks like a crack house and they are too cheap and/or lazy to keep it properly maintained? Do they have an ethical responsibility to their neighbors to keep their house looking reasonably well cared for, even though it is their property? It seems obvious that no one should have the right to protest civil or contractual issues using high explosives, but do the residents have the right to protest them at all? Or should they abide by the contract they signed of their own free will when they bought the place?

It’s worth thinking about…

Don’t Knock It

I was skimming through a bunch of news aggregation sites the other day when I ran across a new idea in value added that I thought might be worth sharing with you (assuming that anyone is actually reading this). We’ve talked about the concept of Value Added strategy in this space a few times, but for anyone joining us late, it’s the idea of adding something to an existing product in order to make it more attractive to potential customers, which usually means giving the product a function or value it didn’t have previously – hence, literally, “adding value” to it. There have been some dandy examples hitting the market in the past year (my favorite is a product that purports to be a primer and paint all-in-one, but I have to admit that the wireless photo-printer is good, too – snap a picture, hit print, and your pictures are ready on the printer rooms or miles away), but some products are harder to add value to than others – such as real estate, for example…

I don’t mean to suggest that value added is a new concept in real estate; far from it, in fact. Most of the developments in the real estate industry over the past century or so have revolved around adding value to a house to make it something beyond a large covered area in which to store your belongings. Thus, you have such additions as central heating and cooling, built-in appliances, network cable runs, and communities of people with similar social and economic needs with facilities you can use, like pools and basketball courts. The problem is that, as so often happens with added features, all of these things have become standard, or even expected, to the extent that they are no longer selling points. These days people will expect new appliances and pre-run cabling in any new house, and concierge services in any community or development. Even community facilities and services are starting to pale, leading to increasing efforts to come up with some new amenity that will draw the purchaser’s attention. I’ve never seen anyone try offering free booze until last week, however…

A story on the Associated Press by way of The Southern.com tells the story of a woman trying to unload a townhouse in the Chicago area who has decided to include a $1,000 credit for the bar across the street after failing having trouble finding a buyer. I’m sure that the sort of people who disapprove of alcohol, bars, or anything else that people do for run will start complaining about this offer any time now, assuming they haven’t already – but the idea struck me as pure genius. Partly because this offer has the potential to add very real value to the property (anyone who drinks on a regular basis would find such a credit to be extremely useful), but also because the bar in question is a neighborhood landmark that has been in business for 113 consecutive years, and anyone wanting to meet the neighbors, make friends in their new neighborhood, and generally feel a sense of community right after moving in could make use of such a credit in ways that have nothing to do with alcoholism…

I find myself wondering if other sellers shouldn’t be looking for similar perks to offer with their property. If you were selling a family house in a suburban neighborhood you could offer a credit at a local daycare facility or preschool with the sale; if you were selling a resort property on an ocean or river you could include a boat, a surfboard, or credit in a local shop selling beach and swimming apparel; if you were selling a house in a bedroom community outside of a major commercial center you could offer a credit to the local auto repair shop or gas station, and so on. Some of these would work better than others – if the preschool is one of the ones with a nine-year waiting list and your offer included a spot on next year’s roster, the perk might be worth more to some buyers than the house itself – but the possibilities are certainly there. As silly as the idea might sound at first glance, it’s entirely possible that you could turn the Real Estate Crash around on this one simple concept: more value added…

I’m not saying it would work. But don’t knock it until you’ve tried it…

Bulldozers for the Win!

A few days back there was a story online about Bank of America bulldozing a bunch of houses in Cleveland. With thousands (and possibly millions; nobody really knows for sure) of homeless people in the United States, and millions (possibly tens of millions; nobody really knows for sure) of people one paycheck or less from being foreclosed out of their homes, this seemed almost perverse. People were making appropriate (and mostly appropriate) comments at the bottom, ranting and raving about how cruel and heartless this action was, and how its another thing we should all hate B of A for doing – thus completely missing both the facts of the case and the point of the exercise…

First off, the story also indicated that the bank had donated over a hundred houses to the City of Cleveland for low-income housing; they’ve also donated over 150 buildings in Detroit and are now planning to repeat this program in nine other cities. That won’t end the housing crisis in America, but it’s a good start – and they certainly don’t have to do any such thing. If you read the story carefully, you’d also notice that once B of A gets done bulldozing the selected properties, they’re also going to donate the land underneath them to the City for use as green space (parks and whatnot), although Cleveland could easily sell the land to developers (to raise money) or use it to build public buildings of various kinds (including more low-income housing). But that’s not really the point either…

The actual point of these operations is that the houses being destroyed are ones that the bank owns but can’t give away, let alone sell, usually because they would cost more to repair to a point where you could actually live in one than they would be worth if you did. However, these properties cost B of A money every day they’re carried on the books, and they have the potential to cost the bank a lot if someone were to break into one and injure themselves (to take only the most obvious annoying possibility). Bulldozing the structures eliminates the liability issues, and donating the property should remove the carrying costs; if they do it right the resulting tax credits might even cover the company’s expenses in foreclosing on the mortgages in the first place. But this still isn’t the point…

The laws of supply and demand state that it isn’t possible to charge as much for something that is in vast supply as you can for something rare. If people can obtain a house just by asking for it, they are unlikely to pay money for one, which means the housing market will just get worse. Lowering the supply of anything has the effect of raising the price by an amount proportional to both the reduction and how much people want the item in question, which in this case means raising the price people will pay for a house. Granted that this will also result in people wanting to take our home loans, which will benefit Bank of America, it will also benefit anyone in the country who owns real estate or builds, repairs, buys or sells houses – and anyone who does business with those companies and people…

I’m not saying that Bank of America is comprised entirely of angels looking out for the good of the country; I’m not even saying that you shouldn’t hate Bank of America if you want to. I’m just saying that if you’re going to do so, you might want to select something they’ve done that is actually bad…

Would You Buy a Used Condo From This Man?

A few posts back I brought you the curious case of Donald Trump’s for-profit educational enterprise, called Trump University, of course. If you’ve been following the news stories about these for-profit companies that claim to be colleges, universities, or at least something more than a complete waste of time and money, you probably already know that most of them are, in fact, a complete waste of time and money. What puzzled me at the time (and led to the rather snarky title of the piece) was the question of why people would pour thousands or tens of thousands of dollars into such an organization knowing that it was not accredited, could not grant any degree or college credit, and in fact was mostly just a profit center for Donald Trump. Even granted that I work in Education, and might therefore be expected to know or at least care more about the issue than some folks, the information about for-profit schools in general (and the Trump University lawsuit in particular) have been all over the news lately. Why would anyone invest their savings in such a thing?

Well, before you answer that, consider the cases currently pending on behalf of literally hundreds of people who purchased real estate (usually condominiums) in real estate development programs endorsed by Trump, but not otherwise affiliated with the Donald or his company. In most of the cases, the true relationship Trump had to the projects (basically getting paid a few million dollars at a time to put his name on them – and occasionally meet with potential buyers – but no other financial or managerial connection) was kept confidential, but that does not change the fact that with the Real Estate Bubble straining at every seam and all of the experts saying it was time to move to something else, these people still spent money they could not afford to lose on projects for no better reason than the Trump name on the prospectus…

You can pick up the MSNBC story here if you want to, which includes a link to the video about the situation from last April, but the facts are fairly straightforward. All of these investors claim that their only reason for committing to these dubious developments was Trump’s name on the project, and had they known how little he actually had to do with them, they would never have done so. I don’t think we can criticize them for wanting to ride Trump’s coattails into an easy fortune; certainly, a lot of people have made money on real estate in the U.S. over the past decade, and nobody has made more with less effort than Trump himself. The more important question is what made these people think that Trump wouldn’t screw them over in this fashion in the first place? And even more importantly, what made them think that just because Trump could make money on a project, so could they?

To do him all possible justice, Donald Trump has never claimed to be a philanthropist, or a champion of the common man, or anything other than a hard-nosed businessman in a cut-throat industry. He has made money fairly consistently over the years, and will do so in the future, at least in part because he has the resources to sink money into long-term projects, work through intermediate cash flow difficulties, and cut his losses and move on where absolutely necessary. The average small investor has none of those things; expecting to make money on real estate the way Trump does because you’re reading his notes or following him onto a project is like believing that you will be able to play basketball like Michael Jordan if you wear the same shoes. Except that it’s stupider than that; an average person has a very small chance of lobbing a ball at a basket and having it accidentally fall in, but the average person has no chance whatsoever of being able to suddenly raise $100 million using other investments for collateral…

Whether or not Trump’s masquerading as one of the developers on these projects is actually fraudulent is for the court to decide, but even if it was the investors had a responsibility to do their own due diligence and find out if those condo projects had any reasonable chance of being completed, let alone returning a profit. Not doing so and just assuming that anything Trump puts his name on MUST be a goldmine would be a lot like buying gold because some Fox News pundit who owns a gold brokerage tells you that the price of gold is going to rise – which is to say, stupid beyond all human reason…

Of course, people have done that recently, as well…

Just Another Day

We bought a house today. It sounds so simple, doesn’t it? Like you walked into a shop, browsed through a couple of aisles, found something you liked, and whipped out your credit card. Actually, considering that we’ve only been in this State for a bit less than two weeks, it probably does look that simple, at least from the outside. But the fact is, our current home-buying venture was so front-loaded that it’s a wonder the whole thing didn’t tip forward onto its metaphorical face, and it serves as an excellent example of how doing something with style, precision and speed is usually just a matter of really good preparation…

And of selecting the right business partners, of course. In this particular case, I can’t take a lot of credit for the fact that 13 days into our time in Michigan we’ve already selected, made an offer on, inspected, agreed to terms and conditions, and closed escrow on a house; most of the heavy lifting was the work of two (or four) other people. First, of course, was our wonderful California-based Realtor team, Steve Smith and Martha Alonzo, who not only sold our house in Redondo Beach in a market where nothing seems to be selling, but also vetted Realtors here in Central Michigan to find us someone truly exceptional…

Second, Karen Fisher-Austin, our local Realtor (who is, in fact, truly exceptional), started sending us property listings two months ago, including pictures, comparable property information, and virtual tours. Starting with this small mountain of data, Angie and I spent several weeks pouring over the property listings for East Lansing, as well as looking around the neighborhood and surrounding areas on Google Earth and other sites. As a result, we arrived in town already knowing the dozen or so properties we wanted to visit, and were able to select one in just four days…

Most of the credit for our success has to go to my wife, who put her amazing abilities as a manager and administrator to work on this project, starting with the initial contact phone calls back in Redondo and following through to getting all of our documents together at the end of the close meeting today. Now I suppose I could ask for some credit in having the impulse that led to our meeting Martha, the gall to ask our California realty team for help finding an agent in the upper Midwest, or the good sense to have married somebody this amazing in the first place, but the fact is I’d have done all of it anyway; I’m just lucky that my emotional choices have worked out in so many other dimensions…

It has often been said that it’s better to be lucky than good, and goodness knows I’ve proven the truth of that more than once. But it is also commonly remarked that we make our own luck, and while it might look like in this case we were lucky to blow into town and fall directly into what we were looking for, the truth is that Angie and I have spent long days, difficult nights, and a week on the road getting to this place, and none of the things we’ve done are anything that another home buyer or seller (or pair of them, anyway) couldn’t have done…

Now, I’m not going to tell you that selling a house in a declining market like Los Angeles is easy; or that packing up a large house, arranging movers, contacting an agent in your new city, learning the terrain, finding a new home, purchasing a house, or moving in are necessarily easy. I am saying that even a task as complex, arbitrary and emotionally difficult as moving to a new city can be done with speed, efficiency, and style – provided you also have a good plan and the right people to help. If you need a good Realtor in LA or East Lansing I can refer you to one, and if you need a good plan, I can probably help walk you through the process. But if you need a partner as good as mine, you’re going to have to get your own…

The End of the Sprawl?

There was a story this week in the New York Times about the distant suburban areas sometimes called “exurbs” because of their distance from the city they are (nominally) connected to, and how these neighborhoods are suddenly looking a lot less inviting, what with the oil crisis, the mortgage crisis, and so on. Back when gas was less than $2 a gallon it might have made sense to drive 70 miles each way to and from work, but with $5 gas fast approaching (and $10 gas expected within the next decade), it no longer does. The average American household spent $1,422 on gasoline in 2003; as of April of this year that figure had risen to $3,196, and the price of gas has risen another dollar since then. All of which leads me to ask if this is the end of the suburban sprawl – and if that is actually a bad thing…

It’s only fair to say that not all of the news during the gas crisis has been bad; the Federal Highway Administration reported that in March of 2008, Americans drive 11 billion fewer miles than in the same month in the previous year – the largest single-month drop since the FHA began keeping records. Sources here at UCLA indicate that the Vanpool program and other ride-share programs are at an all-time high, with the vans in particular reaching 96% of capacity, and an expansion in the works. Public transportation is also experiencing a boom nationwide, with some districts reporting an increase in ridership of as much as 20%. There’s even talk of reviving passenger rail between cities…

It’s also worth pointing out that sprawl is bad from an environmental standpoint; destroying wildlife habitat, eliminating wilderness areas, contributing to the greenhouse effect, and covering productive farm land with cheap houses and asphalt (which increases food prices and leads to flooding). Some people will (and have) argued that sprawl is good from an economic standpoint, in that home-building industries employ a lot of people and purchase a lot of materials, but it seems worthwhile to point out that urban renewal projects employ most of the same people and require much of the same material, but also have the added benefit of keeping our cities from decaying into slums and reducing air pollution (from cars), highway maintenance costs (from commuting cars) and fuel consumption (cars again).

As the article referenced above points out, this sort of enlightened self-interest is working out very well for Denver, where the new Downtown construction projects have brought money and commerce back to blighted areas. You can see a similar alchemy occurring in other cities, including Los Angeles, where the traffic and fuel costs are a definite factor in driving the new Downtown residential and commercial projects. If Denver goes through with its proposed commuter rail system (similar to the light rail and Metro Rail programs in LA) they may also be able to reduce traffic and congestion in outlying areas, while preventing companies from moving their operations out of the Denver Metro area (or out of the state altogether)…

The upshot is that while the current oil crisis may make remote suburban areas (and the long solo commutes to reach them) impractical, it does not have to result in the economic devastation being predicted for real estate, home building and transportation companies. These companies will have the option of retooling to produce products and services that are geared toward the changing forces driving the market, serving the needs of their customers as they are, not as we might wish them to be, and adapting to a new set of rules and conditions, or of trying to maintain a business model rendered obsolete by commercial and market forces and slowly going under. It’s going to be a rough couple of years for companies that insist on having the rest of the world conform to their demands, instead of responding to the market’s demands, but those that can adapt should do quite well for themselves…

And those that can’t will go under – and no one will miss them.

Another Bailout

Congress is expected to pass another bailout package for a stricken industry this week, and there’s enough bipartisan support for this one that the White House may not be able to prevent it, even if they really want to. It’s the sort of legislation that bring out the worst in people on both sides of the aisle– Conservatives are against all government interference in business unless it involves giving billions of dollars to large companies that will support them in the next election, while Liberals tend to be against any government support for business unless it somehow preserves the jobs of “ordinary voters” who will support them in the next election. Which means this bailout should cause awkward moments all across Washington, because this one is intended to deal with the Mortgage Crisis…

Reuters is reporting that a fund of well over $300 billion, including over $4 billion for communities hit hard by foreclosures, is likely to pass in the Senate this week and become law later this year. The basic concept is that the fund would be used to help people with “exotic” mortgage arrangements re-finance into something they can actually afford. Critics from the Right are attacking it because of the money going to things like credit counseling services and community foreclosure maintenance programs (which keep foreclosed properties from turning into crack houses, condemned structures, or worse) which will actually help people instead of lending institutions. Critics from the Left are attacking it because it will keep lending institutions and investment firms from losing more money and going under. I can’t help thinking that the truth is, as usual, getting buried in the hoopla…

There’s no question that a lot of innocent people are getting screwed during the current mortgage crisis. People who were not sophisticated about money, people who were pursuing the American dream a bit too recklessly and people who had nothing to do with these disastrous loan programs but now stand to lose their jobs because their employers were greedy idiots all fall into this category, as do all of the other people who stand to be hurt by an accelerating recession in the country. At the same time, this program constitutes efforts by the Federal Government to take money from all of the people who made good money decisions and lived within their means and give it to a bunch of reckless, unwise and oblivious home buyers as well as a small but genuine number of outright greedy real estate speculators. It hardly seems fair to the people who carefully avoided the Real Estate Crisis to make them pay for all of the people who didn’t…

As usual, I’m a pragmatist, and I have to concede that a recession is bad for the whole country (the careless and the careful alike); if we can stop it from getting any worse by nipping the real estate crisis in the bud, I’m all for it. What I would like to see in return is stronger regulation of mortgage and commercial lenders that would make predatory lending practices illegal everywhere they aren’t already, stronger enforcement of mortgage fraud laws (400+ arrests is a good start; now let’s get the other 56,600 cases per year resolved) to prevent more of those cases, and constructive programs like credit counseling and community foreclosure maintenance to lessen the impact of other people’s idiocy the next time around. We can’t keep people from doing stupid things, nor would we want to try, but we can keep them from dragging everyone else down with them when they do…

The bottom line is that it’s a new world out there, and the business models that made sense a hundred years ago are lunacy now. That’s why the banking and securities laws have changed, and that’s why banks and investment companies don’t do business in 2008 the way they did in 1908. Maybe it’s time the real estate industry was dragged kicking and screaming into the new Century…

Mortgage Crisis Update

I know I’ve been doing a lot of “Update” posts lately, but it’s not my fault; stories break when they break, and I blog about them when I feel there’s something worth sharing with my readers. Or, you know, when I’m outraged, feel the need to express my opinions about the larger field of business to someone, am in the mood for pontificating on about some subject or other, or when I’m really bored. In this case, however, I’d be trying to find ways of telling as many people as possible about this subject even if I didn’t have a blog…

According to a story released today by the Associated Press, Federal authorities have indicted over 400 real estate industry personnel since March in a nation-wide crackdown on mortgage fraud, including dozens of them in the past two days. Leaving aside the political and law enforcement chest-thumping, the story goes that 406 people have been arrested in connection with 144 cases of mortgage fraud across the country. The total dollar amount of property involved in the case was initially put at over $1 billion, but this will probably rise as the investigations continue. It’s a good start, but considering that there were over 53,000 cases of suspected mortgage fraud reported last year (up from 37,000 the previous year), it still sounds like the tip of the iceberg to me…

Mortgage fraud is a category of crime that takes in a lot of ground, from forging a buyer’s credentials to inflating appraisals to misrepresenting the nature of the purchase (e.g. claiming that the buyer intends to live there when actually they’re just trying to flip the property and make a fast buck). In some cases the financial institutions involved have also been culpable, but for the most part these are situations where real estate developers, loan officers, sales people and the like making money by whatever means necessary and putting the screws to their employers as much as to the buyers/sellers and the American people in general. In a few cases, there’s even actual insider trading involved…

Apparently there were two Bear Stearns fund managers who were participating in this sort of fraud, and one of them had gone so far as to move his own investments out of funds and companies that are now threatened by the losses from all of the bad real estate deals, which means that he’s being charged with insider trading as well as wire fraud and securities fraud. No one really knows how many other cases of this exist, but it seems improbable that this was the only example of a fund manager making money off of fraudulent transactions, and then using the damage caused by the fraud to make more money off the stricken companies…

I don’t have a drop of sympathy for any of the idiots being caught up in this sweep; I hope the Feds refuse to send them to any of the nice, white-collar prisons and instead send them somewhere where they can meet some of the people who have been hurt by the mortgage crisis. And I don’t have much sympathy for the wildcat speculators, either; you wanted to make a huge killing in real estate without investing time, effort or money of your own; you deserve whatever financial consequences you suffer, and legal charges for fraud into the bargain. But most of those people will just declare bankruptcy and walk away unscathed, and it’s unlikely that any of the white-collar criminals being arrested in the Federal sweep will be punished (significantly) either…

Meanwhile, all of the innocent people who saw the last real estate boom as a chance to finally own their own home are going to remain completely screwed. The real estate market is going into the tank, loans are going to be much harder to come by, and the damaged caused by the artificially inflated prices (and the people who broke their finances as well as their hearts trying to pay them) will take decades to fix.

It’s days like this one that I sort of wish I had gone into law enforcement after all…