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July 2nd, 2008

Bad Banks, No Biscuit

Calculated Risk summarized this article from Housing Wire.

http://www.housingwire.com/2008/07/01/fdic-warns-banks-on-heloc-freezes-reo-management/

I'll do my own summary, because I love me some additional distortion. Not.

Part 1 involves the HELOC winter occurring particularly in some western states but increasingly nationwide. The FDIC (that would be, the folks what regulate banks. Kinda) sent letters 'round to the banks saying you may violate TILA (Truth-in-Lending-Act, and let's not forget there's a major judgment as to whether lenders violated TILA by doing bait-and-switch on loan terms that just went class action and favored the borrower and is sitting in front of an appellate court and will likely go all the way to the Supremes in play that has every Moneybags in the country shivering in their footwear) if you freeze all HELOCS and unfreeze on a case-by-case basis. What does this mean?

Banks are trying to reduce the money they have loaned out. They have to have some fractional reserve to cover what they've loaned out. Their fractional reserve, er, teleported out of this universe when a variety of exotic financial instruments based on mortgages became illiquid and/or worthless. Since raising additional reserves by selling stock or otherwise getting investment is Really Freakishly Hard in this financial environment, the easiest thing to do is reduce the loans outstanding. By freezing them. To wit, freeze the home equity loans.

Why would the guvmint want to stop the banks from doing this? Well, if the banks freeze up, there's no money for the Peepul, and if the Peepul have no money, then they can't buy anything, and Bidness goes belly up and then the banks have no money, and the Peepul lose their jobs and then etc. let's just say Great Depression and have done with it. Essentially, the FDIC is treating uniform freezing of HELOCs as a run on the banks. Which is weird, but makes sense. They are expressing it in legal terms (because they are regulators, and responsible people -- unlike, say, Chuck -- don't go around saying run on the banks -- oh, wait, but _I_ just said run on the banks didn't I? Whups!) -- you contracted with these people to make money available so don't just take it back unless some clause in the contract says you can.

Part II involves how banks are treating the properties they now own (REO, no, not the rock group from lo, these many decades gone). Economists (because they are even more stupid and optimistic than I am) have been assuming that lenders who own property would, say, obey the rules and Do the Right Thing to maximize value of these properties (pay the taxes, maintain insurance on the property, pay utilities, blah, blah, blah). In practice, it turns out that lenders are Clever People who are, in fact, really rational. They have computers and people who are numerate (unlike, apparently, commentators on the economy typically quoted in MSM). They repo'd these properties because they could collect PMI if they foreclosed and they thought they'd get more that way than through a short sale or workout program. Then, once they _had_ the property and couldn't unload it (really, at _any_ price in some cases), they figured, if I don't pay the taxes, I'll save that cost AND the local taxing authority will put a lien on it, take it off my hands and I won't have to pay _anything_ on it anymore.

Sounds kinda immoral, doesn't it? It's unclear from this argument if doing this is actually Against the Law or just not Good Practice, and what the implications would be for someone who might, say, sue the bank for Bad Behavior (shareholders in the bank? neighbors of the REO? the taxing authority already strained to the limit patrolling all these REOs?).

I don't understand why we treat professional bad behavior so much more leniently than, say, junkie bad behavior. No loser shooting up and jacking cars to get to the next fix could _possibly_ do this much damage. Not even a million of them.

foreclosure moratoriums

This would be a surprisingly easy story to miss, if you weren't obsessed with the economy/real estate market currently. About a year ago, a moratorium on foreclosures involving subprime mortgages went into effect. More recently, a 90 day moratorium on _all_ foreclosures went into effect. (These are all in Massachusetts, which is not where I live.) Other towns, cities and states have implemented various moratoriums as well; I'm not at all up to speed on the details of these.

The foreclosure process goes something like this. I borrow money with a certain understanding as to how and when it will be repaid, with the further understanding that if I don't meet those terms, the lender can take the house, sell it, and use the proceeds to pay off what I owe and I will owe the remaining amount (if any, and if it's not a non-recourse loan) or get the remaining amount (if any). The details of taking the house away from me and selling it necessarily involve the local law (sheriff, etc.). Thus, the local law can modify the process, say, by the governor and/or legislature changing the rules. There were already some waiting periods built into the process; the moratoriums for the most part extend those and/or add new ones, generally at the front of the process, i.e. before the borrower is booted out of the property (or, conceivably, renter, if not occupied by the owner, er, borrower, whatever). There are many steps to the process. Once started, the process need not be completed, if the lender decides not to continue, say, because they came to some sort of agreement with the borrower. Among other things, if the borrower can produce all the cash (balance owing) before the end of the process, the lender can't complete the process. (In fact, sometimes producing all the cash after the sale can get your place back, in some jurisdictions, under some circumstances, but that's neither here nor there for my purposes.)

A variety of people who believe that housing got way freaking out of control think this moratorium stuff is a bad idea, typically presenting their arguments against in a couple of different ways. Just rip the bandage off arguments often invoke Japan real estate. Fairness arguments revolve around how I was so responsible I didn't do some crazy loan product to buy something too expensive why should I be punished just deflate this sucker so I can afford to buy finally. Banks aren't overly happy about the moratoriums, because this takes a long, drawn-out process and makes it longer. The argument for the moratoriums is, let's give the borrower time to work with the lender to come up with a solution -- and motivate the lender _to_ come up with a solution.

Another way to get a moratorium is a little less official. Because local law (e.g. sheriff) is involved in the process, local law can decide to influence the time frame (drag their heels, would be the unkind way to put it). Local law is _highly_ motivated to do this in some areas, with the complicity of their immediate supervisors (councils, mayors, etc.) because the more REOs sitting around being vandalized, partied in, squatted in, and generally running the neighborhood down, the harder it is on the cop-on-the-beat who has to patrol these disasters. Given that the banks are (apparently) not reliably paying for utilities, real estate taxes, etc., it's not like the town wins much by booting the owner/borrower/renter (who is, if nothing else, at least stopping someone else from looting the plumbing fixtures, copper wire, etc. in the house and, hopefully, not allowing hordes of teenagers to do what teenagers love to do in the house). This kind of moratorium is apparently also happening in some towns/cities/etc.

Does this sound like an elaborate and expensive game of chicken to you?

Because it sure sounds that way to me. I get why each team is arguing that the other side should just cave. I really do. But the game as a whole is a bad, bad, bad idea.

more gas math

Those average numbers have been sort of niggling at me. It just seemed like those are so freaking high, that if someone was driving an "average" amount and really couldn't stop, when would the gas savings -- all by itself -- pay for the higher mpg car?

Using 13600 miles per year, and comparing against a baseline average of 19 mpg (numbers extracted from previous referenced article), I assumed you'd get 48 mpg in the Prius, which you would buy for $21K. This suggested it would take 11ish years to pay for the Prius in gas savings over the 19 mpg car. If you were able, like R., to get 44 in the Fit which you bought for $16K, by comparison, it would pay for itself in gas savings in 9ish years. But you probably aren't R., and if you are, you'd probably do better than 48 in the Prius. (OTOH, you might not be driving 13600/year either.)

If you get 60 avg in the Prius, it pays for itself in 10 years.

What if gas continues to go up?

Back at 48 mpg in the Prius, at $6/gallon, it pays for itself in gas savings alone in 8 years.
At $10/gallon (when the world has probably ended, and definitely you've gotten the bike out of storage and have more people living in your house, either a renter, or a down-on-their-luck friend/relative), the Prius pays its entire purchase price, in gas savings over the your previous vehicle which got 19 mpg, in under five years. You may, at this point, be running a taxi service for all the people who can't afford to drive their own cars. (The Fit, if you are R. and get 44 mpg, paid for itself in 4 years.) (If you got 60 mpg avg out of your Prius that whole time, you paid it off in 4 years and 3ish months.)

Expecting your next car to pay for itself _entirely_ in gas savings over your previous car is loopy on several levels. After all, people do have to periodically replace their cars, either in the form of increasing repairs or buying a new (to them) car. Maybe a different way of looking at this problem is called for.

How much is someone in an average car running an average number of miles paying for gas over the course of the year? with gas at $4.30, over $3000/year (and people were complaining at the high cost of gas when it was _half_ that). People finance cars. If you finance gas (credit car, anyone?), it really gets crazy fast (bankruptcy court, hello! Wait, what do you _mean_ you changed the laws?). Running a Prius (at 48 mpg) costs you a shade over $1200 a year in gas. That's like paying $1.80ish in the 19 mpg car.

This seems like a _much_ better explanation for why people by Priuses (Prii?). (The Fit for R., a little over $1300/year.)

People like the woman I referred to in the earlier article, who just bought an SUV a yearish ago, are in a car-financing place where swapping requires a lot of justification. People who are already needing to buy a new car, really, really easy decision to go with the higher mpg car, even if it costs a little more. (And for the record, the Versa, Yaris, etc. are all cheaper than the Fit, altho I don't know what R. could get out of them in terms of mileage.) In the meantime, carpooling, taking readily available public transportation, reducing trips, etc. is easier and cheaper yet (the less you drive, the longer it takes for a high mileage car to justify its existence. Of course, it _lasts_ longer, then, too.).

I'm still trying to figure out how to run numbers of moving from an outer burb to an inner burb. Very tough to find valid simplifying assumptions. It's also worth noting that as soon as you insert calculations about trade-in value, financing costs, etc. in car calculations, you can make these numbers do any damn thing you want them to.

house math

In the previous post, I assumed that the miles/year number was immovable, other than observing that the fewer miles you drive, the more money you save in _any_ car, the longer _any_ car lasts, and the longer it takes to justify switching to a higher mpg car.

When I was young, I learned (and took until recently to unlearn) the idea that an average mileage car had 10K miles on it per year. Turns out this number is representative of, say, the early 1980s. While I recognize that most commentators in the MSM tend to think of returning to the lifestyles of the early 1980s as akin to returning to, I don't know, washboards and hauling our own water and firewood, I think this is a valid indication that we could curtail our driving by a quarter to a third without the world coming to an end. Real estate agents and commentators concur that outer burbs values are suffering by comparison to inner burbs, city neighborhoods and the "inner city", with walkability being a major factor.

Over at SeattleBubble, a blog I find generally amusing, there have been a couple of posts and an unspeakable number of comments on _why_ moving closer in does not make sense. Now, this is _really really weird_. I mean, like, _so_ weird. Most people who are all over the it-was-a-bubble thing are equally all-over the finally, sprawl will go away meme. Some are lusting over rotting slums in exurbia. I feel some sympathy. The author of the blog has run two sets of numbers as to _why_ it makes no sense for [pronoun] to move from Marysville to Shoreline.

Some of my readers are familiar with Seattle. If you're not, let's just say that neither one of these is actually in Seattle proper. Shoreline was, when I grew up, in unincorporated King County (with a good school district). Marysville was farmland just shy of Everett. On the _wrong side of Everett from Seattle_. Things, needless to say, are different (and yet I am young enough to be pregnant without technological intervention. Go figure.). The author's location in Kenmore (further away from Seattle than Shoreline, altho I'd have to ask around to discover commute time comparison to Marysville because of the way the highways run, I suspect not as far as Marysville) goes some way to explaining his unwillingness to believe people will move closer in.

Why did I say [pronoun]? Well, the author uses they/their in a way that could be interpreted as a single person of unspecified gender or as a family. He then mentions family, but always assumes there is one (1) person commuting into Seattle. And at this point in the original analysis, and in the second analysis and about 40 comments deep, that I cried bullshit. I mean, who the fuck has a family and _one_ driver? Even if there isn't a commute, there _are_ store runs, school runs, library runs, blah, blah, blah. _I_ grew up in the 1970s in a house with one (1) car and one (1) driver because my mother is crazy and my father is controlling and they worked out some kind of deal (she also had no access to the checkbook, a very limited allowance and they did the grocery shopping together. Think prison. It was close). As soon as my eldest sibling reached 16, she got a license and she drove us around in a second (used) car that was acquired for the purpose. Various siblings stepped in as chauffeurs thereafter, with my mother never driving. To this day. I don't know _any_ other middle class household, then or now, where this is how things worked. There were _always_ two drivers and usually two vehicles. Even if there weren't two commutes -- as is overwhelmingly the case now, even with parents of very small babies -- there were errands that added up to a commute. Which is why the walkability thing keeps coming up. If you live right in the middle of everything, you can get by with a single car -- which R. and I did for a year and a half in the Central District in Seattle. And we put precious few miles on that car in the meantime.

This is why calculating the gas/car cost of living close in vs. far away is tricky. If you live really close in, in the right kind of city, you don't need any car. If you live close in in other cities, you can use one car for 2+ people. If you live moderately out, you'll need one car per person, conceivably more if you've got some kind of capacity/towing vs. commuting issue. It isn't just the gas: it's licensing, insurance, the general cost of owning and operating two vehicles rather than one (or n vehicles, versus some number less than n). In the Marysville v. Shoreline comparison, there are also differences in quality and availability of public transportation as well. Generally speaking, in addition to less service, the time-cost of public transportation goes up more per mile than driving your own car; while your family might be okay with you taking an hour to go each way on the bus v. 30-45 minutes in the car, they probably draw the line at losing you for 1.5-2 hours each way, five days a week.

What would a real comparison of Marysville vs. Shoreline look like? I think I'd start off by saying that you don't need to buy an equivalently large house/yard closer in, if parks/services/etc. closer in are close enough to be walkable and are sufficiently desirable. A smaller yard, for example, might imply less need for yard equipment to maintain the yard (push mower vs tractor). Maybe you don't need to buy a playset if there's one down the block that is better. You don't need a second car to go buy eggs and whatever if there's a Red Apple across the street. Or your first car will be available for errands if everyone at work can take public transport to work. Or bike. Etc.

Let's compare our hypothetical 2 x 13600 milers (at 4.30/gallon, paying $6150+ in gas) and move them to where they can reliably take the bus to work and sometimes bike or walk, without excessive time cost. This should drop their mileage down to maybe 7K. And then they can buy a Fit, which they'll drive more like me, and get 30ish per gallon. Their annual gas cost has now dropped under $1000. They're only insuring one vehicle, rather than two (that should be good for another $1000+ savings over the course of the year). Plus they don't have to buy/finance/maintain/whatever a second vehicle -- let's call that another $5K in savings.

I think our family has just saved $11K/annually. Assume they stay in their new home the average 7 years. That $77K. Even if they had to pay $100K more for the privilege of moving closer in to the city, these numbers are starting to look _really_ similar, and when you figure the resale closer in will be higher than the resale further out, and their one car is essentially immortal given how few miles they're putting on it. . .

Yeah, no freaking wonder people are moving closer in.

ETA: also missing from the SeattleBubble Marysville vs. Shoreline analysis: the train. Which, as near as I can tell, is how people are commuting from Lake Stevens to Seattle. There's a chance -- albeit a small one -- that Marysville beats Shoreline for some job/house locations, especially if you can work on the train but can't on the bus because you're wedged in standing instead of sitting down. Altho RHI that train is getting pretty crowded, too. I gotta wonder why the hell anyone would live in Marysville and commute to Seattle (rather than, say, Everett, which is what the usual deal was in the past), but I know people moved to Arlington and commuted to Seattle. Hell, I heard stories of people moving to Sedro Woolley and commuted to Seattle, but that's either a lie, or an indication that immigrants to the PacNW from California are truly capable of anything.

obama, telecom bill, etc.

http://www.nytimes.com/2008/07/02/us/politics/02fisa.html

So: lots of young 'uns (and the young and optimistic) are feeling disillusioned because Obama-the-Senator has compromised and gone along with telecom immunity for helping the Bush administration violate our civil rights.

Welcome to politics. No, no, don't go home. We want you here. We _need_ you here. We're all tired, and worn out from the struggle.

In fact, why don't _you_ drive for a while?

excuse me?

http://www.boston.com/realestate/news/blogs/renow/2008/07/landlordtenant_1.html

FWIW, I don't much like Ms. Fischman, judging by several weeks of her columns. But this one actually stunned me. I'll do to it what I usually do to an analysis that looks a little fishy, but might be hard to explain why it's Evil.

In Massachusetts, if you rent to someone who has children under 6 years of age, you are required by law to make sure the rental space is lead-free/deleaded. (You don't have to remove it all; for places where there won't be friction, paint that contains it is adequate, for example, but don't use _me_ as an expert.) This is a moderately controversial requirement, in that it does cost something to delead (typically on the order of $10K or less, but sometimes running up considerably higher). (If you _own_ a place with lead and you have an under 6 year old, you also have to remediate. Sellers don't seem to have to do tests to find out and remediate so the protection is not as strong as the septic system laws in MA.)

It is _illegal_ to discriminate in housing against a family with children.

Rona wants to know if a couple who was expecting was morally obligated to tell their landlord -- prior to renting from them -- that they were expecting a baby.

Let's consider a parallel situation. Let's say your mother is black and your father is white, and because of the vagaries of genetics, you have curly blonde hair and green eyes. Let's say (cause it is) that it's illegal to discriminate in housing against black people, but your landlord would consider you black if they saw your mother. Are you morally obligated to tell your prospective landlord that you are black, at least by their definition?

If you're moving in with your partner, do you have to tell your homophobic landlord you're lesbians and not just good friends looking to save on the rent?

If you don't have to tell the landlord, and the information is _illegal_ for the landlord to decide not to rent to you based on, I don't get where the moral issue arises? Sure, it might be nice to give the landlord the maximum reasonable amount of time in which to _do_ the remediation. But wtf?

I should NOT be surprised. This is _absolutely_ everything I dislike about Boston. Newcomers to Seattle (rightly) complain about the whole pencil-you-in-for-lunch phenomenon, and how you'll never see the inside of a native's house (altho the immigrants belief that the natives have some cleverly concealed secret social life among themselves is absolutely unfounded; native Seattleites don't get out much. Okay, at all.). When I got to Boston, I about died when I realized the ubiquity of moral justifications for bigotry of all sorts. Nice people. And they definitely vote Democrat. But a bit backwards in some ways.

ETA: after further thought, it occurs to me that the author might have been just attempting to provoke discussion since in previous comments, some had defended landlords who were unwilling to remediate lead and felt it unfair to force them to (older folk renting a single unit were singled out for ain't-it-wrong-to-make-'em status). While I don't have any particular problem with that _intent_, I maintain that the way it was executed was repulsive.