House Fix It Blog

“Man is the only animal who can be skinned twice” …Will Rogers

Well, it’s a done deal. The Stimulus Bill has been signed into law and now the waiting game begins to see if it will work as intended. We all hope that it will, for the entire world economy is dependent upon the financial health of the United States. The “talking heads” have marveled at how fast the bill went through Congress, which is reminiscent of how fast George Bush was able to convince Congress to declare war on Iraq. There is a valued old saying, “sin in haste, repent at leisure”. Remember that no one who created the Stimulus Bill was alive during the Great Depression, so we are relying upon textbooks and theories at this point.

Now, the next leg of the recovery plan must be to repair the housing industry. The housing industry lead the down cycle in what typically appeared to be another recession that comes along every 5 years or so. And these recessions generally last from 18 months to 3 years. What went wrong this time? Three major factors come to mind:

• Mortgage Markets Run Amuck. It wasn’t just Fannie and Freddie buying the loans from borrowers who never should have qualified, it was also the jumbo loan servicing companies who knew they could pass along this junk paper to the next “Greater Fool” and Wall Street was ready to assist with this effort by bundling and securitizing mortgages;
• Bankers Behaving Badly. The traditional bank policy of foreclosing on defaulted property has backfired. Because of the sheer volume of foreclosures, the foreclosed asset cannot be resold for any amount resembling the original loan principal. This compounds the banks’ losses, and gives rise to frequent trips to the Treasury for more taxpayer money. Slowly, lenders are realizing that keeping owners in their homes at lower interest rates is a far better business plan than the losses they realize upon foreclosure;
• Unrestrained Consumer Greed. The credit card companies play the enabler role in this scenario too. Too many teaser rate credit card offers, too many “must have” cheap goods from China, and the belief by many homeowners that their house was a perpetual ATM.

Who’s to blame?  Forget it.  Putting Bernie Madoff in prison isn’t going to restore investor or consumer confidence in our system. Running the government printing presses to flood the world with paper currency won’t help much either. The real key to recovery is the belief by the consumer that when I wake up tomorrow, I’ll still have my job and a roof over my head. It’s largely psychological because 90% of Americans currently have both. However, “what if” is the Boogie Man gnawing on the human psyche, and that is going to take a long time to repair.

“Civilization ends at the Hudson River”

Notwithstanding the recent notoriety US Airways Captain Schullenberger gave the Hudson River, there is an old saying in Manhattan that “Civilization ends at the east bank of the Hudson River.” Those who espouse this belief add to its arrogance by stating that the Mayor of New York City holds the second most powerful job in the world. So that leaves the rest of us somewhere between Hee Haw and a Saturday night tractor pull.

Enter Wall Street and real estate. For the past 25 years the investment banking community has been trying to treat real estate like a stock or bond. As you know, stocks and bonds represent a “claim” upon the assets of public corporations, and most of these assets are goodwill. In the United States today, with some exceptions such as REIT’s, human capital produces earnings rather than earnings produced from traditional brick and mortar assets. But real estate is “dirt” and as Will Rogers said years ago “Buy land, they ain’t makin’ any more of it.” The loans against real estate are mortgages or trust deeds, and the security for these instruments is the land and improvements on it.

Contrary to what the media has told us over the past 12 months, there has not been a real estate collapse; the land is still there and the improvements are still there. What collapsed was the “House of Cards” created by Wall Street to expand the CDO (Collateralized Debt Obligations) market to an unrealistic level. Derivatives and fractionalized mortgage bundles do not provide any security to the holder as many hedge funds and pension plans have discovered. As a nation, we are paying the price for straying from the basic tenets of making real estate loans.

If Wall Street is the epicenter of world finance, it follows that it is also the epicenter of world confidence. Despite a change of administration in Washington, the folks in the Hinterland have lost their confidence, they are scared, and scared people don’t borrow money or make purchases. Yes, the confidence will return, but not at the same rate that it was lost. “Once burned, twice shy”.