Adding Hurricanes to Foreclosure

The first of June is the opening day of “Hurricane Season,” which makes it an excellent time to consider insurance companies, again, in terms of whether or not they should be in our portfolios–if, indeed, anything much ought to be other than metals and sound energy sources.

Insurance is taking hits from all over the landscape, from the probable inevitability of Hillary Care Plus, bidding fair to destroy health care insurance, foreclosures which have lead to loss of private customers (do any of us suppose that banks pay the same rate for home insurance that we do?), business failures, and the effects of Ike, Katrina, and Rita, with at least two storms probable to wreak havoc this season.  One wonders how many are on the hook for the recent earthquake in Belize.

A decade ago the rare foreclosure on a house really wasn’t that important other than to the individual who couldn’t meet his mortgage payments; the bank repossessed, the house was sold again within a relatively short period, and life went on as usual.  2009 is an entirely different proposition, with hundreds of thousands of homes that have been foreclosed on, lending tight (at least according to official sources; see my interview with an investment/mortgage banker in tomorrow’s Morning Whiskey!), job losses averaging over 625,000/month, a jobless rate that is officially eight and a half per cent. but probably twice that by former ways of tallying unemployment, and the whole socio-economic-political situation.

One factor which is new to this hurricane season is that never before has there been large numbers of what amount to abandoned houses.  Those which have not had storm shutters put up, or plywood, or at least a bunch of tape put up in big X configurations, and the usual sort of battening down homeowners normally do, are going to be a serious menace to other buildings in the vicinity.

How will damage caused by unoccupied domiciles be charged, and to whom?  It can scarcely be called “an act of God,” since the loss will be due to loss of preparation at least as much to the storms, themselves.  Who is responsible, the bank or the insurance company of the homeowner whose house has been clobbered, or the homeowner himself?  Someone is going to have to pay for the damage, and someone is going to have to clean up the messes or the entire neighborhood will diminish in value.

Banks are already troubled with malicious damage from the erstwhile owners who trash their former houses deliberately when forced to move out.  There are truly disgusting tales of those angry enough to defecate on the carpeting, break windows, sabotage appliances, sling bleach around, and generally act like thugs who never had any business getting a mortgage in the first place.  In at least one instance a major bank razed a selection of MacMansions, complete with all the extras such as eighty dollar a square foot (uninstalled) granite countertops, rather than try to protect or sell them.  Thieves are raiding the houses for copper and other valuables.  There are squatters.

In Galveston there are still 17,000 houses that were destroyed or have unrepaired damage from Ike during the last season.

Again, who is to bear the losses?  Who is responsible for protecting the properties?  No matter what the answer, it does not bode well for the economy.

Wells, as it is known in the trade, is hiring underutilized realtors to secure houses before storms and to take care of insulating outdoor faucets before freezes.

J P Morgan Chase is requiring bank employees to do the maintenance!  That must be wildly popular with tellers and lower managers who have their own belongings to protect.  One of the things I learned and have not written on yet is that a major problem in the banking houses is how little is done to foster employee loyalty and esprit de corps.  One can imagine the reaction of professionals being turned into maintenance men, and somehow I doubt that those who earn their salaries with their minds will be recompensed for the tasks they will be assigned to fix up, clean up, and protect houses they have no personal stake in.

To add to the excitement/frustration, government (of course) is getting into the act.  Palm Beach, Florida, County Commissioner Burt Aaronson has threatened banks with action if they do not see to this maintenance before storms hit.

Randall Webster, Director of the Emergency Management Department for Horry County, in South Carolina (Myrtle Beach, if that helps), is reported to have done approximately the same, and doubtless New Orleans, Houston, and other areas susceptible to severe storm damage will follow suit if they have not done so already.  I have sources at Citibank and BOA and will see if I can discover what their “emergency” prevention plans are.  If any of you have “insider” information, please respond below.

Back in the good old days, say, a hundred and thirty-five years and more ago, Americans felt responsible for “killing their own snakes” and also expected others to be responsible for any damage they had caused.  In this era of the Nanny State and Obamanomics, the almost certain outcome is the declaration of a “disaster area” by Mr. Obama.  More billions will be created to dispense from the Treasury, with more employees to oversee the new program…without anyone asking the residents of Houston or New Orleans precisely what they think of the efforts of FEMA, et al., after Ike and Katrina.  I have reports that singe my monitor with their vitriolic resentment over FEMA just walking off and leaving the mess.  I will remind you again that large grocery chains in Houston had five-item restrictions on purchases following Ike, and that vast amounts of damage have yet to be repaired.

FEMA caused far more problems than it solved during Ike, Katrina, and Rita, and very little has been done to clean up the destruction from those storms–unless one wishes to count the widely-publicized gratitude of a professional welfare recipient in New Orleans complaining that she “only” got a 60″ flat-screen TV for her subsidized housing and that she wasn’t “fooled” by the wood floors that were installed.  She doesn’t like the modern craze for distressed wood, any more than she liked having a job, which she tried for six months out of the sixty-plus years she has been on welfare.

Some may say, “Oh, well, FEMA tried, and we can’t get rid of the Nanny State, which is growing by ever-faster leaps to gargantuan proportions.”  If not us, who?  Still, it is not a major portion of our task to point out that hundreds died in the Super Dome because FEMA would not allow relief trucks to enter the city until the Governor geeked and gave FEMA control over the Louisiana Guard, although that is precisely the sort of governmental abuse some of us expect to see in increasing amounts.

Our sole question at this moment is whether the insurance field is a good candidate for our investment dollars, and I am going to “make a sign with my thumb,” in the negative.   Even with the clout insurance companies have had in the past, I have an itch that says that no matter how many millions of Bernankes are thrown at them, they could come out behind, as will all of the banks and homeowners.  Money tends to stick to the fingers of those who handle it first, in decreasing proportion to the distance between the source and those benefiting.

My suggestion is that if you have any insurance stocks it would be a good time to swap them for positions in small, well-capitalized gold or silver mines.

From our experiences with Ike insurance is going to be little consolation to those who want to go about their lives after suffering heavy hits, although those who have nothing better to do than wait for adjusters and fill out claims will benefit.  Our choice was to repair the electrical damage and roofs Ike blew off to protect other valuable property and to take care of our livestock, or to wait around for adjusters, estimates, reimbursement, and repair men while undergoing a great deal of inconvenience and possible danger to the stock in the hope of getting more than we spent.  Such matters are a personal choice dependant upon individual risk assessment.  I trust those of you who live in the path of tropical storms have plywood cut to cover your windows and have laid in ample supplies.

Linda Brady Traynham

June 1, 2009

P.S.: Your lesson for today from my vast store of historical trivia:  Hollywood is responsible for the “thumbs down” and “thumbs up” signs.  What I quoted above is what ancient sources say, and Cecil B. DeMille decided that thumbs down was a sensible interpretation.

The Daily Reckoning