Late-stage housing mania
Our editors have some additional thoughts about an item noted in last Monday's DR , pertaining to the Denver Post piece about a house-buying ring that begat inflated prices that begat foreclosures. Dan Denning in Australia shares some choice excerpts and his comments (in caps):
"Real estate records show that was the fifth villa Lee bought at inflated prices after Colorado issued a warrant to arrest him. He bought one in October 2004 and three more in the next three months. Five lenders supplied 100 percent loans totalling $3.1 million." NOT ONE BUT FIVE DIFFERENT LENDERS MADE A 100% LOAN TO A CONVICT.
"James and Fontenot recruited buyers , supplied false loan application information, arranged go buy homes 'above the listed sales prices' and told sellers the homes would be appraised above asking prices, an indictment against them alleges." THERE IS SOMETHING ADMIRABLE IN THIS, AT LEAST TO THE EXTENT THAT THEY TOOK FULL ADVANTAGE OF THE CIRCUMSTANCES BY COMPLETELY GAMING THE SYSTEM AND TAKING IT TO ITS LOGICAL, ABSURD CONCLUSION. SET UP A STRAW BUYER, COLLUDE WITH THE APPRAISER, SECURE 100% FINANCING, SPLIT THE CASH ABOVE THE APPRAISED VALUE BETWEEN THE BUYER AND SELLER, AND LEAVE THE OWNER OF THE MORTGAGE BACKED BOND HOLDING ALL THE RISK. BEAUTIFUL.
"One defendant in the Federal case, Camack, pleaded guilty and took a three-year sentence. 'He was given the opportunity to purchase a luxury unit with no money down, no closing costs and $125,000 for repairs etc.' said Peter Schild, Camack's lawyer. OTHER THAN WORRYING ABOUT JAIL TIME, I'M NOT SURE I WOULD HAVE TURNED THE OFFER DOWN EITHER.
"Critics say mortgage companies have little incentive to ferret out inflated sales because they bundle and resell the home loans to Wall Street investors, taking their profits and diluted fraud losses in large pools of mortgage-backed securities." SO IT'S A VICTIMLESS CRIME? WHAT ABOUT CAPITAL? WHO'S GONNA STAND UP FOR IT WHEN IT GETS SLAUGHTERED LIKE THIS? OR WHO WILL DEFEND ALL THOSE MISALLOCATED RESOURCES, THE CEMENT FOUNDATION WITHOUT A VOICE, THE PLYWOOD DEPRIVED OF JUSTICE. NO MISALLOCATION WITHOUT REPRESENTATION! THERE IS NO SUCH THING AS DIS-AGGREGATION OF CREDIT RISK. IF SOMEONE DOESN'T OWN THE RISK, EVERYONE ENDS UP GETTING SCREWED. IT'S A KIND OF TRAGEDY OF THE CREDIT COMMONS.
"In one summer month last year, she bought three Denver-area houses for a total of $910,000 and left loan closings with cash. One the Kipling house, 'the check I got after closing was $72,000.' AND NOW WE SEE WHAT'S BEEN HOLDING UP CONSUMPTION. IT'S NOT JUST EXTRACTING A LARGER AMOUNT OF EQUITY IN A HOUSE. IT'S THE CREATION OF FICTITIOUS EQUITY IN THE FIRST PLACE.
Adds Justice Litle from Outstanding Investments :
This stuff seems to happen at the top of every market mania — like part of the clockwork. Greed and excess breed deceit like swamps breed mosquitoes. The sheep will always be with us, and thus so will the wolves.
In my opinion, stories like this are both mind-boggling and mundane at the same time.
Mind-boggling for the obvious reasons: crazy plotlines, colorful characters, jaw-dropping stupidity. Mundane because the truly impressive rip-off happens day in and day out, behind the scenes, on a massive scale. When you can juice the money supply here and there, fish a few bucks from the pockets of every US consumer every single month, walk away with tens of billions in inflated gains, and make the suckers pony up for your insurance to boot… now that's some impressive fraud. Making the crime above board and culturally accepted is the coup de grace.
Check out this wry observation from Aldous Huxley. It's 60 years old, but could have been quoted yesterday.
"There is, of course, no reason why the new totalitarians should resemble the old. Government by clubs and firing squads, by artificial famine, mass imprisonment and mass deportation, is not only inhumane (nobody cares much about that nowadays), it is demonstrably inefficient and in an age of advanced technology, inefficiency is the sin against the Holy Ghost. A really efficient totalitarian state would be one in which the all-powerful executive of political bosses and their army of managers control a population of slaves who do not have to be coerced, because they love their servitude. To make them love it is the task assigned, in present-day totalitarian states, to ministries of propaganda, news-paper editors and schoolteachers… The most important Manhattan projects of the future will be vast government-sponsored enquiries into what the politicians and the participating scientists will call "the problem of happiness"—in other words, the problem of making people love their servitude."
Justice also points us to a Wall Street Journal piece about the growing number of home buyers backing out of their purchases.