Bubblemania: Taking Pleasure in Pain

Saturday, May 13, 2006
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Harper’s new cover is a clever one.

harpers.jpg

Americans have been taking the “new road to serfdom” all on their own, with the trip fully paid for by the Feds.

Denver, for one, is hitting rock bottom. The house poor idiots will never learn until they are forced to learn via insolvency. Wayne County (Detroit area) is swamped with foreclosures; I recently supplied some anecdotal notes on this.

After recording more than 9,000 foreclosures in 2005, Wayne County ended January with 3,364 homes in active foreclosure, the highest of any county in the nation by more than 1,000, according to statistics compiled by Foreclosure.com of Boca Raton, Fla.

While Wayne County is ground zero, foreclosures are rising throughout Metro Detroit and Michigan. Active foreclosures in Oakland and Macomb counties and the entire state have doubled in the past two years.

…Real estate and mortgage experts say much of Wayne’s problem is caused by defaults in Detroit. The city suffers from high taxes and insurance, as well as many fee-laden, high-interest sub-prime mortgages. In addition, predatory lenders arrange mortgages for buyers who can’t really afford them, while scammers engage in outright fraud when they take the mortgage money and run, leaving hapless buyers to lose their home.

Note the “predatory lender” language. I suppose these predatory types are holding guns to the heads of innocent home buyers, forcing them into mortgage submission? Of course, such language, as usual, removes all accountability from the decision makers/consumers. As an unaccountable society, this is what we must do: blame the salesman, not the buyer that called him in. Some Detroit bankruptcy lawyer thinks he has the answers:

The first and most obvious reason so many homeowners are missing their mortgage payments would seem to be unemployment. Michigan posted one of the highest annual unemployment rates in the nation last year, and it’s expected to keep edging up in 2006. But while disappearing paychecks are a factor, so are the shrinking paychecks brought about by cuts in overtime or total hours worked, experts say. Divorce or prolonged illness often lead to foreclosures.

“It’s really three things: loss of income, reduction in income or substantial medical expenses,” says Stuart Gold, a Southfield bankruptcy attorney.

No darlin’. A wee bit down in the article, the writer nails it (though rather simplistic):

But just as much of a factor as job loss is the increase in loans for which homeowners borrowed up to 100 percent or more of the purchase price, or siphoned all the equity out of a property to pay off debts or get cash.

Then there are adjustable-rate loans, which ratchet up the monthly payment right behind interest rates, pushing a once-affordable mortgage payment out of reach.

These loans require little, if any, down payment and feature temporarily low interest rates help buyers get into a home they couldn’t afford with a conventional loan.

“Many people are biting off more than they can chew,” said Bettina Pearch, a counselor with Greenpath Debt Solutions in Allen Park. “I see a lot of people who are living for the mortgage. There’s a lot of creative financing out there that is not really in the client’s best interest.”

Overly affordable loans leave buyers stuck if something breaks around the home or in their budget, whether it’s a furnace, a roof, a medical emergency or a layoff.

Buyers often stretch finances to get into a home with a low- or no-down mortgage or a loan with initially low payments, and often don’t have savings to fall back on. With little or no equity in the property, they can’t borrow against the home for repairs or extra cash and can’t refinance to put some breathing room in the budget.

Even selling the property is out of the question, since the owner would need to pay thousands of dollars in real estate sales commissions and closing costs just to get out from under the mortgage.

Budget counselors, lawyers, Realtors and lenders say they see many unprepared homeowners who don’t realize just what they’re getting into when they buy a house.

Indeed, the reason for the mania is clear. Good times, noodle salad, party on.

Here’s another good one….remember I wrote – rather sarcastically – about the 40-year mortgage? Forget that. Banks are bringing you the 50-year mortgage. Now you can become house poor for almost twice as long as is the norm. And of course, add a few refi scenarios into that, and you are mortgaged forever. Party on!

An amazing development I have noted in my own county reinforces Dr. Byrne’s - my Econ Prof – views on things. Companies nowadays operate with blinders on, and make business decisions as if nothing in the world is happening, and if it is, they won’t be affected by it. Thus the “expansion” mentality that fails more often than it succeeds. Companies expand (malinvest) on the basis of cheap money and false signs of prosperity, and they expand until the elastic waistline breaks. Then it’s all or nothing at that point.

I live in Macomb County, as mentioned in the Detroit News story above. It’s very blue collar-automotive here, with mostly moderate housing – new housing aside. I live here because I like to be on the lake, because my house was cheap, because property taxes are 1/3 to 1/4 of what I’d pay in Oakland County, and because Detroit has a city tax that I escaped years ago. There’s no housing bubble where I live – only tons of “for sale” signs that seem permanently etched in front yards.

So now they are building a huge upscale mall on the north end of this blue collar region, because good times and noodle salad have come to the working middle class – courtesy of plastic cards – and the upscale retailers want to take advantage of it. All the fancy joints will be there: from Saks to Nordstrom to whatever. So, as debt loads start to crash and the economy tanks, there are businesses just beginning to invest in “making out” on the bubble economy. Without a bubble economy and cheap credit, there is no way that an upscale mall can make it in this town. Even the pretzel store would shut down. And add to that the fact that Southeastern Michigan has more unemployment than almost anywhere in the nation, and Nordstrom is coming to town to sell $285 shoes and $500 handbags.

Then, just a wee bit to the South of me, Mercedes is building a brand new dealership, to open this year. The area where it is being built has a median income of about $42,000 per household. What am I missing here?

Of course, the dealership is what we’d call “a stone’s throw from Eight Mile Road (and thus Detroit),” meaning that the same mentality that has Wayne County the worst in the nation regarding foreclosures will surely bring sales to a Mercedes dealership, for it will be the banks and consumers that will have to clean up when the noodle salad bowl is empty. And then the Mercedes dealership will sit idle and try to find another party elsewhere.

Do I like seeing al
l of this happen? You can’t say this to an idiot, because they won’t understand, but yes, I do. It is a necessary housecleaning after teenagers wrecked the joint while Mom and Dad were away on a very, very long weekend. Well, Mom and Dad are going to come home. The evidence should tell the idiots that. So yes, for those who mortgage their houses – again and again – for plasma tvs and cars and shopping at upscale malls on middle-class incomes, may you all end up as flattened roadkill. I am the vulture circling, waiting, looking for the rodents on the yellow line, taking a few bits here and there, waiting to swoop in for the big one. Ain’t nothing wrong with that.

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