I guess “Affordable Housing” isn’t much of a headline

Turmoil in the Puget Sound housing market receives front page attention in both Seattle dailies today, as the Times and P-I fish the data for dramatic headlines.

The median housing price, we’re told, “has fallen four months in a row,” is “back where it was the previous November,” and “last month fetched nearly 10 percent less than the typical sale in July.” Wow. That sounds like the nationwide housing collapse has finally hit Seattle, except, you know, “it’s typical for monthly house prices to fluctuate,” some of the median price decline is surely from “the influence of condominiums, which have been making up more of home sales and generally cost less,” and of course the well known fact that “home sales are highly seasonal.”

To further complicate the reader’s job this morning, both articles liberally intermix data for detached homes and all housing, as well as trends from Seattle, King County and the surrounding areas. Ironically, the result of all this muddle is probably a fairly accurate picture: the regional housing market is soft — certainly softer than it’s been in years — but exactly how soft, how widespread, and how entrenched, well… we really don’t know. Gone for the moment are the bidding wars and double-digit annual appreciation to which we’ve all grown accustomed, but at least for us Seattle homeowners (and buyers) what we’re witnessing looks more like a return toward normalcy than an actual slump.

Which of course raises a question that seems to be missing from all the typically breathless local coverage of the region’s housing market: is a flattening or modest decline in prices actually a bad thing?

Self-appointed guardians of Seattle’s quality of life have long decried the loss of our city’s middle class heritage, but arguably the number one culprit in this trend has been the dramatic rise in housing prices that created such enormous wealth for those lucky enough to get into the market early. It was a struggle to buy my house for $187,000 back in 1997, but at a likely price of about half a million dollars today, it would be impossible. Average wages have not doubled and tripled over the past decade, but Seattle’s housing values have, pricing many families out of the market.

The equity in my house is my only substantial asset, so I have great empathy for homeowners watching their property value decline… or at the very least, not appreciate nearly as quickly as anticipated. But as someone with the experience of buying in the bidding war era — I joked at the time that I spent more time picking out a head of lettuce than I did deciding to make an offer on my house — I welcome a more rational housing market. And while the Ye Olde Seattle establishment bemoans the threat “vertical density” poses to our neighborhoods, the only realistic and palatable path toward “affordable housing” is to build more condos, townhouses and apartments… that is, short of a regional economic collapse.

So which is it? Do declining housing prices represent a crisis or an opportunity? I look forward to next month’s coverage to learn the answer.

Comments

  1. 1

    ira Sacharoff spews:

    I think falling home prices have more positives than negatives.
    Sure, if you bought two years ago and need to sell now you’ll be at a loss, and there were many in the Real Estate industry
    who were strongly preaching “buy now, before it’s too late!”
    and some of those folks are losing their homes, but…
    I do happen to be a Real Estate agent, and I believe in home ownership, so when home prices are lower they are more affordable, so it’s a good thing.
    most people in the real estate industry don’t share my views…they’ve been in denial about falling home prices forever ( I could see it more than a year ago, and have been telling clients that now is not a good time to buy)…
    Also, I’m a home owner and my property taxes have skyrocketed. I realize that the county needs revenue to provide services, but I look forward to a bit of tax relief…this is me, progressive democrat sounding like Tim Eyman, shame on me.

  2. 2

    roger rabbit spews:

    Unless you’re planning to move soon, or borrow against your equity (bad idea) the market value of your home doesn’t mean very much. More important is how much you owe on your mortgage, the interest rate, and monthly payment. I’m a big believer in the no-debt lifestyle, so the most material thing in my thinking is PAYING OFF THE MORTGAGE. But, you might not have the means to do that if you’re a part-time radio-jock with no long-term contract … unless you inherit a shitload of money! Whatever you do, don’t WORK for it! Congress doesn’t want you to work! Working is severely punished under our tax code! If you can’t inherit money (e.g., from a bachelor rich uncle), then for crying out loud get it from capital gains but DON’T WORK!!!! Nobody should do any work until we get rid of the Republicans and institute Democratic Tax Reform.

  3. 3

    Marcel spews:

    In addition to more development in multifamly zones we could also encourage more dwelling units in the single family zones.

    Likely that half a million dollar house used to hold a family or 4 or 5 people, and today it only holds 1, 2 or 3 people.

    The city makes it difficult or impossible to add units in the garage or the basement.

    This could increase supply of affordable rentals and it is more ecological to return to a situation in which 5 people are inside those 4 walls…even if there are now two kitchens.

    You can legally have up to 8 people in a group house but you can’t put in two kitchens and have two dwelling units of 2 people each.

    Odd, isn’t it?

  4. 5

    John425 spews:

    I understand that the Chinese graphs for “Crisis” is two characters…”Opportunity” and “Danger”.

    Some folks will lose their homes and value while others will scoop up properties at rock bottom prices.

    Opportunity and danger go hand-in-hand.

  5. 6

    michael spews:

    @2

    Thanks Rog,

    Count me in as one of the buy something affordable, pay it off, flip the man the bird and live mortgage free crowd.

  6. 7

    rhp6033 spews:

    RR at 2: It just hit me – under our tax code, working for a living is subject to a sin tax! Now I understand!

  7. 8

    rhp6033 spews:

    # 3: If you go back to the era before the Great Depression, you will see that just about any larger-than-average house also used to house a servant or two or three – a nanny, maid, or cook, or all three! That was why Victorian-era houses all had those dormer windows on the top floor.

  8. 9

    spews:

    well, washington state and especially seattle have quite a long history of boom and bust. it’s just the way it works up there.i can’t imagine that the real crisis that is happening everywhere else [i.e. the foreclosures] will NOT happen in washington….that really doesn’t make sense. just before i moved i was talking to a man that was [he thought] riding pretty high sitting on top of many properties that he was buying up around gig harbor and then ‘flipping’. i told him then that i thought he should get out of the market pronto….i hope he did….but i doubt it. a lot of all the buying fever wasn’t individual home owners trying to own a house…it was people like the ‘house flipper’ that were looking to make a lot of money doing it. very risky indeed with a bad prognosis for wealth or sanity attached to it.
    i was glad to see that president bush is going to force a cap on variable mortgages to help prevent the real family homeowners from losing their houses.
    the other guys? well…they were playing business men and that’s what happens in any business venture. i wouldn’t want to be any of them now………
    after all, in washington state, buying up property in the hopes that it will make you rich is about as good a business plan as opening a sno-cone stand in the arctic.
    but *sometimes* it does work…..so i guess it falls in the gambler’s addiction category………intermittent positive reinforcement.

  9. 10

    Rujax! spews:

    Mr. Sacharoff-

    Your post is a little confusing.

    You say:

    “I do happen to be a Real Estate agent, and I believe in home ownership, so when home prices are lower they are more affordable, so it’s a good thing.”

    Then you say:

    “they’ve been in denial about falling home prices forever ( I could see it more than a year ago, and have been telling clients that now is not a good time to buy)…”

    So which one is it?

  10. 11

    palamedes spews:

    Once you get past the Microsoft millionaires (and from what I hear, the days of making big bucks there is long, long gone unless you are one of the anointed ones), the truth is that only the Southeast as a region has lower median salaries than we do.

    If it appears to be the case that getting a mortgage in general, and the jumbo mortgages one needs in a lot of the Puget Sound in particular, have become much, much harder, then prices will continue to fall until people can afford them.

    If you’re a two-income family without a home but with some savings, now to a year from now may be a good time to look around. Otherwise, it’s still going to be hard sledding for a while for the rest of us.

  11. 12

    Right Stuff spews:

    If it appears to be the case that getting a mortgage in general, and the jumbo mortgages one needs in a lot of the Puget Sound in particular, have become much, much harder, then prices will continue to fall until people can afford them.

    I agree with much of what you said at 11. But I would just add that it’s not getting tougher to get a loan, rather the lending institutions are getting back to sanity in their lending practices.
    Also the sage advice;
    ” just because someone will give you the loan doesn’t mean you should take it.”
    seems to be valued more these days…

  12. 13

    correctnotright spews:

    the problem has been the mortgage industry:

    who hasn’t gotten the letters in the mail or heard the solicitations on the radio for “low interest” or “consolidate your debt” or “refinance now before it is too late” – this hard sell has been going on for some time.
    Even I have looked at some of these loans, – wow- ,under 5%! It isn’t until you look at the details (under 5% for 4 years and then whooaaa! up to 10% plus the prime.

    Of course the person I talked to explained it this way – the average american moves every 5 years soooo – if you plan to move – then no problem.

    Of course I didn’t fall for those come on lines – but many people have. when the housing prices then drop and they CAN’T sell their house – or get the increased equity they ASSUMED was going to be theirs….well, that is when things hit the fan.

    Bottom line: Yes, people are responsible for signing up these loans – but the assumptions and the sell techniques used by the mortgage companies are deceptive, at the very least – and also bad business – why deceptively con a person into a loan they will defalt on? Commissions! and then resell the mortgage anyways to speculators….yes – unbridles capitalism wins again!

  13. 15

    Right Stuff spews:

    “Bottom line: Yes, people are responsible for signing up these loans”
    100% right they are! Unless they forge your signature, you are responsible.

    “but the assumptions and the sell techniques used by the mortgage companies are deceptive, at the very least – and also bad business”
    Caveat Emptor – didn’t anybody watch the Brady bunch for crying out loud….. Seriously, I agree about the teaser rates etc, but unless they forge your signature……

    “why deceptively con a person into a loan they will defalt on? Commissions! and then resell the mortgage anyways to speculators….yes – unbridles capitalism wins again!”

    I again agree with your conclusions, mortgage brokers broker a loan to someone who clearly doesn’t qualify for a loan, gets the commish, the lending institution bundles these “high risk” loans with other debt instruments and “capitalizes” them. Speculators find they bought some bad news…… HOWEVER…..What I Cannot Stand!!!! The market will correct this if allowed too…
    Message to those speculators……Caveat Emptor!!
    If you don’t know you are buying bad debt, then you deserve to lose your shorts on the the deal.
    The market corrects this problem with those who purchased the subprime loans going out of business. Ditto the Mortgage Broker and Lending Institutions….
    The worst thing that can happen is to have the gov bail anyone out…..

  14. 16

    Right Stuff spews:

    15 Cont.
    Oh and bye the way. I also don’t have much sympathy for the people who are now facing forclosure…

    ” just because someone will give you the loan doesn’t mean you should take it.”

    Just becuase someone will give you a zero down 500K loan….5yr ARM…….

  15. 17

    ewp spews:

    Despite both the Times’ and PI’s articles on our local real estate crash, no such crash is actually happening, nor is it likely to happen here. For whatever reason Washington State has a much lower percentage of subprime or other exotic mortgages. And, Seattle has a much lower percentage of housing purchased by investors, (people who bought real estate with no intention of living in it), than many other urban markets. What were seeing is a slowdown in price appreciation to something much more in line with the general rate of inflation. That’s definitely not a bad thing for the overall health of our local real estate market, and it provides an opportunity for first time homebuyers to take their time, find the right house, and get a mortgage that works for them. The people who will be hurt financially are those who overpaid believing that they could easily flip the property for a profit. If you purchased your house to live in, and you don’t need to sell in a hurry, no worries.

  16. 18

    ratcityreprobate spews:

    The problem with coming down too hard on the foolish who signed up for loans they can’t afford is that their mistakes have a way of coming around and biting all the rest of us in the ass. For example, that pension fund your parents are relying on to live on their old age may be invested in bonds that are collateralized by sub-prime loans that have defaulted. Or those property taxes you paid to the local Fire District were invested in the King County Investment Pool which is sitting on commercial paper that is collateralized by sub-prime loans. Perhaps those taxes you paid have just evaporated. It isn’t fair but it is what is starting to happen.

  17. 19

    spews:

    Rujax,
    Sorry if I seemed contradictory. I want people to own homes. I don’t want people to own homes at any price. I don’t want people to be spending way too much on housing, don’t want them to be taking out these risky loans and have no money left for anything else. When prices drop more, and they will, I think, then it’ll be a good time to buy, just not right now.

  18. 20

    Marcel spews:

    Yes it certainly was horrible socialism when FDR intervened in the marketplace and state legislators put a moratorium on foreclosures in the 1930s.
    Then it was horrible socialism when the government took over the whole American economy during WW2.

    And it was horrible socialism because all of this led to….immense prosperity for everyone. Terible thing, that. Oh too bad since 1972 growth has stoppped for he middle class, but the free market ideology has reigned supreme.

    You guys are all free market nuts.

    Government intervention to slow the adjustments of ARMs can help everyone. Doing nothing can hurt everyone. Yes it can be done wrong, or right, but just stop the silly free market rhetoric and the caveat emptor nostrums and the idiotic idea that ANY intervention can only be bad.

    As a generalization letting the free market screw us all has been disproven time and time again in reality.

    The state legislators in the 1930s put a halt to banks selling secured properties. They passed laws changing the lenders’ contracts and saying “no, you no longer have that remedy of selling the property.”

    This was upheld.

    That is a much bigger intervention than the mild steps Bush is proposing now.

    Then on taking office FDR CLOSED THE BANKS. You were not allowed to go get your money. That certainly interfered with your contracdt with the bank didn’t it?

    But it was key to stopping the downsliding economy and panic.

    The bank “holiday” let the government stop the panic and organize a rational review of which banks could stand and which ones could not.

    Sometimes capitalism needs that good old government intervention. Or else things fly apart.

    Don’t you learn anything?

  19. 21

    Roger Rabbit spews:

    What wasn’t headline news in today’s fishwrapper was the story (buried in the back pages) that the sneaky Republicans who are trying to game the 2008 election by dividing up California’s electoral vote didn’t get their initiative on the June ballot.

    If they meet the signature requirement it’ll be on the November ballot. This could create chaos. Let’s say it passed. Would it apply to the presidential election on the same ballot, or the next one? No one knows.

    Frankly, I don’t think this initiative will pass. That’s because Democrats will pull out the stops to defeat it, and Democrats carried California by over 1.2 million votes in each of the last two presidential elections. So, the GOPers probably can’t pass it for the same reason Democrats can’t pass similar initiatives and laws in GOP states — they haven’t got the votes.

    But they can force Democrats to spend a lot of money and man-hours fighting it. And maybe that’s the whole point — to divert Democratic resources from candidate campaigns.

  20. 22

    Roger Rabbit spews:

    If Republicans want Califnoria’s electoral votes, then they should run a moderate candidate that the majority of Californians could vote for. But majority rule and democracy are not what the GOP wants. They want to impose extremist candidates with an extremist agenda supported by a small minority of voters on the majority of the population. Instead of winning elections by appealing to voters, they intend to steal offices by manipulating the election system.

    Frankly, I think we should do it too! No more Mr. Nice Guy! I think we should also rig voting machines, suppress the Republican vote, and use dirty tricks to prevent them from voting. Why not? They do it. We can’t afford not to.

    When I was a wee little rabbit, I had many brothers and sisters, and I can’t count the number of times Papa Rabbit spanked by butt for things my siblings did. When I pointed out that I didn’t do what I was being punished for he simply said, “Then that’s for what you did that I didn’t catch you!” So you know what I did? I did everything my brothers and sisters did! I figured if I was going to be punished anyway, I might as well be guilty. That’s why I turned bad.

    Well, it works the same way in elections. Republicans accuse us of stealing elections, and some dopes actually believe them, so I figure what the hell we might as well steal elections since they’re doing it and they’re going to accuse us of doing it anyway.

    Oh yeah, one more thing. Wingnuts are armed to the teeth, so …

    LIBERALS MUST ARM!!!

  21. 24

    Roger Rabbit spews:

    Speaking of our upside-down tax code, Republicans are gloating today because they forced Democrats to add $50 billion to the deficit to give AMT relief to middle class families. Except, “blue dog” Democrats in the House have vowed to block any tax cuts that aren’t offset by revenue enhancements.

    What Democrats want to do is make billionaires like Steven Schwarzman pay the same tax rates as the janitor who empties his wastebasket at night.

    Schwarzman will make about $9 billion this year. Yeah, you read that right. He averages $750 million a month, which works out to $37.5 million a day or $4.69 million an hour or $78,125 a minute.

    Schwarzman runs a hedge fund. He gets paid a percentage of the hedge fund’s profits. Under a loophole that was never intended for this purpose and is being abused, rich hedge fund managers like Schwarzman pay capital gains taxes on their compensation. But his compensation is not capital gains, because he hasn’t invested a penny of his own money in the hedge fund he runs. He’s not an investor, he’s a manager, and he gets paid commissions, just like car salesmen and real estate agents who get taxed at ordinary income rates. Since the maximum capital gains rate is 25% and a typical middle-class family is in a 25% marginal tax bracket plus pays 7.65% social security and medicare taxes, Schwarzman probably enjoys a lower tax rate than you do.

    Democrats want to close this loophole. Doing so would raise the $50 billion without raising taxes on anyone else. But Republicans are blocking AMT tax relief for 21 million ordinary American families so the biggest pigs at the trough — a few dozen or a few hundred people who already have more money than they can possibly spend — can keep slurping up outsized portions of the national economic output in exchange for producing nothing and doing nothing except pushing money in circles while not paying their fair share to Uncle Sam, who would throw YOU in a concrete cell if you filed a return taxing yourself at Schwarzman’s tax rate.

    When you file your tax return in April, and pay $2,000 extra, remember who fucked you over — the Republican obstructionists in the Senate.

  22. 25

    Roger Rabbit spews:

    Republicans are also big fans of letting millionaires “offshore” their money to places like the Cayman Islands so they pay no taxes at all.

    I’m not saying Americans shouldn’t buy second homes in the Cayman Islands or other Caribbean spas, if they can afford to. All I’m suggesting is that if you don’t want to pay U.S. taxes, then you shouldn’t be allowed to take money you make in the U.S. out of the U.S. You can pay for your Cayman Island retreat with the rubles you make by running kiddie porn web sites from Russia, or whatever. But untaxed U.S. income should stay in the U.S. And if you don’t want to pay taxes here, then you shouldn’t be allowed to live here, or set foot inside U.S. borders — regardless of where your citizenship is. I’m only sayin’ …

  23. 26

    ArtFart spews:

    17 Agreed that the major banks around here seem to be a little stodgier about writing mortgages than they might be elsewhere, but I’ve seen the likes of Nationwide set up shop here in the last couple years, and I doubt they’re being any more restrained here than they’ve been elsewhere. In fact, it’s pretty hard to believe they’d have spent the resources to move into our area if they didn’t see some low-hanging fruit for the picking. However, the real problem is the culmination of 25 years of scratching away the government safequards that were erected after 1929 to prevent such a thing from happening again.

    We refinanced our house in 1987 to do a remodel, which after a year of shopping seemed to better fit our needs than moving. At that time, in the closing process we had to sign a statement that we weren’t borrowing against our home to, among other things, put the money in the stock market. Ten years later, we once again refinanced to get a significantly lower interest rate, and there was no such stipulation. (We’ve since happily paid it all off.) Of course, now…with the advent of home-equity loans, what difference would it make? Why would hocking the roof over your head to buy the latest equivalent of Enron or Worldcom be any worse than doing so to buy a bunch of fancy clothes or a trip to Hawaii?

    The real problem now is that there’s billions of dollars’ worth of short-term commercial paper floating around the institutional markets, collateralized by long-term notes (mortgages) which are starting to be defaulted on and replaced by foreclosed houses that are dropping in market price. The banks that aren’t already stuck holding wads of these things are becoming increasingly reluctant to bid on them (the Chinese banks dropped out a couple weeks ago) and the Fed has quietly started absorbing these instruments (often referred to nowadays as “toxic waste”) to keep everything from going to hell in a bucket with frightening speed. This may simply mean that instead, everything’s going to go to hell in a bucket with agonizing slowness.

  24. 27

    Roger Rabbit spews:

    @9 Actually about 25% of the homes sold during the recent residential real estate boom were bought by flippers. That’s the nationwide figure. Don’t know what it is for Washington, but I assume similar.

  25. 28

    ArtFart spews:

    Oh, yeah….the title search for that 1987 re-fi revealed a covenant still on the books in our neighborhood stipulating that “no member of other than the Caucasian race shall be domiciled in any house in this development except when employed as domestic help.”

    “Domestic help”???? We’re talking about a 1946-model Cape Cod in Wedgewood Rock, with three bedrooms, one bath and what my sister-in-law used to call a “one-butt kitchen”. There wouldn’t have been anybody here but some newly mustered-out GI and his sweetie, enthusiastically working on the Baby Boom.

  26. 30

    Roger Rabbit spews:

    @9 (continued) “i can’t imagine that the real crisis that is happening everywhere else [i.e. the foreclosures] will NOT happen in washington….”

    I can. According to a recent Business Week article, it turns out that greedy Wall Street, in the process of squeezing individual mortgages together into investment products called SIVs, took a shortcut to save themselves a little time and money — they skipped the legal step of transferring title to the properties. That means all those subprime mortgages now going bad have no collateral. What Wall Street sold to banks and institutional investors like insurance companies and pension funds was a trillion dollars of unsecured loans.

    Legal aid lawyers representing distressed homeowners figured this out and glommed onto it, and judges are agreeing with them. You can’t foreclose on a house if it isn’t legal collateral for the loan! The homeowner still owns the loan, but the buyers of SIVs are now in the same position Goldy is: Trying to collect an unenforceable loan from the Mark the Welshing Rednecks of the world.

    This is going to be fun. Not too good for the economy, though. And brace yourself for higher insurance premiums when that industry takes a 12-figure bath on these nearly-worthless debt instruments.

  27. 33

    Roger Rabbit spews:

    @15 The big boys who bought all these predatory loans aren’t as smart as they think they are. See #30.

  28. 34

    Roger Rabbit spews:

    @18 “For example, that pension fund your parents are relying on to live on their old age may be invested in bonds that are collateralized by sub-prime loans that have defaulted.”

    Collateralized? What collateral? See #30.

  29. 35

    spews:

    Goldy,

    I think you mistake us old Seattlites for the neoelitists from Hunt’s Point.

    Most folks I know my age were huge supporters of the Rice regime’s concept of Urban Villages.

    There is a huge gap, however, between Norm Rice’s neighborhood villages and Vulcan’s taudry townhouses. Damayor and Dadevelopers have seemingly no interest in creating neighborhoods anymore than the folks who done bjuilt LA had such an interest.

    There is a world of difference between Boston’s South End or Beaocnb Hill, bith high density housing, and the kind of overpriced tenements we see going up in Seattle.

    Justn look at what Damayor is abuilding on Cap Hill. Large high rise condoes, hopefully not able to sell for their projected prices, but lacking commitments for schools, parks, or streetside dvelopment. Oh yeh, we are gtting a wonderful terminal for fast transport to Seatac ..excpt the damn thing is going in without the local bus service or parking needed to make it accessible.

    You and I share a love for the idea of an urban Seattle, but what I see is more like the high rise version of the endless suburb than the great neighborhoods we both experienced in Philly or Boston.

    I will believe in Mayor Nickles vision when I see someone build a basketball court next door to 2200 and a school on Cap Hill.

  30. 36

    ratcityreprobate spews:

    @34 RR

    “took a shortcut to save themselves a little time and money — they skipped the legal step of transferring title to the properties.”

    The lenders who made the loans have liens on the properties not title to the properties, at least not until the foreclose. The sold the liens.

  31. 37

    ira Sacharoff spews:

    I’m not so convinced that Seattle will be exempt from the hosing downturn the res of the country is experiencing, or that we’ll feel a softer blow.
    Seattle does have a history of booms and busts, and very few people look at the lessons of history.
    I’m expecting another 10% decline in median housing prices here.

  32. 38

    Roger Rabbit spews:

    17, 26 – As long as anyone with $80 can get a license to be a mortgage broker and there’s no regulation of the industry, there’s going to be abuses.

  33. 39

    Roger Rabbit spews:

    @28 Any restrictive racial covenants still in the property records are what courts refer to as “unenforceable as against public policy.” They don’t have to be formally removed; they’re simply null and void. Therefore, most people (and public officials) don’t go to the bother and expense of removing them.

  34. 40

    Roger Rabbit spews:

    @36 Read the article:

    ” … [S]ome foreclosures are now facing legal challenges …. That could spell more trouble for both lenders and investors in … mortgage-backed securities.

    ” … As Wall Street collected millions of mortgages into giant securitization pools, one of the key legal procedures for transferring ownership of the loans appears to have been often ignored … [which] could open mortgage investors to … legal attack by homeowners that … could block foreclosure.

    ” … Normally, when a loan is sold, a simple document is prepared showing that the debt and … collateral … has been transferred to the purchaser … called an assignment. But … Wall Street commonly skips this step, which requires separate paperwork for each loan. Instead, the industry customarily relies on a … pooling-and-servicing agreement (PSA) to spell out arrangements for all of the loans in a pool. But … court rulings indicate, a PSA may not be good enough when it comes time to foreclose.

    ” … Under a PSA, mortgages purchased from homeowners are transferred to a specially created trust, which then sells bonds …. But without any formal assignment of the mortgages … the trust … couldn’t show it had the ownership required to initiate foreclosure. … [J]udges have … dismissed dozens of foreclosure cases ….

    ” … There … could be a more troubling consequence for investors … [p]layers in the secondary market for mortgages rely on an obscure but critical legal theory — known as the ‘holder in due course’ doctrine — to insulate themselves from problems with the underlying loans. Under the doctrine, a homeowner who believes … a lender deceived him … can’t press such claims against the purchaser of a mortgage … protect[ing] pension funds and the like from having to worry about any misbehavior by home lenders …. But it’s a different story if, as appears to be common practice, the trust waits to complete paperwork transferring a loan until after it goes into default. In that case, the holder-in-due-course protection evaporates, and anybody who tries to foreclose could face defenses from the borrower that he or she was lied to when seeking a loan.

    ” … Foreclosure is turning out to be trickier than … Wall Street anticipated. Observes David D. Dowd Jr., a federal judge in Akron who joined colleagues in trying to streamline the process for handling foreclosures when the housing bust hit: ‘I think they liked the procedure we set up — until we started asking nasty questions about whether they actually own the note.'”

    Quoted under fair use; for complete story and/or copyright info see http://www.businessweek.com/ma.....annel_news

    Roger Rabbit Commentary: Basically they botched the collateralization of the loans, with the result that investors who bought the packaged mortgage loans did not get the right to foreclose on the collateral. As the article points out, that can be fixed, but it’s an expensive and tedious process that has to be done on a case-by-case basis. It may take months. Meanwhile, the defaulting homeowner sits in the house making no payments. The extra expenses and lost time are irrecoverable costs. These costs will be borne by the purchasers of the packaged loans.

    In addition, as the article points out, the procedure used by Wall Street to package and resell the loans opened them up to deception and fraud claims by homeowners — in effect, they’re responsible for what the mortgage broker and/or lender did. Given how much predatory lending occurred in the runup to the mortgage meltdown, the potential financial impact on the purchasters of the loans is enormous. Now, you’re not just talking about not being unable to collect the principal and interest; they’re exposed to potentially unlimited legal liability for the conduct of third parties, including exposure to jury awards of punitive damages.

    For trial lawyers, this could be as big as asbestos or breast implants. For purchasers of mortgage-backed securities and the Wall Street firms that sold them, it could turn into a multi-trillion-dollar nightmare.

  35. 41

    Roger Rabbit spews:

    @36 Remember WPPSS? That stands for Washington Public Power Supply System, which issued billions of dollars of bonds to build a series of nuclear power reactors, only one of which was completed. This occurred in the 1970s, when interest rates were high, and those bonds carried interest rates as high as 16 percent. When rates dropped, those bonds and the debt service (interest payments) on them were a potentially huge liability to a number of public utility districts. Ratepayers faced paying much higher electric rates for 50 years to come for electricity that would never be generated or delivered — they would get nothing for their money.

    Fortunately for the PUDs and ratepayers, the Manhattan law firms advising the Wall Street bond firms that bought and resold the WPPSS bonds fucked up. They were too cheap to associate local law firms to research local laws. And they missed a critical statute, whose effect was that the PUD boards, in authorizing the bonds, exceeded their legal authority. Consequently, the WPPSS bonds were invalid and couldn’t be enforced against anyone except WPPSS itself, which was bankrupt, so the bondholders instead of the PUDs and ratepayers ate the economic losses of the WPPSS debacle.

    What you have here in the SIVs is another fuckup by the Wall Street companies that buy, repackage, and resell debt. It’s basically a replay of their WPPSS fiasco. Once again, their customers are stuck with devalued or worthless debt owed by insolvent borrowers, and because of their screwup, the already-impaired collateral is even more impaired, and their customers may get stuck with large unanticipated legal costs and liabilities.

  36. 42

    Roger Rabbit spews:

    @37 Seattle’s housing downturn will merely be delayed. Seattle recovered from the Bush Recession later than other areas of the country, and our local economy and employment held up longer. But we’re subject to the same economic forces; we’re simply trailing behind the nation in the timing of the arrival of the fallout. It’s like being a little farther away from a nuclear blast; the fallout arrives later but it arrives.

  37. 43

    spews:

    Goldy, you wrote wrote: “And while the Ye Olde Seattle establishment bemoans the threat “vertical density” poses to our neighborhoods, the only realistic and palatable path toward “affordable housing” is to build more condos, townhouses and apartments… that is, short of a regional economic collapse.”

    It’s not the “old” establishment. But since it is clear that you drink from the fountain of “more condos = cheaper housing”, lets look at the facts.

    1) 15 Years of condo development has not resulted in more affordable housing.

    2) 15 years of destroying SFHs has decreased the amount of rental opportunities, especially in situations where several people can pool resources and share living space. That has been what has created an opportunity for many to live here who can’t afford the apartment rents or get into a mortgage.

    3) You have revealed you own bias as to why we should go with more density; all of your wealth is tied up in your house. The only way one can realize speculative wealth in property is to sell. Development drives up the prices of land.

    4) Years of neglect of programs and infrastructure to address issues such as affordable housing (I don’t see a Democratic majority rolling back rent control on the state level) or people who can’t afford a place to live–or are unable to work due to physical or mental health issues (just read the PI & Times for the prevailing attitude) is a large component of speculation of homes–“those people” drive down property values. We don’t allow humans to shit in public, but there is no call to sweep out the dogs and cats that do. That’s a sad statement on any claim to liberalism.

    The bottom line is that development will continue to draw people here that can afford it, and push people out who can’t. There is a word for that. People need to figure out how to create wealth through hard work, and less through speculation, because as you can see, an economy dependent on the latter isn’t sustainable.

  38. 44

    ratcityreprobate spews:

    @40 and 41 RR

    Interesting reading Roger, thanks. If they have no collateral and may be liable for damages then the investors are in even worse shape than if merely holding defaulted collateralized paper. Having spent the better part of 40 years doing commercial loan workouts I don’t have a lot of sympathy for them, documentation is boring but critical. And yes, I’m very familiar with the WPPS fiasco.

  39. 45

    palamedes spews:

    @12:

    I don’t know if sanity has returned to the home loan market so much as that greed has been punished, and the survivors are trying to ensure that they don’t become the next victims.

  40. 46

    Right Stuff spews:

    What Wall Street sold to banks and institutional investors like insurance companies and pension funds was a trillion dollars of unsecured loans.

    Those institutional investors and banks are not children, they either knew that there was “risk” with these instruments, and decided that the fast buck was worth it, or they were just stupid.

    Caveat Emptor…..

  41. 47

    compassionatelibertarian spews:

    Government intervention in the mortgage market is a horrible idea. If you were stupid enough to purchase a home with poor credit and an 3 year Option ARM with negative amortization for 6-7x your yearly salary, you SHOULD and WILL be punished by the forces of the free market for your incredible stupidity. You will be weeded out, your home foreclosed on and purchased by a savvy investor who “kept their powder dry” for the hard times, and be turned right back around to being a renter.

    Oh how I love capitalism! 6 months from now when all of these buffoons around here who cash-out refinanced their bubble-appreciated homes to buy a Lexus and a European vacation go belly-up, I’ll be there with the half a million dollars in cash and a 790 credit score to snap up some tasty properties at fire-sale prices.

    Like I have said previously: if in this region you bought housing in the last five years that was not 1) single-family/detached on a quarter acre or more, 2) not in Bellevue, the Gold Coast, Kirkland, or one of the established neighborhoods in Seattle (Laurelhurst, Madison Park, etc), you have grossly overpaid and will be taken to the cleaners on the value of your home.

    Happy Holidays!

  42. 48

    mark spews:

    Of course with all of the humility coming this way I’m
    sure property taxes will go down at least 10 percent
    right?

  43. 49

    ArtFart spews:

    You folks are dancing all around avoiding the elephant in the middle of the room: The “investors” who are getting stuck holding all these flaky mortgages are a lot of big, big financial institutions…like the bank where your paycheck gets auto-deposited, or your life or health-care insurance company, or the mutual-fund holding company that you’ve been putting your 401K payments into since your employer shitcanned your pension plan. The question now is whether there are going to be enough Arabs (you know, the cousins of those “islamo-fascists” we’re supposed to be killing off) willing to buy big chunks of all those institutions to keep them from going bust and closing their doors before y’all get your money out of ‘em.