Please, Shoot the Vultures, But Don’t Blame Them for Being Vultures!

Since Bernanke's "We have a small subprime" comment, in mid-2007, mortgage delinquency is up like 300%, unemployment is up like 100%, foreclosures off the charts, and the economy is in the tank. You cannot stick your head-in-the-sand and expect problems to go away, and new ones not to appear.

The let's "ignore housing" plan, the plan by default because there was no real plan to address housing ever put into action, has not brought us to this mess. Many who comment on the housing crisis publicly think this was the best course of action. Let them fall…let them fail…and let them rot.

The rot brings out the vultures: distressed asset buyers; distressed asset managers; distressed asset REO specialists. When this is all said and done, the lack of a viable solution will come to be viewed as far worse than the original problem.

Many loan mod firms are shady, dishonest and opportunistic in all of the bad ways, unfortunately, because no one of quality, substance and vision stepped up and delivered. These guys filled the void.

So, blame the narrow minded rhetoric by many who simply believe the best plan is no plan. Blame the lenders and services and regulators who can't get their hands around this problem because they are so busy covering their tracks and trying to turn this disaster into new profit, and don't necessarily blame the vultures.

Short sales, drop-bid sales, REO specialists, bad mod firms, bulk purchases of distressed assets, all of this ilk are the result of doing nothing about this problem. They are all vultures, no better than bad mod firms.

When I first wrote "The Plan to Repair Housing", I felt that the modification process could have been completed in about 6 months. There was enough talent and technology available to accomplish this feat. Not the process that lenders use today for modifications, there is no process today but a far simpler process, more direct to the problem, and more uniform.

My process would also have eliminated all (or most) of the vultures, by eliminating much of the economic road-kill.

I have a client, who started his own modification, with my guidance in February, 2009. In May, after getting nowhere for three months, he called me back and I took over his case. It’s almost August, and there still is no lender / servicer analyst in place to speak with. By the way, this is a FNMA loan. The client has provided their personal information twice thus far… it keeps expiring, which creates delays while updated info is sent back into the lender's system.

These clients are lucky… they still have their original jobs, just not their original incomes. They’re down about 35% from their income level of 2.5 years ago. They also have a few alligators to deal with soon. The delays in the modification are going to soon lead to other issues and conflicts as other creditors seek satisfaction through legal action.

There is simply no excuse for the delays, ineffective and confused policies and procedures, and deafening silence, which have become the hallmark of the industry response to this crisis.

Similar to the concept that there are “two sides to a trade”, there are two sides to a crisis. Many of the individuals who were part of the original problem, at all levels, top-to-bottom, executive to salesman, are now part of the new problem. VULTURES can only work one way, one side of the trade, the problem side.

My original concept was “Swift, Simple and Sufficient”: Swift, in that it could have been completed in 6 months; Simple, in that it was a one-size-fits-all solution, utilizing exiting mortgage concepts; Sufficient, in that I always saw the entire problem as being very large. I saw the whole iceberg.

Properly implemented, my “Plan”, or one with similar attributes, would have eliminated the vultures. Don’t complain…do something about it… become part of the real solution.

Comments

[Mad Hedge F...:]

If you have had any doubt that commercial real estate is not the place to be putting your capital right now, take a look at the latest Q2 industry data. The vacancy rate jumped from 19.9% to 21.4%. Net negative absorption nearly doubled from 600,000 sq. ft. to 1 million sq. ft., while 723,896 in new space was completed. Closed sales plummeted from $87.2 million, to $45.9 million. Paying tenants looking to add space are staying away from the market in droves, easily renegotiating reductions in lease rates instead of committing to risky new purchases. The inventory glut is dragging prices down, scaring off marginal lenders. Several high profile bankruptcies of trophy properties have only exacerbated the pain. The capital drought looks likes it will get worse before it gets better. I would love to recommend shorts here, but the listed REIT’s have already been so crushed, I’d rather stay away. Look at the chart for Prologis (PLD). Pilots will recognize all of this as an irrecoverable flat spin, a twin pilot’s worst nightmare. Non-pilots should watch Top Gun.

Jul 21 01:17 PM

[derryl:]

Mr. Preston,
I just read your plan and the problem I see is that, while you acknowledge government programs and bad lending artificially inflated housing demand and prices, your plan seeks to stabilize that demand and prices at current levels. I think prices need to fall low enough to attract buyers who can qualify for a real old style 20% down no 'features' mortgage. Supporting the bubble punishes new buyers who can afford payments on affordable houses but who are effectively locked out by inflated prices and tighter lending standards.

There is no banking god who says insolvent banks MUST be shut down and liquidated, unless the BIS and Basel II are acting as that god. But Paulson's $700B Wall St bailout proves that even god's will can be thwarted if there is sufficient confusion and taxpayer money available. What I'm saying is that declining real estate prices do no necessarily cause bank failures. Forcing a failure or relaxing standards so the bank can continue are human decisions made by banking regulators. So artificially supporting bubbled real estate prices cannot be justified on grounds of systemic risk to banking.

Jul 22 01:41 AM

[John Preston:]

Actually, the real plan was to stabilize the prices....let the economy cool and find new footing....and let lenders re-invent the mortgage process in a more safe and sane manner.....

The problem I saw...which is now a reality, is that dramtically falling prices would lead to excessive reduction on consumption and a severe jobs problem.....

My mental model was to find support for prices, in todays world, somwhere above current levels..but obviously somewhere below the peak values....a mid-point if you will....and allow the re-invented lending process to finish the process of establishing prices in a more rational evirionment.

It is my feeling that the heights of bubbles, and the depths of recessions, are the wrongplaces to try and define normal and to try and apply the big "fix"....


On Jul 22 01:41 AM derryl wrote:

> Mr. Preston,
> I just read your plan and the problem I see is that, while you acknowledge
> government programs and bad lending artificially inflated housing
> demand and prices, your plan seeks to stabilize that demand and prices
> at current levels. I think prices need to fall low enough to attract
> buyers who can qualify for a real old style 20% down no 'features'
> mortgage. Supporting the bubble punishes new buyers who can afford
> payments on affordable houses but who are effectively locked out
> by inflated prices and tighter lending standards.
>
> There is no banking god who says insolvent banks MUST be shut down
> and liquidated, unless the BIS and Basel II are acting as that god.
> But Paulson's $700B Wall St bailout proves that even god's will can
> be thwarted if there is sufficient confusion and taxpayer money available.
> What I'm saying is that declining real estate prices do no necessarily
> cause bank failures. Forcing a failure or relaxing standards so the
> bank can continue are human decisions made by banking regulators.
> So artificially supporting bubbled real estate prices cannot be justified
> on grounds of systemic risk to banking.

Jul 22 09:40 AM

[MartyT:]

I think your plan is a good plan and would help if it were properly implemented. At this time I believe that neither our elected government officials nor our hired government employees are capable fo executing or even agreeing to execute any plan regardless of any plan's merits.

I believe the main reason our goverment is unable to execute any plan is because:

1) Many individuals care more about personal gain than the good fo the country.
2) Many individuals would rather see their opponents fail than see the country succeed.
3) Many individuals are just too dumb to understand their jobs.
4) Many individuals are just too lazy and unmotivated to work hard.

When you add all four of those reasons togethor is difficult to get anything done on a national scale done.

Jul 22 10:42 AM