Month in Review: October 2007
[previous months in review available here: Sep 07, Aug 07, Jul 07, Jun 07, May 07, Apr 07, Mar 07, Feb 07, Jan 07.]
Age 54, who are you?
In October, I turned 54, and so it’s perhaps with thoughts of senescence in mind that I wrote a two-part post, How a program ages: the six stages of public perception, and Part 2, maturity and decline, which opened:
More than twenty years ago, at a housing conference I co-chaired where I was describing a then-nifty innovation in affordable housing finance, someone tossed up the doubting-Thomas question, “Why get in now? Why not wait until things are clearer?”
I’m not ready to take a position on the matter
“Because,” I extemporaneously shot back without thinking, “every HUD program goes through six stages — conceptualization, enactment, chaos, codification, scandal and shutdown.”
The audience broke out in laughter.
“Chaos, codification, scandal and … what?”
Yet I was dead serious [Pretty rare! -- Ed.], and it’s still true today.
“Look, the beard shows I’m serious!”
Meanwhile, earlier that month I expressed outrage at HUD’s new we-pay-if-we-feel-like-it contract language, in Moral bankruptcy: Part 1, the maze without the exits, and Part 2, the camel’s back
Have you got this? HUD fails to fund a contract to which HUD is a party. What must the owner do – why, go ask HUD to evaluate whether HUD’s failure allows the owner to opt out?
Mirror, mirror, on the wall
Who’s the funder of them all?
Naturally enough, the ever-evolving subprime mess occupied a solid week’s worth of posting, first in some practical advice to delinquent borrowers in Subprime: “Why are you in trouble?”, and Subprime: “What’s the best way forward?”
You thought you could afford the payments, but you can’t. We’ve all spent more than we should. We’ve all under-budgeted and had to make the embarrassed phone call for abashed request for financial help. It happens – even though nothing specifically bad occurred, your financial eyes were bigger than your wallet. So there you are, having over-reached. The question is, How do you react when you’re over-extended?
“Character is what you are in the dark!”
This argument also works better if, up to now, you’ve followed the Abraham Lincoln approach to debt service: making full payment some of the time, and some payment all of the time. Again, the point is not what you can’t afford that counts, it’s what you can.
You fibbed about your income. This is the second-worst excuse, because you got yourself into this mess. Why should we now bail you out when you got us in trouble?
Now, if you fibbed about your income, you can’t bury it. It’s going to come out.
Hey, Sully, remember when I said I would kill you last?
I lied.
You’re better off, humiliating and self-incriminatory as it may be to admit, to tell the lender and fling yourself on the mercy of the court.
The other multi-part post looked through the telescope’s other end, exploring why loan modifications should be in the lenders’ interest, in Compared to what? Part 1, the fix we’re in, Part 2, masters and specials, and Part 3, motivating modifications:
Markets don’t stop while people wait for regulators to develop the appropriate regulation (to say nothing of the difficulty of crafting the right regulation). As time ticks along, the only winner is the foreclosure option, which is usually bad for everybody and destabilizes neighborhoods. Homeownership is the hillside sod of society, and we want to keep the economic hills from eroding.
Even though debt normally speaks with a voice of distrust, workouts and loan modifications are inherently about trust — regaining trust, in most cases. The asset manager who recommends a workout or loan modification is taking a personal risk. In my experience, it’s very seldom done for ulterior motives [You've never worked in a subprime bucket shop! -- Ed.].
Doing so runs a substantial risk of consumers being used to prop up the mortgage industry in the short term by keeping financially strapped consumers in homes they cannot hope to afford.
Ay, there’s the rub — but even using the professor’s own figures, two thirds of those receiving modifications will be current two years later. Saving two out of three is quite good, particularly as the alternative — a cookie-cutter approach — is guaranteed to distort the markets, as the professor acknowledges:
You’re all just alike
If legislators or regulators require modifications to some group of borrowers regardless of their fundamental ability to make the loan payments successfully well into the future, that balance will be upset.
These borrowers are already in trouble.
Without applying even existing regulations toward regulatory oversight or transparency in loan modification practices, however, it is hard to imagine long-term positive benefits for borrowers.
Oh? How I might behave before I have put my foot in the bear trap is really quite different from how I behave after the jaws have swung shut.
Say, “ouch!”
You never want a workout to be “normal.” Yes, there are neighborhood risks, but promoting moral hazard will not help those. Furthermore, zero equity ownership speculators were not meaningful community members anyway. Nonetheless, occupancy is a reasonable goal, but can be separated from mortgages and ownership by moving toward rental policy.
True — and I’m a major proponent of a permanent professional rental sector delivering sustainable affordable housing — but it’s also true that homeownership changes behavior for the better. Taking it away from people who’ve got it for the first time is worse than never having let them have it. This it also strikes many as inequitable — which is why we see so much effort being made at the Federal and state level to create soft-landing or second-chance refinancing programs.
I focused on capital movements by observing the curious boost one gets for admitting large losses in putting the trash out, and the challenge of getting capital and resources to stick in poor countries in Filling a sieve:
It’ll fill eventually, won’t it?
That, says Raymond W. Baker of the Global Financial Integrity Project, is why foreign aid fails — because even faster than it is poured into deserving countries, it pours out via illicit financial transactions.
Raymond W. Baker
As he put it in a recent speech:
I want to talk about two things this morning. One, the international structure that supports the flow of illicit money across borders, and two the harmful impact these illicit flows have on economic growth and poverty alleviation in poorer countries.
[Yes, patient reader, this comes back to housing. In the end, everything does J.]
Beyond housing, cities are a network of infrastructure, all of which costs money one way or another, as highlighted in my three-part reviewing various cities’ efforts to get free municipal wi-fi, in There ain’t no such thing as free infrastructure: Part 1, why, Part 2, downstream, and Part 3, partnership:
The Law of Economic Gravity implies that the minimum market-clearing price for an ongoing product or service can be expressed by a simple equation:
Capital cost ties together (x) the hard cost of building the system or infrastructure, times (y) the weighted average cost of capital. Since capital recovery occurs over an interval, when that interval is completed, capital recovery cost drops dramatically.
Don’t laugh, it’s paid for
The phone and cable companies have already recovered the initial billions they’ve spent over decades, making it possible to set prices at levels that cannot be matched.
Here is the user-fee conundrum in a different form: an installed infrastructure drives down the market price of a networked product because the cost to recover capital investment can be low indeed. That’s good for consumers, and for society generally. Yet that inherent pricing advantage, and the market-standards-network monopoly effects, but tend to create a natural advantage to incumbency.
My backyard squirrels provided the messy inspiration for a property-rights fable in Property rights: Part 1, whose nuts? and Property rights: Part 2, as the twig is bent:
Somewhere in what I consider his best novel, my science fiction writing colleague and fellow workshop participant Jim Morrow wrote a great line:
People say science doesn’t have all the answers.
Science does have all the answers. We just don’t have all the science.
The answers will be clear to Morrow
Regarding boundaries, the problem isn’t that the law doesn’t have all the answers, it’s that opening up dimensionality and interdependence means we don’t have all the law. We’re going to have to forge it. Interdependence renders the old simple-fence boundary basically useless.
I made fun of a mayor in Don’t strain your arm, explored the remarkable legitimization of homelessness that is bit by bit creeping into Los Angeles jurisprudence in American pavement dwellers, and looked at the importance of capital in Or pay me later: property reserves. Later in the month, I took a trip to Mumbai to look at slums, so several posts dealt with cities in one form or another, starting with one stimulated by picking up the newspaper in a hell-for-leather Mumbai auto-rickshaw, in Cities are interdependent
Among the many challenges of improving cities is simply this – compared with rural areas, cities are enormously more complex ecosystems. Everything is connected to everything else, and the bigger the city, the more connections there are, and the more immediate and stark the contrasts and linkages.
Mumbai,
And then highlighting the importance of the social networks inherent in slums, in Cities’ cryptobiotica: Part 1, the crust, and Part 2, don’t bust:
Desert cryptobiotica gets crushed because it cannot speak.
Beware the wrecking ball, my son.
Slumdwellers can speak; in the voting booth wealth disappears. People who live in slums are just as smart as any of us. Even though individual slumdwellers are as nothing politically, when they join together and take control of their vote bank potential, they become a force that the highest officials respond to.
Sometimes the voice is anger and destruction.
Many date the fall of apartheid from the
Mumbai’s airport, with the slums right up against it
It was a demonstration of distributed network intelligence, and it worked.
Just as government is a factory that produces two products (money and laws), politics is a game with two counters, money and votes. Individually, slumdwellers can be ignored; they are effective only when collective.
We’re voters too!
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