Month in Review, September 2008: Part 2, everything but the GSEs
[Previous Months in Review available here: Aug 08, Jul 08, Jun 08, May 08, Apr 08, Mar 08, Feb 08, Jan 08]
[Continued from yesterday’s Part 1]
So chock-full of events was September that, like FDR, I’m breaking precedent in times of emergency by going to a two-part Month in Review:
If
Among that mountain of words on the GSEs and Treasury’s interventions, I found time for a little theory and practice, starting with The risk of complicated structures, and a possible epitaph for Securitization, Mark 1:
In another essay, The Window in Context, Dr. Padfield observes
“Designing a structure that is robust enough to [work even if] badly built and intermittently maintained is just as important to the life cycle costs as is the energy consumption from day to day.”
These principles apply equally well to financial structures. When I was young and foolish, I liked very complex financial rules, incentives, and compensation structures. As I’ve had more experience [you mean, aged — Ed.], I’ve simplified rulemaking extensively, believing that simple rules not only after a better chance of being followed – fuzzy boundaries are bad boundaries – but also, they serve as better motivation. That’s led me to this rule of thumb on joint ventures:
Rule number 1: measure twice, cut once
Staying with topicality, I looked at a variant way of changing property ownership without necessarily changing its occupancy, in Rent to own:
What do you do when you’ve got a lovely, empty condo?
Ready for immediate occupancy!
The worst thing the condos can do is sit vacant for a protracted interval. Not only does this cost you operating money, an unoccupied property feels unloved, and people shy away from moving in there. So, as illustrated by this recent Boston Globe story, you offer a ‘test drive’, by inviting people to become renters in hopes of later becoming owners:
Rent-to-own might be a solution to the various inventive tort claims offered by delinquent borrowers in Any which way you can?, or the unhappy family whose story was credulously profiled in the Boston Globe, as recounted in A duty to negotiate? Part 1: the story:
Using a loan I borrow from you, I buy a house that I now cannot pay for. I fall into default, and you send me notices of default, but I want to renegotiate.
Are you obligated to negotiate with me?
Okay now, bank, let’s negotiate
That appears to be the premise behind litigation recently filed by Lori and Mark Pestana of
A claim I questioned more skeptically in Part 2: the claim:
Trying to take me for a ride?
4. Even assuming arguendo that the Pestanas’ facts are true, are they entitled to relief? As usual, when one slows down a complaint, the questions are a little more dicey. Let me frame it as I deduce the Pestanas want it to be seen:
“We were current on our mortgage, and we could have kept making the payments. But we were told that we could get a break, and we acted on the advice of WaMu’s legally authorized representative. As a result of that detrimental reliance, we incurred penalties and surcharges we wouldn’t have had to, and now we can’t get back to covering our loan. Our default is your fault.”
In blue I’ve highlighted the five elements in the logic chain. The Pestanas, to gain my sympathy if not judicial relief, need to show that the hole they are in is not their doing but WaMu’s – or, if not WaMu the bank, then WaMu’s duly authorized agents, the loan servicers.
Any good lawyer knows that suing simply on defense – to stop someone from doing something – is unbalanced, you have to sue for money on some basis, if only to balance the scales. Hence the conjured claim of damaged credit which, as I’ve noted, relies on the supposition that the Pestanas could have kept paying the loan but didn’t because WaMu told them to.
Should WaMu settle? David-and-Goliath litigation is asymmetric in two ways:
Goliath has several advantages: (1) it has experience and procedures, whereas David is facing everything for the first time, (2) it’s used to litigation and can treat it dispassionately, whereas litigation scares most normal people, and the want to exit it as quickly as possible, and (3) to the litigator, it’s only money.
How big is your legal budget?
David likewise has some advantages: (1) it automatically gains the sympathy vote, which matters both in the court of public opinion and in an actual state court, where judges are usually inclined to give the smaller party the benefit of any doubt, (2) it can tarnish Goliath’s reputation, which is a weapon of variable potency depending on how badly Goliath cares about its good name, (3) if the amount in dispute is small compared with the costs of litigating to a resolution, Goliath may be willing to settle on a purely utilitarian calculation.
“Maybe I should have considered settling …”
My advice would be predicated on the Pestanas’ demonstrating that they really could make payments restored at the original level, and that they did do the things they say they did. I’m being true to the two questions I asked in a post a year ago, before the Pestanas defaulted:
Why are you in trouble? Whatever explanation you give, it had better be the truth.
What’s the best way forward? Your goal is to demonstrate that foreclosure, although administratively reliable, is a very risky financial path, whereas modifying with you, however it may sting, is reliable.
Find your way back to paying your home loan
With rental due to make a comeback, I profiled its history in The prejudice against rental:
Throughout my professional career, I’ve dealt with a curious prejudice – against rental housing generally, and against affordable rental in particular.
In country after country, situation after situation, I’ve found that when people think of housing, they instinctively equate it with homeownership, and when making distinctions, ownership is seen as good, rental as bad. A great set of examples, of stupefying bluntness, comes from a 1922 booklet by M. W. Folsom, “The Facts about Home Owning“, from A Home of Your Own.
, and The truth about rental:
Everybody needs rental at some time in their lives. While there are plenty of benefits of homeownership, in our modern world – and this is true both for the developed, economic world and the emerging nations and cities of the global south – some part of everyone’s life is spent in rented accommodations.
Most people start their families in rental and move to owned homes
* If we don’t need rental and roommates immediately after high school or college, we need rental when we’re a young single or couple trying to minimize our monthly expenditures.
* We need rental when we care about labor mobility to follow the jobs and to create our careers.
* We need rental when we want to cut our housing expenditure and our housing consumption.
* We need rental when the children are grown and we want to move out of a too-big house and back into urban living, for a short walk to a longer life.
* We need rental as our physical and psychological horizons shrink, and we want others to take care of us
In lighter fare, I questioned the expanded mandate for Community Preservation Act funds in The money was just sitting there and chronicled my adventure in teaching at the world-renowned Boulder Institute for Microfinance in Turin, Italy, in Microfinance and the housing value chain: Part 1, follow your customer, and Part 2, tweak what you do now:
Somewhere in The Moon is a Harsh Mistress, Heinlein describes his intellectual hero Professor Bernardo de la Paz working as an itinerant teacher on the Moon, teaching anything to anybody, by reading up furiously and staying a few weeks ahead of his syllabus. It was with something not entirely dissimilar that I put together, and taught, a syllabus on Mortgages for the Poor; An Overview of Products and Supporting Infrastructure at the world-famous Boulder Microfinance Training Program (MFT), which after fourteen years has become the global standard for training in microfinance.
I figured the students would be apprehensive.
I have to make housing loans?
As I said to them about five minutes into the course:
To a housing lender, a microfinance loan is a tiny amount, with an exorbitant interest rate, for an insignificant interval, and with no collateral – hence really risky.
Having paused just long enough for them to wonder, I went on:
Of course, to a microlender, a housing loan is a huge sum, with a minuscule interest rate, over a really long interval, and with no knowledge of the borrower – hence really risky.
Providing something of a breather from current events, I started in on a multi-part History of public housing: Part 1, the Puritans, and Part 2, the progressives:
Enough with the GSE posts already!
Because urban land’s value rises directly as cities grow and become more dense, the rise of cities is always accompanied by an upsurge in slums – and by a corresponding rise in reformers.
Hull House, the best-known nineteenth-century American social-housing experiment
In the 1890s, Hull-House was located in the midst of a densely populated urban neighborhood peopled by Italian, Irish, German, Greek, Bohemian, and Russian and Polish Jewish immigrants. During the 1920s, African Americans and Mexicans began to put down roots in the neighborhood and joined the clubs and activities at Hull-House. Jane Addams and the Hull-House residents provided kindergarten and day care facilities for the children of working mothers; an employment bureau; an art gallery; libraries; English and citizenship classes; and theater, music and art classes. As the complex expanded to include thirteen buildings, Hull-House supported more clubs and activities such as a
Like others of its kind, Hull House subsisted on donations. The Progressives were encountering the Law of Economic Gravity as it applies to affordable housing: affordable housing always costs money, because there is always a cost-value gap. Markets always clear, and well-located urban land always has a value that prices it out of reach for affordability.
Late nineteenth-century poorhouse in
To a Progressive, a market force is something to be addressed through the power of (enlightened) government, and it wasn’t too long before the Progressives’ efforts bore fruit: the Massachusetts Constitution (older than the US Constitution, I proudly note) was amended to empower the state —
“to take land and to hold, improve, subdivide, build upon, and sell the same, for the purpose of relieving congestion of population and providing homes for citizens.” Page 90
Inside the poorhouse, late nineteenth century
This is the first eminent-domain law that I’ve encountered for the purpose of slum improvement, and it’s significant that it includes two ideas: (1) improving urban neighborhoods, and (2) providing affordable housing. Are we trying to fix busted neighborhoods, or are we trying to cure urban poverty? Though they often overlap, they’re not the same at all as they lead to quite different interventions and quite different metrics of success – yet, as we’ll see, these two will be intertwined throughout the history of eminent domain, and are still intertwined today.
Fixing neighborhoods and housing the poor are intertwined