Month in Review, December 2010

February 16, 2011 | Apartments, Foreclosure, Global news, GSEs, Haiti, India, Management, Microfinance, Speculation

 [Previous Months in Review available here: [Nov 10, Oct 10, Sep 10, Aug 10, Jul 10, Jun 10, May 2010, Apr 10, Mar 10, Feb 10, Jan 10]


By: David A. Smith 


What could possibly go wrong?


Seeking alternatives to further depressing stories about the bleak state of the housing market and economy, I took time in December for a little primer on the basics of property-managing multifamily dwellings, in The cobbler’s kids: Part 1, a fool for a client?, and Part 2, some more equal than others:


Mr. Iacono is about to learn the difference between ownership control and property management.  The former is an essential function that should be handled by the condo board, the latter is a technical activity that can readily be contracted.


Yet, he said, given all the work involved and the potential discomfort in having to act as arbiters in disputes among neighbors who are also friends, the board has been discussing the possibility of turning operations over to a management company.


Until you do it, it looks easy; then it looks harder, and the self-managed building becomes the un-managed building, the cobbler’s kids going unshod.


Don’ need no shoes anyway


It has gone so far as to interview some candidates but has yet to make a decision.


Think about what you earn in your day job, and whether you really want a lower-paying night job.


He that teacheth himself has a fool for a master.

– Benjamin Franklin


Being an autodidact is overrated


Likewise, one can make finely wrought individual decisions if one consciously takes a small-scale approach to a large-scale problem, as revealed in Cottage underwriting:


One loan at a time, careful and slow


Tom’s a good fellow, so I trust he will take this question in the right spirit – just what is the right way, Tom?


Why David, you should know that the right way is the way we do it, of course


Global news figured prominently in December, as we examined the effects of capital on developers and governments in three countries, starting with Haiti, where It’s not what you’re doing, it’s what you’re NOT doing:


“To continue in Haiti, we need to be partners and have to be a part of the reconstruction plan, but I don’t think anybody knows what those plans are,” he says.


The NGOs concentrate on going about the business of emergency relief, while choosing to ignore the challenges of nation-building and creation of governance and systems – for many reasons:


·         NGOs are not governmental bodies and may shy away from engaging in governmentally-related activities.

·         NGOs want to deliver ‘relief widgets’ and see anything other than relief widgets as distractions and deadweight.

·         NGOs don’t know how to engage constructively with government

·         NGOs are afraid of being entangled in corruption and bribery.


What corruption?  Do you see any corruption?


All are good reasons – all are the most natural thing in the world.  Taken together, they add up to a massive failure of engagement, and a resulting waste of all that wonderful technology and generous aid.


From Haiti we jumped to India, where to understand the Andhra Pradesh microloan payment boycott, I quoted extensively from David Roodman’s definitive investigation: Part 1, Prosecution, Part 2, Defense, and Part 3, Verdict:


A state of microloan non-payment


In the first two-thirds of his terrific post, When Indian Elephants Fight, David Roodman of the Center for Global Development has done first-rate work uncovering not only the market facts – bad behavior by microfinance institutions in Andhra Pradesh – but also the shockingly vindictive, ill-thought, and counterproductive ordinance the state rushed through in an infamous day, October 14.  Now Mr. Roodman seeks to give the legislators their due:


The Ordinance has some good features:


But he has his good points too, Mrs. Lincoln


·         A requirement for clear interest rate disclosure

·         A “fast track” court system to resolve disputes

·         A definition of coercion.


After this faintest of praise, Mr. Roodman then dismantles what’s left of the ordinance’s credibility:


Still, it “leaves a lot to be desired,” according to N. Srinivasan, author of the 2010 microfinance State of the Sector report.  I concur.




The World Bank cannot be happy with these developments. (I haven’t asked my World Bank friends, not wishing to put them on the spot.)


Still, the true bottom line is this:


1. Credit

2. The poor, and

3. Business-like insistence on regular repayment


are a dangerous combination.


An excellent distillation – pick any two.



Change any one those three elements, and it is safer: savings instead of credit (cf. Gates Foundation), the well-off instead of the poor, the flexible and somewhat subsidized communality of SHGs instead of the hard-nosed efficiency of MFIs. If microcredit is to safely serve the poor, it must soften its edges. There are many ways to do that.


The scaling of microfinance was over-engineered and over-revved.


Finally, we looked at China, finding scary data by picking up Another piece of the Chinese housing puzzle: Part 1, pumping up the inflation, and Part 2, collapsing without crashing?:


See something that frightens you?


As I’ve previously posted, China’s reliance on real estate transfer taxes and its insane cheap credit provision to state-owned development companies means that money is chasing itself throughout the system:


We’re all chasing each other



This system is unsustainable – and the IMF agrees with my assessment:


The IMF said land sales make up 30% of local government revenue in Beijing. This has echoes of Ireland where “fair weather” property taxes disguised the erosion of state finances.


Exactly – a transaction-based real estate taxation system amplifies cyclicality instead of dampening it.


Back home, our markets have already taken their beating –


Say, none of them are in authority any more, are they?


– which for a lender raises the thorny question, What’s worse than not being able to foreclose?:


A lender, you see, doesn’t want to own property.  The lender wants to own pieces of paper that represent financial obligations by a responsible counterparty who will regularly send other pieces of paper (known as checks), in stipulated amounts at stipulated times.  To a lender, this pure-DNA expression of value – numbers on a page or a screen – is the natural state of things, quantifiable, reliable, and safe.  Owning actual bricks and sticks is yucky.



Real estate ownership?  Yu-uck.


Yet it gets worse, for even if the lender can outsource the work responsibility to a servicer or collection agent, the servicer must physically recover the property:  Realizing the asset – turning it back into money, which is what the lender wants – involves a multi-step process:


1.     Declare the default.  Spend money on lawyers.

2.     Complete the foreclosure.  Spend money on lawyers.

3.     Clear the arrears and liens.  Spend money on utility and tax bills.

4.     Repair damages and make ready for sale.  Spend money on windows, appliances, security guards, groundskeepers.

5.     Market the home.  Spend money prepping brokers.

6.     Sell the home for cash.  Receive money.


Reading that post, you might think lenders would welcome a self-dubbed good Samaritan who will take it upon himself to do for a property in foreclosure what he thinks the lender would want done.  That road to salvation is, however, paved with good intentions:


Soon to be repaved with stimulus money


Adverse possession is predicated on the concept of property abandonment.  Obviously the delinquent homeowners have abandoned the properties, but their lenders have not.  That the lenders are moving slowly is no invalidation of their title.


[Mr. Guerette]‘s tenants confirmed that after he was arrested in April, he told them they could stop paying rent. Even if he is not allowed to keep taking homes, he said, why should needy people not be matched with homes left to decay?


Thus Mr. Guerette compounds his felony from his own actions to those of his tenants, whom he now incites to trespass.  The moral slope is slippery indeed.


“Men may keep a sort of level of good, but no man has ever been able to keep on one level of evil. That road goes down and down. “– G. K. Chesterton


“There are over 4,000 homeless in Broward, and the number is growing all the time,” he said. “I thought I could use these homes and put people into them. It could be a good thing.”


Good intentions grant no immunity, but perhaps they justify leniency.  Were I representing the unnamed banks in question, I’d be interested in harnessing Mr. Guerette’s good intentions while insulating myself from the risk of his moral erosion – say, by giving Mr. Guerettte a suspended sentence and placing him on probation, so long as he remained an agent on the bank’s behalf.  He wants to perform a service – he just took property to do it.


“So it wasn’t mine – so what?”


For private properties, restructuring of debts occurs via foreclosure or with the filing of bankruptcy, a route available to municipalities (with state permission) as well, but as of now states cannot, so we need to Enable state bankruptcy: Part 1, Why, and Part 2, How:


In practical terms, both groups [bondholders and public-employee pensioners] are stuck.  Both also depend for their eventual repayment on the state’s solvency.  Both therefore will benefit if the state can be relieved of a tax burden so weighty it drives out business and immigration – yet neither wants to compromise before the other does.  Hence the need for bankruptcy.


No, you concede first


Bankruptcy isn’t perfect, but it’s far superior to any of the alternatives currently on the table. If Congress does its part by enacting a new bankruptcy chapter for states, Jerry Brown will be in a position to do his part by using it.


[Update: AHI gets results! Senator John Cornyn is exploring Congressional authorization of state bankruptcy. – Ed.]


I also took apart an intriguing proposal to eliminate Fannie Mae and Freddie Mac that works with a peculiar kind of logic, Assume no crisis, and presto!:


Emil Henry Jr., who recently penned a Wall Street Journal op-ed entitled with the provocative nostrum “How to Shut Down Fannie and Freddie,” has real credentials – a stint as United States Assistant Secretary of the Treasury for Financial Institutions, working for Treasury Secretaries John Snow and Henry Paulson from October 2005 to March 2007 – so he must know that his proffered recipe is absurdly simplistic, predicated as it is on a flat declarative statement that is both hypothetical and really risky if wrong:


The Treasury Department can stop rubber-stamping their debt issuance at any time.


There will be a private market ready to absorb the securities currently held by the GSEs.


As I put it, in language reminiscent of the critical moment in The Wedding Singer:


“Once again, things that could’ve been brought to my attention YESTERDAY!”


When a policy is bad, I’m all for exiting it, and when it has historically been addictive, I’m all for steady withdrawal – as the UK did when it gradually phased out the mortgage interest deduction – but not now.  We kick a noxious habit when the economy is good, not when it’s hanging by a thread. And we certainly don’t want to kick up borrowing costs for everyone in America, not when millions of homes are underwater and consumer confidence is at historic lows. 


Maybe we shouldn’t have revved the engine up to 110 mph on a curving road – but we did – and to recommend abruptly slamming on the brakes now is at best naive.


Not the time for a sudden stop




Comment from Tony Orlando
Date: February 16, 2011, 1:01 pm

Well said� Great information, keep up the great work!

Comment from Tony_Orlando
Date: February 16, 2011, 1:45 pm

Hi. I read a few of your other posts and wanted to know if you would be interested in exchanging blogroll links?