By:David A. Smith

 

 

In those moments where you’re not quite sure if the undead are really dead, dead, don’t get all stingy with your bullets. I mean, one more clean shot to the head, and this lady could have avoided becoming a human Happy Meal. Woulda … coulda … shoulda.

– Columbus, from Zombieland

 

In its effort to be trendy and vivid, Reuters (March 28, 2013) re-invoked a metaphor it had first used back on Reuters (January 10, 2013) (red font) describing the consequences of defaults, whether strategic or unstrategic, and mortgages that were more recourse than the borrowers expected:

 

Always make sure

 

Special Report: The latest foreclosure horror: the zombie title

 

Columbus, Ohio (Reuters) – Joseph Keller doesn’t expect he’ll live to see the end of 2013. He blames the house at 190 Avondale Avenue.

 

Five years ago, Keller, 10 months behind on his mortgage payments, received notice of a foreclosure judgment from JP Morgan Chase. In a few weeks, the bank said, his three-story house with gray vinyl siding in Columbus, Ohio, would be put up for auction at a sheriff’s sale.

 

In this story one sympathizes with the protagonists, even though they repeatedly ignored Survival Rule Two. 

 

The 58-year-old former social worker and his wife, Jennifer, packed up their home of 13 years and moved in with their daughter.

 

That was understandable – how depressing to live in a house you have been told will be foreclosed – though unwise, because Mr. Keller failed to look behind him, and while that might have been wise for Lot’s Wife and Satchel Paige, it was for Mr. Keller a mistake:

 

The home they thought dead, now decaying

 

Joseph thought he would never have anything to do with the house again. And for about a year, he didn’t.

 

Then it started to stalk him.

 

First, in 2010, the county sued Keller because the house, already picked clean by scavengers, was in a shambles, its hanging gutters and collapsed garage in violation of local housing code.

 

Here the metaphor falters, for it wasn’t the house that stalked the Kellers, it was those who attached claims to the house; if anyone was a zombie, it was they.

 

Then the tax collector started sending Keller notices about mounting back taxes, sewer fees and bills for weed and waste removal. And last year, Chase’s debt collector began pressing Keller to pay his mortgage, which had swollen, with penalties and fees, from $62,100 to $84,195.

 

Some years ago, I warned against ‘strategic mortgage default’ (if in fact it ever existed, as opposed to default under duress); and even before then, I laid out rules for a delinquent subprime borrower.  One such was simple: stay in touch with the lender, and be part of the solution.  That included verifying every step of the way:

 

Keller continues to bear responsibility for the house because on December 23, 2008 – about two months after he received Chase’s notice of sale – the bank filed to dismiss the foreclosure judgment and the order of sale. Chase said it sent Keller a copy of its court filing on December 9, 2008. Keller says he never received any notification. Either way, his name remained on the property title.

 

Whether Mr. Keller was notified should be clearly proven one way or another; banks send these notices certified mail or using some other service that proves delivery and receipt.  If it had not, the Kellers should have been able to stay, and frankly should have stayed:

 

Abandoned multi-home dwelling, Chicago

 

Since 2006, 10 million homes have fallen into foreclosure, according to RealtyTrac, a number that in earlier, more stable times would have taken nearly two decades to reach. Of those foreclosures, more than 2 million have never come out. Some may be occupied by owners who have been living gratis. Others have been caught up in what is now known as the robo-signing scandal, when banks spun out reams of fraudulent documents to foreclose quickly on as many homeowners as they could.

 

Unfortunately, it has now become clear many people did not confirm their process completion.

 

More than 300,000 homes are foreclosed “zombies,” study says

 

ORLANDO, FloridaA national survey found 301,874 ‘zombie’ properties dotting the U.S. landscape in which homeowners in foreclosure have moved out, leaving vacant property susceptible to vandalism and degradation.

 

Sorry to disappoint Reuters, but the properties aren’t zombies.  Wikipedia’s definition is as good as any:

 

A zombie is an “animated corpse resurrected by mystical means, such as witchcraft”.  In modern times, the term “zombie” has been applied to an undead being in horror fiction, largely drawn from George A. Romero’s 1968 film Night of the Living Dead.  They have appeared as plot devices in various books, films, television shows, and video games.

 

While zombies may a wonderful plot device (people who turn into demons, people whom one must unhesitatingly kill) and societal metaphor (choose your opposing group you wish to dehumanize, and presto), empty houses have little in common with them.  A better metaphor, one more familiar and less threatening, is the abandoned prairie dog burrow:

 

Move out for a minute, and you have no idea who’ll move in

 

Abandoned property becomes a convenient resting place or stopgap for all sorts of interlopers who appreciate the convenience of a ready-move-in location, and who have little or no interest in maintaining the property.

 

Once a bank walks away from a foreclosure, the real rot begins. Living rooms turn into meth labs. Falling shingles menace passers-by.

 

Empty homes create clandestine occupancy and become houses of crime. 

 

Zombie properties can be easy to spot as they deteriorate into neighborhood eyesores –

Let’s be clear; homes do not deteriorate that rapidly by themselves. 

 

Who’s been messing in our burrow?

 

– and havens for criminal activity.

 

These abandoned homes are maltreated and plundered by those who move in to the prairie dog burrows.

 

[Marlon Sheafe, 55] started visiting the tall, crooked house [he owned] every week.

 

I’ll return later to Mr. Sheafe’s back story; it’s not as pristine as implied by this context.

 

Looters had stripped the place bare. The “dope boys” had left their sneakers on the porch and their empty cans of sausages strewn around inside. Sheafe repaired the steps and spray-painted patches of the exterior where the vinyl siding had been ripped off. He returned every week to check on the house and mow the lawn.

 

They also become health and safety hazards:

 

Squatters’ cooking fires turn into infernos. The latest iteration of the trend: gas explosions.

 

Abandoned house that had been used as a meth lab

 

Electric companies usually shut off the juice when homeowners tell the utility they are moving. But natural-gas companies usually don’t. In recent months, abandoned homes have exploded in Chicago, Cleveland and Bridgeport, Connecticut. In all cases, foreclosed homeowners had moved out. With no one home to smell the gas, it went undetected – until the houses blew.

 

Though there have been written many romanticized tales of squatting as a kind of housing-Robin-Hood, the reality is squalor and crime and addiction and poverty.  That is why homes must be occupied, and why they must be owned by someone with an economic interest.  Those two attributes combine in homeownership, they are divided in rental, and in squatting or semi-abandonment both are absent.

 

Watch out for squatters

 

Oh, America. I wish I could tell you that this was still America, but I’ve come to realize that you can’t have a country without people. And there are no people here. No, my friends. This is now the United States of Zombieland.

– Columbus, from Zombieland

 

Drug paraphernalia left in abandoned house

 

“We are seeing more and more close calls,” says Mark McDonald, a former natural gas public safety worker who now runs the New England Gas Workers Association. “These houses are a formula for disaster.”

 

That’s why most vacant houses need to be rapidly reoccupied, or firmly secured, or if neither then demolished. 

 

Cleveland: House being demolished by its owner, the Cuyahoga County Land Revitalization Corp.

 

Florida tops the list of zombie properties with 90,556 vacant homes in foreclosure, according to a foreclosure inventory released on Thursday by RealtyTrac, a real estate information company in Irvine, California.

 

Illinois and California ranked a distant second and third with 31,668 and 28,821 zombie properties respectively on the list.

 

Observe that, though it’s Florida where many vacancies exist, it’s from Cleveland or Detroit where arise the heartstring-tugging stories.

 

Cleveland, City of Light! City of Magic!

 

[Continued tomorrow in Part 2.]

[Continued from yesterday's Part 1.]

 

By:David A. Smith

 

As we saw yesterday, using a Wall Street Journal (May 7, 2013) and the SEC’s own release 2013-82 (May 6, 2013) (blue font), the SEC called upon Harrisburg, Pennsylvania, to stand and deliver up an acquiescence to charges that the SEC then settled instantly.

 

Come on, Concorde!

 

Though to Harrisburg the settlement must have appeared a bewildering experience, the SEC was looking beyond one city to the larger marketplace.  Cities – and through them, elected and appointed officials of these cities – are now on notice that anything they say in their official capacities will be construed legally as a supplement to the bond issuance documents, and hence must be held to the same standards of accuracy.

 

Did you drop it where you hit it before?

 

The SEC also took issue with Harrisburg officials for doing what many public officials often do: Putting a good face on a difficult situation.

 

Surprisingly, the Journal is being disingenuous.  One can spin all one wants, if one states facts correctly.  Lying is not spinning, it is lying.

 

 

For example, in the state of the city address in 2009, Harrisburg’s then-mayor described the incinerator as an “additional challenge” and an “issue that can be resolved.”

 

Here again the Journal‘s focus on simplifying the story cut out of it critical information. 

 

By the time the 2009 budget was passed, Harrisburg was aware of the Authority’s projected budget deficits and that Dauphin County was challenging a rate increase.

 

The county was sending its trash to the city’s incinerator, and a challenge to the rate increase meant that Harrisburg wouldn’t be able to boost the incinerator’s income.  Ergo:

 

We’re not getting enough garbage

 

As a result, the Authority was unlikely to have sufficient revenues to pay its 2009 debt service obligations. However, Harrisburg’s 2009 budget as adopted did not include funds for debt guarantee payments.

 

So the city knew, as a mathematical equation, that it would be in default on the bonds.  And it knew it would have the city’s guarantee called. 

 

I reckon I could hit that tree over there – the one just behind that hillock, not the big hillock, the little hillock on the left.

 

But the city budget ignored the cost of calling the guarantee.

 

According to the SEC’s order, another public statement available to investors on the city’s website was the annual State of the City address delivered on April 9, 2009. The address only discussed the municipal resource recovery facility as a situation that was an “additional challenge” and an “issue that can be resolved.”

 

All these statements were made by then-mayor Stephen Reed, about whom we heard in my 2010 post and who will be prominently featured in later installments of this post.

 

The address was misleading because it failed to mention that by this time, Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt.

 

Mayor Reed knew that the city had already paid out two million bucks, and was going to have to pay out much more, and yet he failed to mention this in his speech to the citizens. These are certainly misleading statements.

 

It also omitted the total amount of the debt that the city would likely have to repay from its general fund.

 

The disclosure standard also requires that the issuer/ debtor must “not omit to state a material fact.”  One cannot pick and choose the subset of facts one reports to the capital markets.

 

By this time, Harrisburg knew that the Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor.

 

Investors who held the City of Harrisburg’s bonds, and more importantly those who might be buying such bonds, were massively deceived.

 

“We haven’t got any!”

“Honestly!“

 

At least!

 

For the capital ecosystem, disclosure has value more than just protecting individual investors.  The active trading of securities creates information – “the wisdom of crowds” quantified.  These are critical indicators overall, and as we’ve seen throughout the Eurozone mess, the markets have consistently been more reliable and prescient than have been either the elected officials or the European Central Bank.  As I wrote a while ago:

 

As we’ve seen, in the last year a breakup of the Euro – or at least the expulsion of Greece or Spain – has gone from unthinkable to openly anticipated, to inevitable.

 

– As Europe’s debt crisis rages, turmoil in Greece, Spain or Italy sends investors rushing into the safe arms of the US government.

 

Isn’t he just the cutest sixteen trillion dollar debtor?

 

So the Eurozone is no capital haven, and indeed it is likely that more Euros are invisibly fleeing Greek and Spanish banks than visibly making their way into the currency.

 

Meanwhile, China’s economy is slowing down dramatically, and its figures were never that reliable to begin with; nor is China’s treatment of foreign investors one to inspire confidence.

 

Markets keep elected officials honest. 

 

Parson: That’s nothing like a willow.

Moore: Well it doesn’t matter, anyway. I can hit it seven times out of ten, that’s the point.

Parson: Never a willow.

 

Never a willow

 

Mayor Linda Thompson, who has held office since 2010, said the SEC’s charges “are what they are” –

 

It is what it is has become the all-purpose non-denial denial, and to my ears it immediately signals either duplicity or at best suppressed anger.

*

The mayor is what she is

 

– and added that the city has “completely revamped its policies and procedures…to ensure that accurate and complete financial information” is made available to investors and the public in a timely manner.

 

This is a holdup, not a botany lesson

 

Moore: Shut up! This is a hold-up, not a botany lesson.

 

Three years ago I liked Mayor Thompson, because of statements like this:

 

“Any mayor that signs a bill that doesn’t budget for its debt obligations certainly is in violation of debt act ordinances and also its own city ordinances,” Thompson said following the vote.

 

 

In hindsight, perhaps I liked her principally because she was an improvement over stayed-too-long mayor Stephen Reed. 

 

In recent years, the SEC has been stepping up its investigations in the $3.7 trillion municipal-debt market. In an interview, Elaine Greenberg, chief of the SEC’s Municipal Securities and Public Pensions unit, said policing financial disclosures by cities, states and other municipal borrowers is a priority.

 

Greenberg reflects SEC values

 

Moore: Now my fine friends, I want you to hand over all the lupins you’ve got.

Squire: Lupins?

Moore: Yes, lupins. Come on, come on.

 

The Harrisburg case is part of a larger campaign the SEC has decided (quite correctly) to mount.

 

It’s all in where you choose to place your stones

 

Earlier this year, the SEC charged the state of Illinois for failing to adequately disclose in bond documents the shaky condition of the state pension system.

 

The SEC’s doing the right thing here; if any of these defendants were private corporations, or private pension funds, it would be a lot more than just a settlement; people would be lawyering up and desperately plea-bargaining to avoid jail.

 

That means you’re in trouble

 

The agency brought a similar case against New Jersey in August 2010. The states agreed to settle the charges without admitting wrongdoing.

 

And nobody noticed.  This case was intended to get the public’s attention – and the attention of public officials.

 

In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.

 

The SEC agreed to let Harrisburg off with no penalties so they could issue the release and get the headlines. 

 

Parson: What do you mean, lupins?

Moore: Don’t try and play for time.

 

And that strategy worked.

 

Hand over all your lupins

 

“We’re glad to see that the SEC didn’t levy any fines on the city. That could have made it more challenging,” said Cory Angell, a spokesman for Harrisburg’s current receiver, William Lynch.

 

Both the word ‘receiver’ and its predecessor ‘current’ should catch the alert reader’s eye; we’ll pick up that story tomorrow and the day following, for it’s a juicier tale than can be contained within the margins of an SEC release.

 

Squire: Well we haven’t got any lupins.

Girl: Honestly!

Moore: Look, my fine friends. I happen to know … that this is the Lupin Express.

Squire (under his breath): Damn!

 

I happen to know … that this is the Lupin Express

 

Moore: In a bunch, in a bunch!  Come on, Concorde!

 

Soon every lupin in the land

Will be in his mighty hand

By:David A. Smith

 

Stand and deliver!

 

“Stand and deliver!”

“Not on your –”

Blam!

“Let that be a warning to you all. You move at your peril, for I have two pistols here. I know one of them isn’t loaded any more, but the other one is.”

 

Scratch a bankruptcy and you find a municipal fraud?

 

Scratch a municipal fraud and you find corruption?

 

Wait long enough after the fiscal catastrophe and the enforcers will arrive?

 

Maybe the incinerator can burn all of Harrisburg’s misleading statements?

 

Three years after I last posted on troubled Harrisburg, my eye was caught by a story in last week’s Wall Street Journal (May 7, 2013):

 

City Hit by SEC Fraud Charges

Harrisburg’s Public Statements Faulted

 

The Securities and Exchange Commission has put local government officials on notice that it is closely monitoring the way they describe their cities’ fiscal health, charging Harrisburg, Pa., with securities fraud for allegedly failing to disclose information on its financial troubles.

 

Yet though this sentence seemed promising, scarcely had my hopes been raised than they were knocked sideways by the sentence immediately following:

 

Harrisburg agreed to settle the charges without admitting or denying the findings, and no fine was levied against it or city officials.

 

Come again?  A charge is filed only to be dismissed in the same document, without the defendant being penalized or even admitting culpability:

 

– so that’s one of you dead for sure.

 

Or just about for sure anyway.

 

Just about for sure

 

The SEC faulted Harrisburg for allegedly making misleading financial statements from 2009 to 2011 outside its securities disclosure documents related to bond offerings, including in the city’s budget report and a mayor’s state-of-the-city address.

 

As Harrisburg has been in state receivership for a year, despite objections from the city council (the same political dynamics as were in play in Detroit), it is still unable to pay its debts, and municipal bankruptcy is still a looming possibility, imagine this phone call from the SEC to the state’s receiver:

 

“Oh?”

 

“Mister receiver?  It’s the SEC.  We’ve decided Harrisburg materially misled the public for years.”

“Oh …”

“So we’re charging the city with securities fraud.”

“Oh!”

“Yes.  And we’re willing to settle it.”

“Oh?”

“Yes, settle it now.  Right now.”

“Oh – ?”

“Ah, yes.  You see … well … we want you to agree to settle the charges now.  You won’t have to admit or deny the findings.”

“Oh …”

“Yes, pretty cool, isn’t it?”

“Ohh …”

“Yes.  And your penalty.  Well … um … actually, there won’t actually be any penalties.”

“Oh?”

“Absolutely not.  No fines to the city.  No fines or charges against city officials.  None.  Bupkus.”

“Ohhhhh – kay.”

 

Makes one wonder, doesn’t it, just why the SEC devoted such resources to a non-enforcement.  Here’s a clue:

 

In the SEC … with the subpoena?

 

It is the first time the regulator has brought such charges, and investors say other municipalities could face sanctions for issuing incomplete or misleading information about their finances.

 

So this is a deliberate attempt to influence the observant herd … but what conclusion will the observant herd reach?

 

It certainly wouldn’t be worth your while risking it because I’m a very good shot.

 

Municipal malefactors beware: the SEC is watching you, and if you’re insolvent or in receivership, well, the SEC is certainly going to notice.

 

As much as 20% of the nearly 50,000 issuers of municipal debt in the U.S. don’t supply timely disclosures after their bonds have been issued, according to analyst estimates.

 

Issuers are required to provide the public and the SEC with these updates, which are held to the same standard of completeness and diligence as an original issue. 

 

I practice every day. 

 

That is why the United States has two principal securities laws, the 1933 Act (dealing with original issues and initial public offerings) and the 1934 Act (which covers secondary trading).

 

Which one of you is Glass, and which Steagall?

 

They’re equally important – if anything, the 1934 Act is indeed, in many ways the 1934 Act is a more important protection, because it assures that continuous trading can occur, and that’s essential because without continuous trading, there is no liquidity for securities holders.

 

“This isn’t just Harrisburg, there are lots more issuers like it,” said Laurence Gottlieb, chairman and CEO of Fundamental Advisors, a private-equity firm that invests in distressed municipal debt.

 

Over the years, I’ve worked several times with Laurence; whose whole business is founded on the buying and selling of non-performing debt instruments.  Aside from representing a profit opportunity for Fundamental and its advisors, this after-market liquidity serves an essential purpose, because the buyers of distressed debt do so knowing they are likely to have to intervene, using the contingent rights embedded within their security agreements, to force recapitalization and restructuring of delinquent or insolvent debtors. 

 

Buying distress, as long as he has the information: Gottlieb

 

Competition among secondary-market buyers not only creates liquidity for distressed debt sellers, it also assures that the buyers will compete with each other, and it should therefore reduce the losses the sellers take when they sell their paper at a discount.  As the SEC put it in its SEC release 2013-82 (May 6, 2013) (blue font):

 

Elaine C. Greenberg, Chief of the SEC’s Enforcement Division’s Municipal Securities and Public Pensions Unit, said, “A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one.”

 

There is the 1934 Act requirement.

 

“Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information.”

 

While many people think of secondary-market trading as important only for performing bonds, it’s actually much more important for non-performing loans.  These loans will have to be restructured, some way or another, and that negotiation (as we’re seeing in Jefferson County, Alabama) is no game for weaklings or amateurs.  Many investors can evaluate how to buy and sell performing loans; but distressed debt needs to be owned by entities and people who can not only evaluate but also act, and that’s a much smaller subset. Ergo, without liquidity, enforcement is weakened, for the best enforcer is a specialist. 

 

It takes expertise to find value in this trash

 

In Harrisburg, it’s important the veritable mountain of incinerator debt get into the hands of sophisticated and well-capitalized investors, because it’s manifestly evident that Harrisburg cannot pay it all.

 

The Pennsylvania capital has been mired in debt for years. Its fiscal woes stem largely from years of cost overruns related to a troubled incinerator project. The city of 49,500 was nearly pushed into bankruptcy in 2011.

 

Harrisburg absolutely should have been pushed into bankruptcy, but this requires the state’s consent, and at the time, the state did not want a bankrupt state capitol.  (I think it feared that the state would inherit the city’s debts, a dynamic we also saw play out in Jefferson County.  In any case, Pennsylvania’s governor appointed a receiver – and that’ll be a story worth reporting in a later part of this post.)

 

With the Harrisburg case, the SEC is going even further by policing the accuracy of speeches and presentations of government officials. “Public officials should take steps to avoid misleading investors,” Ms. Greenberg said.

 

Before the receivership, two mayors in a row were complicit (consciously or unconsciously) in Harrisburg’s presenting false information about its financial condition.

 

The 2009 budget also misstated Harrisburg’s credit as being rated “Aaa” by Moody’s Investors Service when in fact Moody’s had downgraded Harrisburg’s general obligation credit rating to Baa1 by December 2008.

 

Though the distinction may sound small, it is in fact material – highly material – especially as the rating agency would have notified the city of its downgrade. 

 

Most days in the week

 

Well, not absolutely every day, but most days in the week.

 

Hence, to misreport it is a basic error, in fact deliberate concealment of a material fact, the kind of action that would ordinarily lead to disqualification.

 

You should be able to notice the difference

 

Then too, that mistake was part of a larger pattern of spinning without reporting:

 

An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address.

 

Here, finally, is the point of the SEC’s enforcement action – the Commission is expanding the reach of the 1934 securities-law disclosure requirements to encompass non-issuance statements by elected or appointed officials. 

 

This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents.

 

Now we can see why the SEC wanted Harrisburg to crumple – for the precedential value. 

 

I expect I must practice four or five times a week, only some weekends – like last weekend – there really wasn’t the time, so that brings the average down a bit. I should say it’s definitely a solid four days’ practice every week.

 

That brings the average down a bit

 

“I would expect the SEC is going to be inquiring of other financially troubled cities: Are they lipsticking the pig?” said Matt Fabian, a managing director at Municipal Market Advisors.

 

Lipstick on the pig is legal.  Substituting a cow for a pig is not.

 

[Continued tomorrow in Part 2.]

By:David A. Smith

 

Though the purpose of journalism is principally to report, now and then one wishes that reporters who observe effects would see them in the context of their causes, as in this story from the Financial Times (March 12, 2013):

 

Things are connected, you know

 

Housing crisis deepens for New Yorkers

 

An elderly woman known to everyone as Ms Gloria sits in the dingy lobby of her Bronx apartment building, armed with a clipboard and ready to lead the residents’ association meeting. Within minutes a dozen tenants, mostly Spanish-speaking immigrants, dribble into the grubby hallway.

 

Substandard housing, such as described here, is a byproduct of demand over supply.  In emerging nations this results from rural-to-urban immigration and urbanization that outstrips the city’s capacity to build infrastructure to accommodate the newcomers.

 

Jacob Riis, New York City Cave Dweller, 1890

 

In developed nations such as the US, rural-to-urban immigration is less prevalent, though it persists, particularly in entrepot cities like New York – and more importantly, it results from a disabling environment for real estate development, in which decaying existing stock nevertheless finds residents because there is no better competition being created. 

 

Unaffordability concentrates in cities, especially San Francisco, Los Angeles, and New York

 

And in any jurisdiction with strong rent control (in addition to New York, there are Cairo, Mumbai, San Francisco), new supply is choked off – and that leads to cities creating the slums inside. 

 

New York City tenement, circa 1910

 

“You’ll all get your turn – don’t talk at once,” commands Ms Gloria, a tenant in the block for 33 years, who prompts residents to speak out about landlord harassment, broken windows, defective radiators, illegal fees, faulty boilers and rising rents, among other grievances. “This lady has no heat, no hot water. We have to do something about this,” she says in response to one resident’s comments.

 

To start with, New York City has a strong enforcement code, and the residents should be pursuing enforcement at City Hall. 

 

Like many parts of New York, the Bronx is in a housing crisis.

 

The basic equation of metropolitan affordability is this:

 

Inexorable laws of land use economics

 

A = f (J, E, S)

 

Affordability is a function of Jobs, Earnings, and Supply

 

When people’s Earnings rise because they can get Jobs (or, sad to say, welfare benefits that create rent-paying power even without earnings), then the price of housing rises, unless it is held down by a continuing infusion of competitive new Supply.

 

There is a shortage of low-priced apartments and those that exist are poorly maintained.

 

At the same time, affordable housing always costs money. 

 

Rents continue to rise, squeezing lower and middle-income earners who are the backbone of the city’s economy.

 

One cannot stop markets from rising (even with rent control confiscating wealth on some apartments, the non-controlled apartments will rise in price), so if one wants affordability, government must pay for it, directly with subsidy or indirectly with land resources, real estate tax abatements, or inclusionary zoning density bonuses.  Ergo, if there is to be genuine affordable housing over the long term, the government needs to be motivating the creation of new supply, and providing new or better financial subsidy resources, not imposing new costs and burdens that choke off that supply or ignoring the dysfunctional authorities under its own control.

 

Spelled out in gory detail … and ignored, as far as I can tell

 

Since 2001, average rents have risen 44% while home prices are up 47%, according to the city council.  

 

These statistics are just about unique in America.  During a decade in which most housing prices rose, spiked, then dropped, only San Francisco (rent control, development restrictions) and Washington DC (expanded Federal government) show this level of increased housing costs.

 

As the country’s housing recovery gains traction and prices continue to climb, city officials fear that many will be forced to move away, hampering New York’s longer-term growth.

 

To these challenges add New York’s high taxes and its restrictions on development.

 

Fiscal restraint and cutbacks on handouts from the federal government mean the city is also less able to help.  Housing assistance programmes have shut down and the city’s homeless shelter population has risen to a record high of 50,135, up nearly a fifth from the year before.

 

Unfortunately, New York is a welfare magnet, in part because its benefits are generous relative to other US cities.

 

Attracted to the benefits

 

“For the lion’s share of New York there’s no such thing as affordable housing,” said SaMi Chester, housing organiser for the Northwest Bronx Community and Clergy Coalition. “These few units are not ‘cheap’, particularly if you’re unemployed or underemployed ….   Landlords are increasingly greedy. They are urban predators who want to raise rents and lower services.”

 

Setting aside the moralist lingo, Mr. Chester’s wrong both as to his facts and his reasoning.  Landlords as a species are no more and no less greedy than anyone else, and most don’t want to reduce services; but the rent one can obtain is invariant of the quality of service – either because the residents are poor or because the law caps the rents – then the landlords who will spend more are bought out by landlords who will spend less. 

 

Many New Yorkers spend more than 50% of their earnings on housing.

 

Throughout the world, some people in cities pay high percentages of their income for rent, simply because they are poor and yet cling (rightly) to the city and its economic opportunities.

 

“This has huge repercussions on what you can afford in terms of food costs, healthcare and education bills,” says Barika Williams, policy director at the Association for Neighborhood and Housing Development, a research and advocacy group.

 

Certainly does.

 

“What you will see is overcrowding or people being forced to move to places like Long Island, Connecticut and New Jersey.”

 

The horror … the horror

 

The horror, the horror.  Long Island.

 

The Bronx, or Long Island? You decide!

 

“The impression is that we’re talking about a small segment of the population. In reality it’s close to half of all New Yorkers that are affected. The city is sending away its growth engine.”

 

Maybe New York should repeal its rent control.  Or cut back on its NIMBYite building restrictions. 

 

In her annual State of the City address last month, Christine Quinn, council speaker and frontrunner to replace Michael Bloomberg as mayor, echoed this statement. “We need to make sure that the people who want to stay in our great city can afford to stay here,” she said. “We will not allow middle-class families to get priced out of the neighborhoods they helped build.”

 

Then build more housing.

 

She called for the creation of 40,000 new homes –

 

Sounds promising, but at (say) $200,000 apiece, that represents $8 billion in capital costs.  How will they be paid for?

 

– and a push to make much of the city’s low-income housing stock permanently affordable, rather than allowing rent controls to expire after a period.

 

If so, Ms. Quinn, be prepared for the mother of all takings lawsuits, because if the judicially imposed affordability is permanent, then a property right has unambiguously been taken. 

 

What I need of yours is mine

 

Since 2004, the Bloomberg administration has created or restored more than 140,000 affordable homes throughout the city, but housing experts say many are still too expensive.

 

That ‘or restored’ is tricky, for because it counts apartments that have remained the same, the standard of evidence is low.  Moreover, over the course of ten years, that’s only 14,000 apartments a year, or less than one half of one percent of the housing stock (assuming three people per household, which is probably high for singles-heavy New York).  Then too, only a handful of these new ‘or restored’ apartments are deeply affordable:

 

Between 2009 and 2011 only about 8% of the affordable homes developed by the city were meant for very low-income families, those earning 40% or less of the median income in the area, though this segment represents a third of all New York households.

 

If that statistic is true – personally, I find it implausible verging on inconceivability – then New York has become a city of the rich and the poor, a barbell distribution with nothing between.

 

A lot on one end, a lot on the other, and little in the middle

 

Now the Financial Times goes completely off the track:

 

We lost the logic of it

 

The housing situation is also complicated by the city’s large inventory of over-mortgaged apartment buildings.  During the housing boom landlords bought up blocks and took on excessive debt based on the hope that rental incomes would continue to rise dramatically in line with property prices. This was unsustainable even at the height of the housing bubble, let alone after the crash that followed.

 

Even assuming these sentences to be true, how does this explain failure to maintain the housing?  Why aren’t the mortgagees foreclosing, or why isn’t the city taking the property for unpaid real estate taxes?

 

“Many of the existing apartment blocks continue to be over-leveraged. Landlords don’t make repairs and are draining as much from these buildings as possible to keep mortgage payments going,” said Kerri White, director of organising and policy, at the Urban Homesteading Assistance board.

 

If so – and it’s not proven, merely asserted by someone who lacks knowledge and is speculating – then that’s exceedingly foolish of those borrowers.  In fact, I don’t believe it.

 

“One way troubled landlords can increase income … is by evicting existing tenants [Sic – just raise the rents – Ed.] and bringing in new, wealthier ones, banking on gentrification. We’ve seen this happen in Harlem and Brooklyn, and the Bronx is next.”

 

If so – if new residents would pay more than the current ones – these so-called greedy landlords would do that regardless of whether they were losing or making money. 

 

Soup kitchen or starve?

(Historically inaccurate; the landlord would have had a superintendent or rent collector)

 

In fact, if there were positive cash flow, the landlords would be more motivated to push the rents, since they would keep the extra cash flow, instead of giving it to a mortgagee that could still foreclose anyhow. 

 

The explanations provided by the Financial Times’ sources make no real estate sense, and the result is an article that reports effects while ignoring causes.

 

Most illogical

By:David A. Smith

 

We can’t all be bankrupt … can we?

 

Ten little Eurozone boys went out to dine

One choked his little self and then there were nine.

These days it cannot be any fun to be Angela Merkel – nothing is going right and she has no Plan B, no exit strategy, and no reliable allies. 

 

Keep your friends close, Francois, and your frenemies closer?

 

All this is shown by the juxtaposition of two articles, one from the Economist (April 30, 2013) (red font), the other from the Wall Street Journal (May 3, 2013):

 

It is a car crash of a data release. One simply can’t look away. Hard to know precisely which part of the euro area’s latest unemployment report is the most grimly compelling. The overall rate, at 12.1%?

 

In the spring of 2010 unemployment rates in America and the euro zone were effectively the same at about 10%. There is now a gap of 4.5 percentage points.

 

America’s unemployment is actually worse than suggested, because the U-3 rate excludes those who have given up working; America’s U-6 unemployment (including part-time and the ‘marginally attached’) is 14.1%.

 

Don’t be misled by the U-3; here is the U-6

 

Still, if the discouraged were included in Europe’s figures, its unemployment would be that much worse.  A better measure is total employment:

 

Total unemployment? In the first three years of the downturn America did far worse than the euro area, adding some 7.5m workers to the unemployment rolls to Europe’s 4.7m. Since then total unemployment in the euro area has risen by another 3.2m while America reduced the ranks of the jobless by 3.5m. The euro area now has some 19.2m unemployed workers.

 

Things will improve soon

 

Five years ago, when the global economy took its nosedive, Ms. Merkel committed herself to a course: Save the Euro at any cost.  That cause, however noble it might have been, led her to two other strategies:

Bail out any country.  Never give German citizens a vote on the matter. 

 

Giving people the vote is too dangerous in a democracy

 

Doubtless Ms. Merkel had economists lined up from Frankfurt to Brussels who unanimously told her it would work.  She had the ECB, whose leadership told her it would work.

 

So she told her parliamentary colleagues it would work.  She told her political supporters the price would be worth it. 

 

Individual country numbers inspire their own brand of horror. Greek joblessness topped 27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%.

 

She told the German High Court that each successive bailout was the absolutely last one, no more.  She told everyone that Germany would not become Europe’s piggy bank.

 

Don’t bring us another bailout

 

She thought it would work. 

 

Does this look like recovery to you?

 

She thought others reliable.  She thought she had allies.

 

Judge Arthur Cannon: Listen, why don’t I trust you, and you trust me?

Dr. Edward Armstrong: The famous last words?

 

One by one, these beliefs have fallen.  Five nations have been bailed out already, and Slovenia is just around the corner.

 

Five little Eurozone boys going in for law

One got in Chancery and then there were four.

Dust off your Cyprus precedents

 

A new hurdle has popped up in Europe’s race to save itself from economic calamity: French President François Hollande, who built his career on an ability to forge consensus, now finds himself in the unaccustomed position of pleasing no one.

 

Mr. Hollande’s ruling Socialist Party is in revolt. Party heavyweights are urging him to turn up the heat on Germany’s Chancellor Angela Merkel and defy her prescription of austerity for resolving the euro-zone crisis. The French press last week splashed a Socialist Party draft paper that described Ms. Merkel as “selfish.”

 

President Francois Hollande is facing calls from within his party to defy German Chancellor Angela Merkel’s prescription of austerity. The situation presents the French president with an acute dilemma, WSJ’s Gabriele Parussini says.

 

Even for the French, it takes some nerve to call the Germans selfish here.  No other nation has contributed more to the vision of Europe, and received less for it.

 

Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year?

 

German unemployment, of course, has held steady at 5.4% since last summer.

 

France was always supposed to be Germany’s anchor partner, its equal in Europe.  That hasn’t happened, nothing close to it:

 

Unemployment rises, deficits worse than projected

 

There are widening concerns that France, Europe’s second-largest economy behind Germany, risks becoming the next problem child.

 

In an interview with The Wall Street Journal, Mr. Hollande said he has “passed on messages to reassure Ms. Merkel” that he “firmly believes in Franco-German friendship.”  But he also signaled that he needs her to meet him halfway on key policies such as creating a “banking union” that would use Europe’s collective financial muscle to help weaker countries fix their banks.

 

In the language of French diplomacy, Meeting me halfway means bail us out half as much as you’ve bailed out the others.

 

Judge Arthur Cannon: Listen. If you are the killer, please tell me, I won’t tell a soul.

 

“The risk is that Germany may want to wait until after its [September] elections to move ahead on the banking union,” Mr. Hollande said. Germany has indicated it opposes some key aspects of banking union for now.

 

Banking union is code for using the Bundesbank to underwrite every periphery-zone bank – and what is the value of putting good money into peripheral-zone banks if their economies continue to shrink?

 

Whatever you say, just give me the money

 

As things stand ECB policy is scarcely being transmitted to the periphery, where rates to firms and households are far higher than in Germany.

 

As Europe’s extremities atrophy, its core also weakens.

 

Mr. Hollande made clear that he is expecting concessions from the German chancellor, in particular over banking union and the creation of common, Europe-wide mechanisms to supervise European lenders and bail out or close troubled banks. Germany opposes Mr. Hollande’s vision for the banking union, saying it would amount to tapping Germany’s deep pockets to repair other countries’ banks.

 

That is precisely what banking union means – and we’ve already seen how well that worked in Cyprus, haven’t we?

 

That was fun

 

Ms. Merkel, for her part, is worried that Paris is moving too slowly to repair its economy and could face deepening economic trouble, people familiar with her thinking say.

 

Never forget that Francois Hollande is a socialist, elected on a platform of relieving austerity. 

 

Mr. Hollande came to power promising to reinvigorate Europe with growth policies and lift France’s economy at home. He quickly took steps aimed at rewarding his electoral base. He increased the minimum wage –

 

Bad for economic growth and national competitiveness.

 

– lowered the retirement age for some categories of workers –

 

Bad for economic growth and national competitiveness.

 

– and announced creation of 60,000 new education jobs.

 

These bonbons handed out, Mr. Hollande demonstrated his promises came with expiration dates, for he pivoted like a ballerina:

 

“Deficit reduction, labor flexibility, competitiveness—none of this is part of the Socialist Party’s software,” says Bernard Poignant, the Socialist mayor of the Breton city of Quimper, who swings by the Elysee Palace once a week to advise Mr. Hollande. “That’s why we are going through turbulence.”

 

 

But the European Central Bank told her it would work, and by now even the Economist is recognizing the jig is up:

 

There is blame to go around for this, but one has to reserve special criticism for the European Central Bank. The Federal Reserve’s main policy rate has been effectively zero since late 2008; the ECB’s has never fallen below the current 0.75% level. The Fed has undertaken major asset-purchase programmes in an effort to raise growth expectations, lower interest rates, and improve lending conditions; the ECB deployed a special lending programme to banks last year in order to prevent a systemic collapse, but its balance sheet has since been shrinking as those loans are repaid. The Fed has reacted to weakening inflation and inflation expectations and has linked policy changes to labour market indicators.

 

The ECB has presided over a wrenching disinflation that has brought inflation well below target, and which is both a consequence of recession and itself an implement of macroeconomic pain.

 

Politicians are cursed by the inability to admit they ever change their minds, even when the facts change completely – and Ms. Merkel forges grimly ahead, counting on her French ally [sic], who is reliable when she is doing what he wants:

 

At home, he is working to appease Socialists who demand more government spending as well.

 

Seeking to please everyone, Mr. Hollande is pleasing no one.

 

This is called a ‘slide’

 

The French president has taken some steps to make France more like its German neighbor. He has vowed to keep reducing France’s budget deficit, although at a slower pace than initially planned to avoid tipping the economy into recession, and balance public finances by the end of his five-year mandate.

 

Politicians often justify their irresponsibility by promising to be fiscally responsible … but only at the end of their term, after they’ve given away as many goodies as they can.

 

Mr. Hollande said next on his agenda is to fix financial shortfalls in France’s pension system and at the agencies that distribute unemployment benefits and family welfare payments. This could further upset his Socialist supporters.

 

He’ll gladly reform the French pension system tomorrow in exchange for banking union today.

 

Many homicidal lunatics are very quiet, unassuming people. Delightful fellows.

 

Don’t ask the German Constitutional Court

 

France says banking union is key to wiping out bad debts, which are crippling some European banks and preventing many borrowers from benefiting from the European Central Bank’s low-interest-rate policy.

 

Actually, there are two ways to wipe out bad debts: pay them off with someone else’s good money, or just cancel them.  But we have a mountain of evidence that the bad debts are held by major European banks.  So Ms. Merkel is trapped.

 

German Finance Minister Wolfgang Schauble has said that adopting common rules for bank resolution would require amending European treaties, an often lengthy and tortuous process.

 

Sovereignty is a tough thing to give away without a war or a vote – but giving away German sovereignty doesn’t bother the French president.

 

Mr. Hollande said existing treaties allow for the establishment of banking union. He added: “It would only take Ms. Merkel to say that treaty changes are not necessary for things to move forward.”

 

Stephane Le Foll, a longtime aide of Mr. Hollande who now serves as agriculture minister in the French government, said the president likes to lead from behind, showing his hand only at the last moment.

 

That’s not leadership, that’s either cowardice or duplicity.

 

Has Angela left yet?

 

[In November, 2012], Mr. Hollande’s Prime Minister, Jean-Marc Ayrault, said France had to take urgent action, such as lowering labor costs, to make its industry more competitive. “France needs a new model that puts it back into the heart of the global economy,” he said in November.

The measures, he said, would trim French labor costs by about 6%—closing about half the competitiveness gap with Germany, according to economists. Some Socialists choked. Still, the law was adopted in December.

 

The plan could have boosted Mr. Hollande’s pro-business credentials. But the president found himself caught in a controversy—involving famed French actor Gerard Depardieu—over Mr. Hollande’s plan to introduce a 75% tax on individuals earning more than €1 million a year. Mr. Hollande had said the tax wouldn’t yield much revenue for the state but was an important symbol to show that people who earn more must contribute more.

 

Actor power!

 

As Mr. Hollande fiddles, Ms. Merkel finds herself virtually alone.

 

At the moment, the ECB is behaving as though the main economic failure in the 1930s was the world’s pathetic inability to grit its teeth and endure the costs of tight money.

 

Mr. Hollande’s ruling Socialist Party is pushing him to turn up the heat on Germany’s Chancellor Angela Merkel.

 

In Europe, 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

 

He’s under 25, all right

 

One little Eurozone boy left all alone; He went and hanged himself and then there were none.