Posts tagged ‘Foreclosures’

08/25/2011

Low Interest Rates: Correct Fed Policy

The Board of Governors of the Federal Reserve correctly used Monetary Policy to try to turn the economy around, by keeping home mortgage interest rates at their lowest level in 40 years.

Congress created the Federal Reserve System with a Central Bank in 1913 to help prevent recessions and other economic downturns from turning into depressions. Since then, all National Banks have joined the system.

The Federal Reserve has the ability to set interest rates for loans to member banks. When the Fed sets low interest rates, members are able to make loans to the public at correspondingly low rates. The availability of cheap money theoretically allows the economy to expand, provided other factors line up correctly.

Low interest rates at the Fed also help the U.S. Government when short-term loans are needed. Since interest on these loans is later turned over to the U.S. Treasury, the Fed basically provides interest-free money to the government. The principal sums borrowed from the Fed are repaid by the government with money raised from publically sold Treasury Bonds. Interest on the bonds is paid by the U.S. Treasury, until the bondholders are satisfied.

The decision by the Fed to keep interest rates low helps the federal government in terms of the annual deficit and national debt, regional banks in allowing them to offer cheap money, and the public, by enabling them to borrow at relatively low rates.

If the Fed now raised interest rates, while the national economy is still struggling to get out of a deep recession, one consequence would be a contraction, and a worsening of the economic crisis. If the Fed imposed higher interest rates, they certainly would not help, and would likely make the housing crisis worse.

Currently, factors other than interest rates are keeping the housing market from expanding. The Fed should continue to keep interest rates low, until measurable improvements are seen in the housing industry, which unfortunately may take the better part of a decade, no matter who occupies the White House or the Congress.

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06/28/2011

Florida: Reflections on Sunshine State

After 2½ years in Florida, we are moving back to Wisconsin, where Irene accepted a job in Madison, with the VA. After packing our boxes, I had a chance to reflect on our stay in the Sunshine State.

Climate was the primary reason we moved here in the first place. Although Florida is hot much of the year, humid all the time, and rainy in the summer, we picked it over the low humidity and clear skies of Phoenix, mainly because the southwest lacks water. Charlotte, Atlanta and Dallas were also ruled out, because their winters are not warm enough.

Although the temperature in Tampa-St. Pete reached 92 F each day, every year, for five months straight, like winter in Wisconsin, people just stay inside, in their climate-controlled buildings and cars. While northerners question the risk of hurricanes in Florida, not one hit the state in 2½ years. For me, the best part of Florida was the ability to go outside and take a walk nearly every day.

Health care was the second consideration when we moved. The Medicare crowd is a major industry in Florida, due to the number of retirees. On the plus side, I found a primary care physician I liked, and had a reasonably good hospital stay for an appendix operation. On the bad end, five different people at an eye clinic examined me one morning (four too many), because they needed to justify pay-for-service billing practices, on the incorrect assumption I was a Medicare patient; an orthopedic doctor also would have run unneeded X-rays for a shoulder issue one time, until I told him I had no health insurance; and as to the dentist, I could have flown back and forth to Wisconsin and still paid less than what I paid.

The cost of living was a consideration when we left Wisconsin. The foreclosure crisis here actually kept us from buying. The old saying is “you get what you pay for.” Here, we looked at bargain properties and ultimately learned of the reasons they were low-priced. Also, Florida condo dues are uniformly too high, homeowners insurance is too expensive, and real estate taxes are just as bad as they are in Wisconsin. There are a lot of available properties in Tampa-St-Pete, but the financial well-being of condo associations was a major concern.

Transportation was good and bad. The Tampa Airport is convenient, and urban areas are connected by freeways and large streets. The problem was the number of bad drivers in Tampa-Bay. Does Florida mandate driver’s education in high school? If not, why not? While turning, no one uses a simple blinker, except cars driven by Snow Birds from the Upper Midwest. Many just cut in front of others, hoping for the best. It’s almost like Cairo or Ho Chi Minh City. It’s a jungle out there. No wonder auto insurance is more than double what it was in Wisconsin.

In the category of recreation, to be honest, we did not use the Gulf Coast as much as we could have. There are nice beaches, boat cruises, and golf courses, but we always seemed to be doing something else.

In the final analysis, life is about people, not places. A person in the middle of a desert, surrounded by a few friends, can have a better time, than a single person all alone, in the midst of a big city. Since we have family in the north, our decision to return was motivated by that. To the nice people we met while down here, good-bye. Perhaps we will meet again. My blog will be down for a least a week. Once we are resettled again in Wisconsin, I hope to start writing again.

06/09/2011

Foreclosures Should Be Simple

A headline in the St. Petersburg Times asked: “What should foreclosure help cost?” While most foreclosure cases are simple and routine and should not cost very much, it is impossible to categorically determine the amount of attorney’s fees in every case, since some present unique issues that require more work than others. What can be said is the first hour or so of advice in nearly all cases is perhaps the most useful and worthwhile.

Defendants in foreclosures need some legal advice, so they can understand the process and intelligently decide what to do next. At a minimum, they should understand they gave the lender a note and mortgage, in consideration for a loan. A note is a contract in which they agreed to repay the lender, and a mortgage is an instrument that created a lien to secure the amounts due.

If a borrower fails to pay as agreed, they are deemed in default and the lender proceeds with a foreclosure. The case starts with a complaint, which alleges a breach of the note. A summons is also served with the complaint, commanding an answer.

In the vast majority of cases, the defendant does not bother to file an answer, because there is nothing to deny, and the bank takes a default judgment. If the defendant files an answer, denying some or all of the allegations, the case slows down, but not by much.

In most foreclosure cases, there is generally no need for a trial, because the facts are truly not in dispute. The bank seeks what is known as a Summary Judgment. Without a factual dispute, the court simply decides which side is correct, based on the law of the case. For example, a banker may swear in an affidavit $100,000 was loaned and the borrower failed to make payments as agreed. If the defendant files no counter-affidavit, because the banker is correct, there is no factual dispute, and no reason for a trial. The court simply enters a Summary Judgment for the bank.

In the Judgment of Foreclosure, the court sets a period of redemption, and orders the land sold, if the defendant fails to redeem by paying the entire judgment plus costs, within the time allotted. At a sheriff’s sale, the bank bids what they are owed. If someone outbids the bank, the bank is paid from the proceeds. If no one outbids them, the bank receives a sheriff’s deed. The sale process must then be confirmed by the court.

Many banks are now slow to complete the foreclosure process, because they do not wish to end up owning real estate they cannot resell. They do not want to be stuck owing real estate taxes, insurance, dues, upkeep, and other expenses on the property. Judges should force the banks to complete their foreclosure cases, or suffer a dismissal with prejudice, for a want of prosecution. The country needs to move all of the foreclosed properties through the system, so the nation can get on with a recovery in the housing market.

05/19/2011

Housing: Basic Supply and Demand

The news reported the ongoing lack of progress in the building construction industry. The problem is easy to understand, when applying basic supply and demand economics.

The supply of housing increased due to foreclosures. Buildings that a few years ago would have been owner-occupied are empty now, because of defaults on mortgage notes. One cause of the problem was the easing of regulation, and the promotion of adjustable-rate mortgages (ARM) that allow payments to be increased during the life of the loan. In the old days, fixed-rate mortgages were the norm, and borrowers made monthly payments, without worrying about increases.

The demand for purchasing homes simultaneously declined, as fewer people now qualify for mortgages. In the old days, a potential buyer needed a substantial down-payment, which generally stopped them from simply walking away upon default. The easing of regulation allowed the financially unqualified to buy, and as they defaulted, they simply stopped paying, and allowed the bank to foreclosure without trying to redeem, since they had no skin in the game. During the period of easy credit, too many buyers entered the market, and now that they no longer qualify for loans, due to a return to traditional lending standards, such as the requirement of a down-payment, there are too few qualified people available to purchase too many buildings.

With the supply of homes exceeding the number of qualified buyers on the demand side, prices have dropped, or at best stayed flat. This is simple economics. So until the oversupply of homes is removed from the equation, there will not be any real growth in the construction industry. Only when new construction is no longer competing against the oversupply of existing foreclosed properties, will the situation improve.

The flat-line growth in the value of homes has also affected those who could bring cash to the table, or who could qualify for loans. This is true despite the availability of relatively low interest rates. In my case, for example, we moved from Wisconsin to Florida 2½ years ago and intended to buy, but as we examined the market, several factors caused us to continue renting for the time being.

First, housing values are not increasing, and in some areas they are actually declining. If after just a few years, we wanted to sell again, any sale, after paying the sales agent, would result in a loss.

Second, the cost of Florida condo generally includes relatively large monthly dues, twice as much as one would pay in the Midwest. It appears a lot of profit-taking is built into them that could be cut out. Dues are like taxes, as they cannot be recouped.

Third, the cost of insurance in Pinellas County is too high, based largely on unfounded fears of a direct hit by a hurricane. Once again, these payments are not recoverable in any future resale.

Fourth, since wealthy Floridians enjoy no state income tax, much of the burden of running local government is based on a relatively high real estate tax, which is not offset by state revenue-sharing.

Fifth, when looking for a condo, one has to consider the number of neighboring tenant-occupied or vacant units in foreclosure, since owner-occupied units are generally better maintained. In this regard, the number of foreclosed units was a factor.

To comfortably buy, purchasers need to know their investment is more likely to grow than decline; the dues, insurance and real estate taxes must be minimal; and the vast majority of the units in any condo project must be financially above water. Given the current situation, at least for now, we will continue renting.