Building a better economy through liar loans and vacant houses by gimleteye

In previous posts here and here and
here and here we made the case for the political origins, in Florida, of the housing boom.

Miami is the index case. A deep slump pervades single-family production home development and with 25,000 condo units nearing completion, the unraveling is quickening. But focusing on the financial and fiscal impacts of the housing crash is to miss the broader destruction.


In Florida, the need to organize water resources and other infrastructure around the housing boom provided an efficient means to channel political loyalty and campaign contributions to Jeb Bush, who served two-terms as governor, and President George W. Bush.

It is an extraordinary event for brothers to hold portfolios in the state capital and the White House, at the same time. Jeb Bush was elected in 1998 and came office with fixed ideas grounded in a conservative “free market” philosophy of governance that meshed with the strategic objectives of the 2000 Bush presidential campaign, managed by Karl Rove.

Unburdened with the complexities of federal governance, Florida turned out to be the better indicator of what would follow in the experiments deemed necessary to “streamline” the housing boom. (We have noted, in other posts, the connections between Florida and federal housing policy makers.)

In other places—like Pheonix, San Francisco, or Austin—the housing boom only needed low interest rates and compliant local zoning bodies to take off.

In Florida, the housing boom was fueled by the nitrous oxides of proximity to the White House, to the centers of power at the Federal Reserve, and the determination of Governor Jeb Bush to make Florida the most growth friendly state in the union by diminishing regulatory “burdens” and increasing the difficulty for citizens to petition their own government.

It is hard to over-state the case in Florida of the collateral damage to democracy from the housing boom, triggered by easy money policies of the Federal Reserve.

While many observers are focused on economic issues—like mortgage defaults and collapsing subprime lenders—scarcely any attention is being paid to what the housing boom meant during years where the unfettered supply of production housing bred enthusiasms for the mismanagement of public resources and governmental responsibility for the public trust.

If at any point during the past six years, in one of Florida’s populous counties, you had the opportunity of attending a community meeting before a planning board in Florida to object to a platted subdivision with tract housing, your complaint would have been added to a long list that went nowhere, useless as a ship's cargo manifest after it's been distributed.

If you stayed home and read the daily newspaper, if the meetings were contentious and a reporter in attendance, the story would have been framed as a controversy between two opposing forces: landowners seeking use of their property for development and citizens wanting to protect their communities, neighborhoods, streams, bays or rivers.

Hundreds of thousands of production homes in platted subdivisions have been built in Florida during the past six years—increasingly in wetlands and environmentally sensitive lands—without even a passing attention by the mainstream media whether the claims in favor of growth can be justified.

On the other hand, the objection of citizens to suburban sprawl are routinely categorized in press accounts as “not-in-my-backyard’ers”, or, “emotional” and connected somehow to values that are out of the mainstream concerns of ordinary people.

As such, the characterizations run parallel with what the building and construction industries in Florida, supported by state agencies, have used as their mantra to promote growth-at-any-cost: that opposition are “elitist” and that, “we are only providing what the market wants.”

But as the housing bust materializes in places like Miami, the fog is lifting.

For the time being, the mainstream media are focusing on the cratering of the subprime mortgage industry, and the cracks in the foundation of better quality debt instruments. The stories of individual, struggling families are becoming widespread: homebuyers have been lulled and persuaded and cajoled into fomenting the biggest housing bubble in US history—taking on far more debt than they could reasonably absorb.

What we are not hearing, yet, is the extent to which lending to bottom-of-the-barrel buyers, speculators, and political insiders used the message “we are only delivering what the market wants” to lay the foundations for the biggest real estate fraud in American history.

Here is what is visible: to keep the incessant supply of production homes moving, lenders and homebuilders began running out of credit-worthy prospects. In the past six years, an increasing percentage of loan generation targeted prospective homeowners who, for better or worse, could only qualify for a mortgage if the lender turned a blind eye to his or her credit history, his or her income, and his or her ability to pay off a loan.

Miami, one of the poorest big cities in the nation, is the object lesson. Local government has been a field of dreams for single-family homebuilders with deep connections to local and national lenders.

We like what Nouriel Roubini writes in a recent blog. The economics professor from the Stern School of Business at NYU desribes exactly what has happened here:

“Suppose you were a poor African American or Hispanic or a white poor with low income and no assets who wanted to pursue the American Dream of home ownership and you did not qualify for a regular mortgage because of your low income. No problem – told you the mortgage broker – we will give you a NINJA (no income, no job and assets) or liar loan, i.e. a loan with no documentation of your income and assets. You did not afford any down-payment because of little assets? No problem as we will let you to put zero down-payment so that you start with zero equity in your home. You could not afford principal payments? No problem as we will give you an interest only loan. You could not afford a fixed rate mortgage? We will give you a 2-28 ARM where the rate is fixed at low level for two years and then you move to much higher market rates. You did afford even that? We will give you a teaser rate for a little while. You could not afford even that? We will let you capitalize interest on a higher face value of the mortgage for a while so that you will have negative amortization and you pile up negative equity on your home from the very beginning. And the poor, hapless and clueless borrowers said yes to all of this as the lender never told him that after two years its debt servicing rate would balloon by 500% once he/she had to start paying high market rates and principal on an ever increasing –not decreasing – stock of mortgage debt.”

Occasionally the mainstream media captures the madness with the passion it deserves. Here is one example by the St. Pete Times. “Developers who want to fill in wetlands or dredge them must get permission from the US Army Corps of Engineers. It can be a time-consuming process, but only rarely does the corps say no. In fact, the corps approves more wetland permits in Florida than in any other state. Between 1999 and 2003 it approved more than 12,000 permits to wipe out wetlands and rejected only one. A St. Petersburg Times analysis of satellite imagery found that in the past 15 years Florida has lost 84,000 acres of wetlands.” Given the heavy “de-watering” of wetlands through water withdrawals in shallow and porous aquifers, we suspect the true acreage of wetlands lost is much larger.

The Naples Daily News published another outstanding series, “Deep Trouble”.

We have been bystanders of the effects of the latest and greatest housing boom in South Florida history: concerned about quality of life, social equity, environmental justice, and just plain old things like wishing we could go swimming without fear of raging infections from coliform polluted beaches and even worse.

Suburban sprawl has exploded into South Florida edging right up to the boundary of public lands called the Everglades, trailing public corruption scandals.

During this time, Jeb Bush commandeered the regulatory apparatus of state environmental and land planning agencies and water management districts, lowering regulatory thresholds for pollution, including the “re-defining” of pollution from hard numerical standards to soft averages, easing permits to polluters, and making it much more difficult for citizen objectors to petition their own government to stop ill-advised developments.

Within government agencies, professional staff and scientists who objected to the party line were targeted for re-assignment or, worse, fired like Herb Zebuth, a senior staffer with the Florida Department of Environmental Protection, who lost his job because he had the audacity to challenge wetlands delineation when Governor Bush tried to place a massive Scripps Institute in a vast tract of land adjacent to the Everglades.

The housing boom significantly weakened the cohesiveness and effectiveness of environmental organizations in Florida. Governor Bush pushed this along with divide and conquer tactics to keep his opposition off balance: inviting a “favored few” insiders to the table, while shutting out anyone who openly criticized policies he supported.

The Florida legislature needed no encouragement, in this respect either. Privatizing the benefits of growth and socializing the risks is its de facto standard.

Nouriel Roubini describes the situation, more pungently and from a bird’s eye view:

“… government regulators were asleep at the wheel while a bunch of voodoo priests of laissez-faire capitalism were running US economic policy and let the housing and mortgage bubble fester. Blaming the now too late government crackdown on free market mortgage practices that were utterly reckless for the final bust and crash is like blaming the doctor for imposing bitter medicine to cure the disease of a reckless patient who lived in a bubble and spent the last few years on a diet of booze, drugs and artery clogging junk food. This latest mortgage carnage did not happen because of excessive over-regulation of markets by the government: it happened instead because – blinded by the anti-regulation dogmas of a bunch of priests of a voodoo religion – the government and regulators did nothing to sensibly regulate the housing and mortgage market and thus allowed this cancer to grow and fester.

Similarly, the last six years’ housing and subprime mortgage bubble and bust had little to do with excessive government intervention – either ex-ante or ex-post. Instead they had all to do with the lack of any basic sensible government regulation of the mortgage market, regulation in practice rather than in theory. Dozens of new subprime lenders emerged and were allowed to lend via monstrous credit practices – liar or NINJA loans, no down-payment loans, interest rate only loans, negative amortization loans, teaser rates, option ARMs with no limits or controls - that should have never been allowed in the first place. Even now that regulators are starting to crack down on the most patent monstrosities such as zero down-payment and no documentation of income, jobs and assets the voodoo priests and their acolytes in the mortgage industry are starting to blame the government for interfering with free market practices: in their ideological view there were optimal reasons for all of such practices: in market fundamentalism if such practices emerged there was a good reason for them and now the government interfering with these monstrosities will cause a credit crunch that will damage the mortgage market and cause a nasty credit crunch that will lead to an economy-wide recession. What a bunch of nonsense and self-interested baloney!

These practices instead emerged because the voodoo free market system of financial incentives for lenders – deceive borrowers with predatory practices, originate reckless mortgages to pile up fees, then securitize those mortgages and shove them on some other investors who had no clue of which toxic waste they were buying – became a whole con scheme. The way a senior and unnamed market participant put it in a bit exaggerated terms this was “an unregulated scam where a bunch of con artists fooled a bunch of clueless deadbeat borrowers”.

Let’s put it another way:

In Florida, massive loss of wetlands, coastal estuaries marred by pollution, local legislatures stung by serial corruption scandals, ethical lapses, loss of political will to safeguard the public trust in clean and affordable drinking water, collapsed aquifers and sinkholes, and—now—massive vacancies in half-completed housing projects as the boom staggers to a bust: “an unregulated scam where a bunch of con artists fooled a bunch of clueless deadbeat borrowers.”

In a Reuters report, Jillayne Schlicke, co-executive director of the Ethical Lending Foundation near Seattle, “worries that mortgage brokers are well on their way to overtaking used car salesmen on the list of professionals least trusted by consumers.”

To that list, add local county and municipal elected officials, lobbyists, and land speculators including big farmers who will do anything to cash out, as soon and as quickly as zoning can be obtained even in the teeth of a crash in the market for suburban platted, single-family homes.

In Miami, some public officials purchased far more home than they could afford, put up to it by homebuilders with their own “in house” mortgage originators. So now there are public officials with highly risky mortgages that wed them to influence peddlers: a shotgun marriage between compliant legislators and policies that are strangling Florida, fetted in the glossy photos of builder publications.

We would like to say that the cycle is over. The damage is done. It is not.

We go to the Court House. We go to the Commission Chambers. We attend to civic engagement that politicians say is the foundation of democracy but which turn out to be, in matters related to zoning and permitting new construction, carefully choreographed charades.

How can civic cynicism match: “We only provide what the free market wants.”

More propaganda is alive and well: “normally the Federal Reserve could be expected to cushion the credit crunch by cutting interest rates. However the central bank is widely expected to keep rates unchanged at this week’s meeting out of concern that the slower economy has not sufficiently dampened inflation pressures.”

Why isn’t the mainstream media asking this question: to what extent is the economy threatened by consumers spending down home equity lines of credit, or money pulled out of second or third mortgages, that were given easily and now that underlying home values are declining, cannot be a further source of wealth to sustain consumer spending?

We have a feeling walking through Miami or on Miami Beach today, that the over-hang of risk equity is enormous. It is filling the marinas, the shops, the restaurants: how long can it go on?