Investors, taxpayers and the housing crash: do you see what we own? ... by gimleteye

Vitran Homes at the Preserves
You can't have missed the talk about banks off-loading their 'toxic assets' from balance sheets and onto US taxpayers. What, exactly, are those 'toxic assets'? Well here is a photo to help your thinking. (please click, 'read more'.)

When you hear the term, "toxic assets", it is important to know that those assets do have an underlying reality; and in many, many cases they looks like this photo: the detritus of the housing boom. At the end of the day, all the foreclosures of questionable value absent demand have an address in the portfolio of a bank or insurance company or hedge fund that may have used properties like this abandoned development as collateral for a loan, for another insurance-related product like a credit default swap.

This development stopped dead in its tracks because the developer could not obtain financing for one reason or another, or, decided it cost less to abandon than take to the next stage. Maybe no bank would extend credit because similar developments, at similar price points, of similar demographics-- packaged and pooled as a mortgage backed security and now rotting on someone's balance sheet-- have no calculable value.

Then, too, this development is located at the leading edge of foreclosures in unincorporated Miami-Dade near Homestead, Florida and Florida City, neighborhoods awash in a foreclosure red tide. I took a look at the area of this development on Google Earth the other day. Not even Google's satellite imagery could keep pace with the unsustainable development in South Dade and the western fringes of Florida's most populous county.



What you see in this photo is a massive Lennar development, scarified and prepped and ready for cement. The Google imagery is from a time in the not-so-distant-past, on the left side of SW 112th Avenue, just north of the Florida Turnpike and just south of Vitran Homes, on the right side (and in this photo, Vitran Homes at the Preserve is still a farm field. Using the word "Preserve" in this location with this result does seem like a stupid joke). It was all farmland. It is waiting for the two by fours, in the photo. Today it is lackluster, mostly empty platted subdivision. The entire area feels as though the oxygen has been sucked out of the air. According to a recent AP story, nearly one in four houses in the area are in foreclosure: one of the highest rates in the nation.

It was all foreseeable. It could all have been avoided if local government acting as zoning and permitting authorities would have done their jobs. All the incentives, however, pointed in the direction of avoidance. Who knows whether those incentives also included Bahamian poker chips delivered with a handshake? Today, President Obama talks often about the need to regain the moral center; starting with reforming Wall Street's culture of greed and excess. But the flip side of the coin is the way local government failed and in important respects continues to behave in zoning matters as if there is no connection at all between their actions and the worst economic crisis since the Depression.

It is important to understand that a large part of the demand for housing, that inflated the housing asset bubble, was pretend. It was imaginary based on the fictions of riskless derivatives tied to mortgages. By 2005, mortgage brokers with an open account at ABC bank were out scrounging buyers wherever they could be dredged up. This is the great fallacy that the Obama administration seems incapable of acknowledging: it may be possible to persuade hedge funds, and private equity, and banks to take these assets so long as all the downside risk belongs to the taxpayer; but what do they do with the half abandoned platted subdivisions? Where is the demand?

Lennar owns its project on the other side of SW 112th Avenue: The Lennar regional VP is the president of the Latin Builders Association; one of most influential lobbying groups in the state of Florida with influence stretching to Congress and federal transportation and housing policies. The owner of Vitran Homes at the Preserves is a director of the South Florida Builders Association. To put it bluntly: these developments are exactly what the builders' lobby wanted and lobbied to construct, turning valuable farmland into the fiction of demand and manageable risk. They were neither.

At zoning meetings and public hearings of city and county commissions, lawyers making $500 an hour responded to citizen objectors, saying, "They don't know what they are talking about." In fact, in the risk game that played excess housing into artificial demand, no one knew what they were talking about, and especially not in the vegetable fields and farms where farmers welcomed the replacement of pole beans and tomatoes with rows of tractors, graders, and ditch witches. Everyone was paid, and paid well, to be dumb.

No one is being held accountable for the vanishing trick: least of all, city and county commissioners who permitted anything and everything to be zoned and permitted and built in Florida because that's what their campaign contributors and lobbyists from the Latin Builders to the South Florida Builders to the Chambers of Commerce wanted. Not a single incumbent county commissioner in Miami-Dade, for instance, has had to answer the question of his or her role in the economic calamity.

The builders are all lying low. Waiting for their chance to spring back into the game. They are in Tallahassee at the state legislature pushing and prodding for a new law eliminating the state agency charged with regulating growth under the premise that the current economic meltdown in Florida was caused by too much regulation of business.

The only group being held accountable are you and me because we pay taxes. They have the first dibs on everything else: the cement, the highways, the cabinetry and the water pipes.

"The government's toxic assets plan will force banks such as Citigroup, Bank of America, and Wells Fargo to take large write-downs on their loans, requiring them to raise more capital from taxpayers or investors, executives and analysts have warned." That's the lead paragraph of The Financial Times, "Banks face big writedowns in toxic asset plan." (March 25, 2009)

Because there is still no prospect of accountability for the costs of bad development decisions, that's another reason the risk of owning this platted subdivision, or share in the company that owns this platted subdivision, is unacceptable to all but one class of investors. Who is going to pay anything for this? Well, the way things are going: you are. You are going to guarantee the hundreds of billions of debt spun out by the Treasury for banks to sell toxic assets to investors at a steep discount.

That's right. The bad pavement. You own that. The weeds growing wild and the infestations, you own those too. The concrete and the exposed two by fours held together with feeble aluminum fittings: they are all yours. You own it all the way to the figurative, fucking horizon.

Think about this post-apocalyptic platted subdivision and multiply the image in your mind by 10,000 or 1,000,000. I don't know what number to use because no one knows. But to understand "toxic assets" you have to visualize a gargantuan scale of foreclosures and worthless debt multiplied twenty to thirty times the value of underlying mortgages in locations far from places of work or any other metric of societal value except that they were cheap, then, and a lot cheaper, now.

When you hear the words "toxic assets" that you will own, think about the fallen stars of the newspaper real estate advertising section. When you hear about newspapers that can no longer stay in business, think about newspaper executives compensated by stock options tied to quarterly profit, who bet the farm on advertising revenue from speculators and their fictions of such friable value they are now drilling a hole in some bank's balance sheet..

Those responsible for the economic disaster do have names: they are local bankers who scooped up the mortgages and sold them without looking or raising a single question. They are the land speculators who scooped up zoning officials and local elected officials, they are anti-regulation Idiocrats in a daisy chain with local title companies, mortgage brokers (in Florida, The Miami Herald detailed more than 10,000 felons who became mortgage brokers but never tracked the fraud up the food chain), they are the Wall Street risk analysts now lying low behind gated estates in Fairfield County, Connecticut. They are the executives from Standard and Poors and Moody's and AMBAC, paid billions to miscalculate risk of derivatives bundling housing for which there was no real demand. They are Congressmen and White House economic advisors, past and present, who made sure that the derivatives industry got whatever it lobbied. Everyone took a slice. Everyone skimmed from the top.

Few in the supply chain thought there was a risk to the fetid, lousy development that passed for sound judgment and property rights. What the cratering of low cost, low density sprawl shows, is that it paid to be be dumb as dirt: how else to explain this outcome: the squandering of a nation's wealth?

I pick on the fringe suburbs for a reason: Yes, the subprime problems are riddled in the cities, but the real energy that pushed the economy off the tracks was in places like Homestead, or Florida City or unincorporated Miami Dade where vacant subdivisions are silent testament how so much of the "growth" in the US economy was tied to mass production of housing, that in many places in Florida could only be zoned by skipping past state and federal laws protecting wetlands, aquifers, and watersheds.

The constant flow back and forth between horrendous land use decisions, platted subdivisions and Wall Street is like a thermal exchange that energizes a dysfunctional society while, at the same time, wrecking the underlying value of place. You cannot drive down SW 112th Avenue in Homestead and think anything but this: Florida is cooked, wasted, done.

Lennar is the developer of the property right across the street from Vitran Homes at the Preserve. I didn't take pictures but you can imagine it. Outside the low stucco walls, chopped down to save money, red white and blue flags wave indifferently in the breeze announcing a sale. The whole state is on sale. The bland, instant-grow townhouses line up on smooth paved aisles, as if you could push a shopping cart through here, there, and in California.

On March 20th, the Wall Street Journal reported of Lennar, the nation's second largest production homebuilder, that the corporation "... which largely cashed out of one of the nation's biggest land ventures near the top of the market, is close to a deal to pick up some of the pieces at a significant discount... Lennar sold much of its interest in the venture, LandSource Communities Development LLC [MCFARL.UL], in February 2007 to pension fund California Public Employees Retirement System for about $707 million. LandSource sought bankruptcy protection in June 2007. Now Lennar is negotiating with creditors of LandSource to create a new company that would acquire much of the land out of bankruptcy, including the venture's crown jewel, the 12,000-acre Newhall Ranch north of Los Angeles, the paper said. Lennar and several hundred creditors holding $1 billion of the venture's debt would contribute "substantial" equity to the new company, the report said, citing the summary of the proposed agreement."

I know: you have to read it twice.

Instead of allowing failed businesses to go bankrupt, the US government is supporting the cause of more financial engineering. More leverage, built this time not on private equity but taxpayer guarantees. Banks are being bailed out on the principal that investors can buy for a dime what taxpayers have guaranteed for a dollar. This cannot end well. In The Huffington Post, hedge fund manager Alan Schram wrote of the Obama bailout plan, "... what bothers me most is that we bet our financial system and the economic recovery on this plan, hailed as a panacea. ... If (the Obama Plan) fails," Schram goes on, "shattering the high hopes of so many, the price of disappointment will be immense. We will be with our back to the wall, facing another wave of panic."

What is there to say about the elected officials, some are still in office and others are 'investment bankers' like former US Senator Phil Gramm, who created the conditions in financial industries that put government in the place of "rescuing" taxpayers and citizens from the excesses of the free market? What are the chances that the helping hand of government will be corrupted by outstretched hands closest to the treasury; accruing to the former bankers now converted to EMT technicians for the national economy and development patterns that already wrecked the economy once?

The production homebuilders and their lobbyists ruined their market and are rigging the bailouts so they can come back and buy cheap, sell higher and pocket the difference. They didn't want anyone telling them what to do, when places like South Dade were devastated. With results like this, who needs a hurricane? Stand aside, let the ambulances pass by, it is what we are being asked to do for the good of America.