"No better time to buy a new home, no better place" reads the faux headline in The Miami Herald paid advertisement section for real estate; describing a platted subdivision in Homestead, Florida. It is a line for suckers.
And another line, comes out as a whine: "If families who want to buy a new home wait for the media to tell them things are better, it will be too late and the deals won't be there." It's pure nonsense.
At Miamicondoinvestments.com real estate consultant Jack McCabe notes: "There were 272 single family homes sold last month in Miami Dade County. ... Puny Tallahassee and Pensacola sold nearly as many even though the areas population and housing stock are but a fraction of Dade."
The reason there are few buyers in Miami is a massive oversupply of housing, fomented by zoning decisions at the level of the county commission, influenced by builders like Caribe Homes and their compatriots at the Latin Builders Association. To be sure, the builders couldn't have pressed their case without cooperating mortgage brokers, a fair share of liar loans and fraud, bankers supplying easy credit like drug dealers to crack addicts, and freshly minted MBA math whizzes doing their seniors proud by taking a dollar of equity and turning it into twenty of debt, well outside the purview of regulators who- for their part--were cajoled and wheedled to let the "free" market do its magic.
In Miami, county commissioners whose campaigns were funded by wringing the supply chain of the builders, from suppliers of cement to paper products, never saw an application for housing that it wouldn't turn down; fine tuning the run-up to the biggest asset bubble in housing since the 1920's. (AP reports today that Lowe's Home Improvement suffered an 18 percent drop in first quarter earnings: said one investment analyst, "We have yet to see trends get less worse.")
In the past year, home prices in Miami have fallen nearly 22% (Case/Shiller S&P Housing Index), one of the most rapid declines in the nation. Loads of homeowners in Miami hinterlands, who thought they were buying cheap land undervalued near the Everglades, now find themselves with unaffordable commutes to distant places of work.
Today in Miami there is no bottom to the housing market in sight. Hundreds of acres of Mediterranean tiles coat subdivisions on former farmland in South and West Dade like ash from Everglades' fires; those tiles are the pride of the Chamber of Commerce and the hoi polloi of Miami who blasted critics, at the time, as "elitist" and worse.
"If you don't buy now, you'll never be able to afford to" was how the early tranche of buyers were suckered in. There are other tranches of suckers, and I predict their voices are going to be heard loud and clear in the Fall elections.
Those would be hard-working Americans, retirees, and people who balance their checkbook every month, only spend what they can afford on housing, and are now--because they are also US taxpayers--are on the hook for toxic mortgage debt sold by Wall Street and local bankers who already pocketed their billions in commissions and fees for engineered financial products that leveraged down deposits into confection.
Here is the lesson: if you are good and honest and set a good example for your children, the housing fiasco shows that as a taxpayer, you are complete sucker. Let's total the cost, that may ultimately fall on your shoulders.
To the $300 billion in realized losses by investment banks, add $300 billion in private toxic debt accepted as collateral by the Federal Reserve-- an unprecedented action by the "independent" lender of last resort-- to keep JP Morgan and others afloat, add $300 billion now under consideration by Congress in the bailout of mortgage holders who are at risk of foreclosure.
The trillion dollar financial crisis may not ruin the US economy on which your job may or may not depend, but add to that the wars in the Middle East that the Bush administration claims cost only $600 million but that Nobel economist Joseph Steiglitz estimates at $3 trillion, and suddenly the estimates of the trillion dollar financial crisis have to be doubled or tripled just to factor in the malfeasance and other less worse inefficiencies of regulators trying to cover their asses.
And now you get a sense why little Caribe Homes and their partners in Florida's building industry have no credibility at all. Zilch. Nada.
If you want to know what voters think of the mess, just wait until the Fall election because it is apparent-- notwithstanding the tired advertising gimmicks that abound-- that while ordinary Floridians were practicing conservative economics at home, in Tallahassee and Washington the party of fiscal conservatism, that would be the Republican Party, was doing the governmental equivalent of "Girls Gone Wild" with the nation's economy.
And so, Caribe Homes' Leeward Isles II is leeward of nowhere and represents for all its false promise, the failure of the growth model for Florida.
The State of Florida, in the midst of the worst economic crisis since the Great Depression, is tapping a $3 billion reserve to cover this year's budget deficits. No, it's not the media's fault.
It's the builders' fault for pushing an anti-citizen, pro-growth at any cost agenda, so hard-- so massively, that the only way out of the crisis was to turn the Federal Reserve into a political arm of the federal government. And in Florida, the builders' response to throttle Florida Hometown Democracy: the signature referendum to qualify a measure that would take growth plan amendments out of the hands of elected officials and put it in the hands of voters: who could possibly think it is a penalty to the economy when the Growth Machine has done such a fine and thorough job of running the economy straight onto the rocks?
Americans are angry and have every right to be. Citizens in South Florida have every reason to be angry that land speculators, under water, are rushing to turn plans for subdivisions into mines for lime rock; gutting the Everglades to save their hides; and still, in the case of Jeb Bush's Miami ally Ed Easton and Lennar, trying to get zoning rammed through for thousands additional homes edging westward.
This is a teaching moment, and it is the responsibility of the free and independent press to show exactly how the political forces behind the housing boom caused the entire economy to veer crazily--straight to the point of systemic failure.
And it is important for Florida's media to show how the influence of our state's builders and Growth Machine in Washington nurtured this national economic calamity, predicated as it was on the abandonment of regulation or, at the very least, the gutting of regulatory agencies to smooth the way for creative destruction.
If you think now is the best time to buy: think again. After foreclosures set new pegs for the housing markets and inflation is supported by the Federal Reserve to be de facto monetary policy, you will see a different set of values dominating American politics.
A year ago, it was clear that the national economic crisis would be the major issue in the November 2008 elections. The US economy is not leeward of any safe shore.
Want to learn more about the radical extremists from the building industry, like the Latin Builders Association, who are part and parcel of our national economic calamity, listen here.
3 comments:
Boycott Lowe's! and its application to move the Urban Development Boundary in Miami!
Boycott Lowe's is a good tactic. But, someone better tell them they are being boycotted, because with a new store, the managers will not know that they have an issue, unless they have 2 customers a day.
I don't think that the populous is as proactive as they should be on issues.
Why sit around and let things be done to you?
Gimleteye writes: God bless Nouriel Roubini
How will financial institutions make money now that the securitization food chain is broken?
Nouriel Roubini | May 19, 2008
The most severe financial crisis in decades has not only damaged the balance sheet of financial institutions. It has also severely affected their P&L, i.e. the process of generating revenues and profits.
In the old “originate & hold” model (before securitization) financial institutions made money from the investment income of holding the credit risk of loans and mortgages. But in the brave new world of securitization where you “originate & distribute” the credit risk rather than hold it on balance sheet an increasing fraction of the income of financial institutions was coming from the fees and commissions involved in this securitization process. This food chain of fees on top of fees is now broken: securitization of mortgages, that was running at the annual rate of $1,000 billion in January of 2007, was down 95% to an annual rate of $50 billion by January of 2008. So the process of generating fees and commissions is broken.
Let’s consider in more detail this loan origination and securitization chain for residential mortgages, commercial real estate mortgages and leveraged loans financing LBOs…
In residential mortgages the process started with peddling mortgages that were toxic in every aspect of their features: no down payment, no verification of income, assets and jobs (the “no doc” loans that were effectively “liar” loans), interest rate only mortgages, negative amortization mortgages, and teaser rates. Why were these toxic mortgages peddled, originated and distributed after being sliced and diced? Because everyone in this securitization food chain was making a fee and transferring the credit risk to someone else down this food chain.
Think of this fee generation process along this long food chain: it started with mortgage brokers whose income/fee was based on maximizing the volume of mortgages being generated and approved; they had all the incentive to ignore the creditworthiness of the borrowers and maximize mortgage volume and their personal income. The fee generation machine then passed to the bank originating the mortgage that was packaging these mortgages into MBS and thus making a fee in this process and transferring the risk down the line to someone else; again the bank care little about the quality of it own origination as it was transferring the credit risk. The fee generation machine included the home appraisers who were being paid by the mortgage originators and had all the incentive to inflate the appraised value of the home to get more and more fees and more and more business; this fee machine also included the mortgage servicers who got fat fees from servicing the mortgages and getting even fatter fees when the hapless borrower falls behind in its mortgage payments and who thus have no incentive to prevent foreclosure. The securitization food chain continued with the investment banks slicing and dicing the MBS into the equity, mezzanine and senior tranches of CDOs and making fat fees on that process and on managing such CDOs. The fees compounded when the CDOs became CDOs of CDO (CDO squared) and CDOs of CDOs of CDOs (CDO cubed). Then the rating agencies that blessed these CDOs chains and tranches with AAA rating were getting their fat fees (and most of their profits) from rating – or better misrating - these toxic products and converting – via voodoo magic –bundles of BBB subprime mortgages into AAA rated tranches of CDOs. Along this fee generation machine the monoline insurers were making fat fees insuring these toxic instruments and providing additional AAA blessing on this garbage and trash. And finally if this garbage of CDOs (or CDOs cubed) was not fully distributed to clueless and greedy investors banks created off-balance sheet SIVs and conduits that would buy the leftover trash that no investor wanted to touch and repackaged it into structures that were financed with the most short term ABCP; these SIVs were then blessed with credit enhancement and guarantees of liquidity lines from the banks that made them de facto on balance sheet items even if they were de jure off balance sheet; but there were extra fat fees to be made from managing this toxic SIVs and conduits and thus the fee generation machine kept on rolling.
In this securitization food chain – or better scam - every institution made a fee and transferred the credit risk down the line. Then no wonder the credit risk was transferred to those who were the least able to understand it: somehow greedy and clueless investors searching for yield bought tranches of instruments – CDO or CDO cubed – that were new, exotic, complex, illiquid, marked-to-model rather than marked-to-market and misrated by the rating agencies. Who could then ever be able to correctly price or value a CDO cubed? And for all the talk about the benefits of financial innovation what was the social value of a CDO cubed? There was indeed zero social value in this type of financial innovation that is closer to a con game than to a financial product of any use.
So now that this credit house of cards has collapsed this securitization food chain is effectively dead and the process of generating fees - and thus profits – for financial institutions is severely hampered: fees are collapsing for mortgage brokers, home appraisers, mortgage originators, mortgage servicers, CDO managers, monoline insurers, rating agencies, SIV managers and so on.
A similar securitization food chain with fees upon fees and credit risk transfer was created for the credit bubble in commercial real estate mortgages and for leveraged buyouts.
In the case of commercial real estate mortgages the process started with a similar reckless origination based on high loan to value ratios and inflated expectations of rent increases. Then the commercial real estate mortgages were sliced and diced and repackaged into CMBS and the CMBS into CMOs and CDOs and then SIVs with all the related set of fees as in the residential mortgage food chain.
In the case of leveraged buyouts (LBOs) the process started with LBOs that should have never occurred in the first place as the last vintage of LBOs had reckless debt to earnings ratios of 8-10 as opposed to the historical average of 3-4. Thus highly leveraged buyouts with tons of debt and little equity took private borderline profitable corporations that should have never been loaded with such massive amounts of debt. And since credit was cheap – junk bond yield spreads bottomed at 250bps relative to Treasuries in June of 2007 - and investors were searching for yield hundreds of billions of dollars of LBO deals were generated with terms that did not make any sense (including covenant lite terms and PIK toggles). Then these LBOs were financed with leveraged loans and bridge loans; and then further sliced and diced into CLOs that were then stuffed into SIVs and conduits when they could not be sold to investors. Too bad that eventually - by early 2008 when this LBO and private equity bubble went bust - hundreds of billions of dollars of frozen leveraged loans and bridge loans were still sitting on the balance sheets of financial institutions being valued at 70 or 80 cents on the dollar.
So how will all these financial institutions generate revenues and profits now that this effective scam has mostly collapsed? Origination of new subprime and near prime (Alt A) mortgages is effectively dead; origination of new commercial real estate mortgages is nearly frozen; securitization of mortgages has collapsed by 95%; the entire CDO, CMO and CLO market is frozen with almost no new issuance; while the SIVs and conduits have collapsed with the rolloff of the ABCP paper that was financing these scams.
So how will mortgage brokers, banks, broker dealers, monoline insurers, rating agencies generate revenues and profits now that this slice & dice scheme has unraveled? The current market delusion that the worst is behind us for financial institutions is based on the view that most of the writedowns of the toxic assets have already been done. But this is not just a balance sheet problem. Now financial institutions have a more severe P&L problem, i.e. how to generate income and earnings from now on when they cannot originate junk any more. The entire income generating model of financial institutions – make income out of securitization fees rather than by holding the credit risk - is broken now that the generalized credit bubble (not just subprime mortgages) has burst; thus, how will these financial institutions generate earnings over time? Capital losses are one-time problems; but destruction of the income generation process is a more severe and persistent problem that will require banks and other financial institutions to rethink their overall business model of credit risk transfer. But there is no clear and sound new business model for them: going back to the old days of “originate and hold” is not fully possible while the new “originate and distribute” model has shown all of its wrong and distorted incentives, risks and systemic failures. So banks and other financial institutions will have to seriously rethink their business model and how they are going to make money: the model of slice and dice and pile fees upon fees and transfer the credit risk is broken. It is not clear if banks and other financial institutions have a better model. May they will have to go back to old fashioned banking: carefully assess the creditworthiness of their borrowers, lend on sensible terms and hold a good part of the credit risk now that the easy fee/profit generating machine of securitization is terminally broken.
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