Tfgray’s Weblog

God bless Thomas J. Dart, Sheriff of Cook County, Illinois (aka Chicago). He noticed that evictions had doubled in the past year. Then he noticed that he was evicting people who had paid their rent in a timely and consistent fashion. The landlords were getting their money, just not passing it along to their lenders.

According to DSnews.com, “Just two years ago, there were less than 19,000 foreclosure cases filed [in Cook County]. This year’s total is expected to exceed 43,000.” On top of all the other problems involving people playing monopoly with real houses, the banks were not doing their due diligence, leaving it up to the Sheriff’s Office to determine if the owner inhabited the house. Tom Dart had the courage to cry foul, and not for the first time. Last year he tried to get a bill passed that would at least identify children and elderly residents of properties in foreclosure so that social service agencies could contact them in advance and ease their transitions to other housing. The bill failed.

There’s historic precedent for Dart’s action, as covered by Ann Keating at http://www.examiner.com/x-781-Chicago-History-Examiner~y2008m10d12-The-Trouble-with-Evicting-People-from-Their-Homes-Even-if-they-dont-Own-them

Tom’s not the first to show compassion. The banks haven’t changed a whole lot, either. Accredited Home Lenders filed, then dropped, a lawsuit in a case where Tom refused to evict. And Chicago is not alone:

http://www.boston.com/realestate/news/articles/2007/10/21/default_crisis_is_evicting_renters/

http://www.nytimes.com/2007/11/18/us/18renters.html

http://www.lasvegassun.com/news/2008/jul/27/when-renter-pays-owner-doesnt-youre-out-tenant/

What can you do if you are in this situation? The following site has some useful information:

http://www.caltenantlaw.com/Eviction.htm [Scroll down to "Foreclosures."]

It suggests that by fighting back, you can delay the whole process by 6 months or so, and this might be the most important sentence in the whole article: “You should also know that if you cannot afford the filing fees, you can get the fee waiver application forms from the Court Clerk, and submit them in lieu of actual payment. When in doubt, do that, because it may be granted, it gives you more time, and it protects your case file from others viewing it.” It also warns against “Cash for Keys” agreements, in which you agree to give up your security deposit and residence in exchange for promises they generally don’t intend to keep.

Important disclosure here: this website,http://www.caltenantlaw.com/, is specific to California Tenant Law. Seek legal advice relevant to your home state. 

In the meantime, it would seem that there could be some sort of legal arrangement worked out to get the property shifted from the non-paying owner’s clutches while not disposessing the paying customers. After all, wouldn’t an income-producing property be a more attractive buy than a vacant one? Whether the solution is governmental or private sector, the key would appear to be changing the law that requires a rental property to be vacated before foreclosure. Any thoughts?

After sleeping on it, I’ve come up with one:

• Make the lender’s due diligence include finding out if the owner occupies the property. If not, rather than sending eviction notices to the renters, then would be sent a letter requesting that they show receipts proving they were current on their rents, with a two week deadline. The letter would explain that if they can prove they’re current, they will not be evicted. (Provision should be made that someone who is getting free rent in return for managing the place doesn’t get wrongfully evicted.) Once they have documented their payment status, they would receive instructions to pay their rent to an escrow account. To avoid confusion, the lender could send a couple or three postpaid envelopes to cover the transition period.
• Those who were not current on their rent would be evicted. And yes, Sheriff Dart’s proposal, that those renters be checked for disabilities and age should be included in the proposed legislation.
• The property would be auctioned off at a sheriff’s sale. The funds in the escrow account, less the cost of hiring  someone to manage the building, would go to the lender.

Why do I think this would work, even though it gives the lender an extra hoop to jump through? Because an income-producing property would sell for a higher price than a vacant building, thus bringing a greater return to the lender. The escrowed funds would cover the cost of the added research and the cost of managing the property during the transition period.

Let’s start with a comment from Polixian to a previous post:

 This should give responsible media outlets a greater opportunity to point out the history of how it is our economy got to where we are…beginning with the Community Reinvestment Act of 1977 (President Jimmy Carter); the push by the Clinton Administration to force sub-prime mortgage lenders to expand their offerings into under-qualified, high-risk groups; the money trail of industry lobbyists (esp. Freddie Mac, Fannie Mae) and their political allies (esp. Frank, Dodd, Obama, and other republicans as well); and, the efforts by the aforementioned, as well as Maxine Waters and Pelosi, to protect such industry practices via outspoken congressional opposition to reform measures.

Ok, I admit I started it, by thinking that the Bushies had pushed this to bring the maximum amount of sheep in to be fleeced by predatory lenders. It was the Liberals that started this. However, here are a couple of details that have come to my attention:

Polixian echoes the Right Wing charge that Liberal policies have forced banks to make loans to people who could not afford the payments. It is soundly rebutted here:

http://www.snopes.com/politics/obama/loans.asp

The landmark case, Buycks-Roberson v. Citibank Fed. Sav. Bank was about the bank’s refusal to make a loan to a Black woman while granting loans to whites with similar income profiles. The lawsuit sought to end redlining, the practice of refusing credit to individuals based upon their neighborhood, regardless of their ability to repay.

I spoke with Michael, my go-to-guy at work, a second-generation bank consultant, who told me he ran the math and figured out that the $700 billion figure for the bailout was based upon 7% of the $10 trillion mortgage market going south, of which $0.5 billion represents those nasty, evil, ACORN-inspired subprime loans. Po’ folks taking down the global economic system? Not hardly.

Then I ran across this, at http://www.webofdebt.com/articles/its_the_derivatives.php 

What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

Michael puts the total US derivatives market at $180 trillion, or about 18% of the global total, and notes that the entire GDP (Gross Domestic Product) of the entire world is a measly $70 trillion. Yeah, you read that right: the derivatives market is about 14 times the entire annual income of the entire world. OK, so what’s a derivative?

Essentially, it’s a bet. Again, from Ellen Brown, who explains this stuff so clearly:

Derivatives are financial instruments that have no intrinsic value but derive their value from something else.  Basically, they are just bets.  You can “hedge your bet” that something you own will go up by placing a side bet that it will go down.  “Hedge funds” hedge bets in the derivatives market.  Bets can be placed on anything, from the price of tea in China to the movements of specific markets. 

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing.  It is gambling, insurance, and high stakes bookmaking.  Derivatives create nothing.”¹  They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services.  In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling.  But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.”  Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked.  But the cost was an increase in risk to the financial system as a whole….²

Credit default swaps (CDS) are the most widely traded form of credit derivative.  CDS are bets between two parties on whether or not a company will default on its bonds.  In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default.  CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes.  In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims. 

And there’s the catch: what if the hedge fund doesn’t have the $100 million?  The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down.  Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets. 

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme.  The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.”

[This might be the time to mention that W's brother Marvin runs a hedge fund, Winston Capital Management, but I digress.]

So, what did that $700 billion buy us? Damned if I know. The credit market is still seized up, since the dominoes are still a-tumblin’ and $700 billion, as impressive as that string of zeros is after the 7 looks, is only .00000004 of the value of the total derivatives market.

And the most interesting part, as Brown points out, is that “Derivatives create nothing. They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services.”

So essentially, derivatives are fluff, wispy critters of air, the foam on the economic beer, so to speak. with as much intrinsic value as the average casino chip. And yes, there are people who have profited most handsomely from them. What to do? Soak the Rich? That would be nice, but the problem is that down the line the real money underlying the cotton candy is your IRA, my 401-K, and Mrs. McGillicutty’s annuity.

Exactly how do we untangle this?  How do we blow the foam off without spilling the beer? Nothing jumps off the top of my head, but I’m putting on my thinking cap, and I hope you will, too.