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Economics, Uncategorized

Coming to a Theater Near You?

Back in April the Sun Sentinel news in Ft. Lauderdale, ran an investigative series titled Bad-Neighbor Banks, which focused on the side effects of the South Florida foreclosure crisis.  The article describes how some of “the world’s biggest banks” have left vacant homes to literally rot away.

In Florida the problem is magnified by the number of (abandoned) homes with swimming pools, one of which the article documents “turned into a stagnant pond with poisonous toads,” and another is described as “Filthy, dirty” with the potential to become “a breeding ground for mosquitos or becoming a health hazard.”

Of course swimming pools are not the only problem.  Another property is described as follows:

The yard grew so wild it became home to rats and snakes.  Ants, bees and termites thrived, and infested Gibson’s house next door. In September 2009 it came to this: Someone set up an auto repair shop on the front lawn. “He has a crane in the yard to remove motors from cars.”

Unfortunately, the story is not just about eyesores, blight and depressed value.   There is also tragedy:

In Miramar in October 2009, a common worry of parents came true. While his family was busy unpacking boxes and moving into the house next door, a toddler wandered into the backyard of an unoccupied, bank-owned house and drowned in the pool.

The boy’s mother, Margarette Francis, told investigators the water was so dark and thick with “garbage” it was unrecognizable as a place to swim.

“It was, oh, disgusting and I don’t think the baby knew there was a pool,” she said. “The only thing I can tell you is the slide attracted him … He probably thought he was walking into a playground and he walked right into the  water.”

The problem is largely a result of an ironic process known as “bank walkaways,” which leaves the question of who is the legal owner of the home responsible for the up keep. A walkaway story appeared in the Cleveland Plain Dealer back in July of 2009, that discussed the shock that many “homeowners,” face when they learn that they had not legally lost their home (and responsibilities) after all, despite the fact that they had been foreclosed on.

The Plain Dealer article described bank walkaways as a disturbing trend.  Three years later in South Florida, the nightmare has become reality.

In addition to being fascinating reading the article(s) elicit some questions.

At what lengths can a municipality go to enforce property codes?  Is a bank who sold the mortgage to investors, merely a “trustee” and not a true owner?  If the owners are the investors in mortgage backed bonds, is the full cost (liability) of maintenance or home razing reflected in the value of the bond?

The issue is not likely to go away anytime soon. In addition to these questions, investors need to put the issue in the following perspective:  somebody has a potential liability that might no be reflected in current market prices.  Depending on the answers to the legal questions posed;either the banks or mortgage backed bonds, might not be worth what you think they are.  If the legal burden falls on the previous “homeowner,” municipalities (think muni bond holders) might have a bigger problems than they think they have now.

It would behoove investors to keep an eye on this story line and related analysis in an effort to quantify just how big the issue could become (if it truly is a problem).   Meredith Whitney was villified late when she appeared on sixty-minutes in late 2010 to disucss the diffuculties facing municipalities and predicted a wave of muni defaults.  Many in the financial world (or at least media) have taken the fact that these defaults did not occur as an all clear signal in terms of municipal bonds.

Unfortunately I am not so sure we have seen the end of this movie.   We can only pray that there is no sequel.

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DISCLAIMER: Nothing in this article should  be construed as a personal recommendation or investment advice.  Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security.   Investors should conduct their own due diligence and seek the advice of a financial and/or investment  professional before making any investment decisions.

Discussion

3 thoughts on “Coming to a Theater Near You?

  1. Pretty interesting dilemma. Personally, this entire problem highlights (IMO) the lack of parties taking responsibility. As in, it is the person(s) who take out the loan is responsible for paying it back. However, if there are provisions for that bank to take back the home as collateral for the loan, then the bank is responsible for it. The problem arises when neither party hold up their end of the bargain. Which goes to my point about a much larger issue. The moral compunction to hold to one’s agreement has lost its way in America. Whether that be a signed document or not (see sports figures walking out on contracts as exhibit 1) or political speak (exhibit 2). The fact that people look to the law first and foremost (only?) vs being held to a higher (power) standard goes to man’s ability to move the goal posts to fit his own selfish ambitions (or lack of accountability). Look for this and many more problems to increase. This nation continues to move farther from the only thing that can save it.
    Oh and have a nice day!

    Posted by Tom VanAntwerp | June 14, 2012, 7:33 AM
    • Tom,

      I hear you, but would also point out that responsibility is a two way street. An earlier blog post https://barnhartadvisory.wordpress.com/2011/12/02/when-everyone-has-bad-credit/ touches on some of these issues.

      Posted by Ted Barnhart | June 14, 2012, 8:08 AM
      • I read the earlier link. I am not advocating for no options like bankruptcy for those that had some misfortune. My point is (and I know you agree with me) that when as a society we look at making a deal (any deal) as ONLY a means by which we get what we want with no real consequence for not holding to our end, we get what we have (and more of it). If the rules are such that I can make a deal and not pay the consequences because the laws have been so skewed in favor of dumping them on to someone else, then let’s party (see the idiots that want someone else to pay off their student loans). Unless, of course, I am beholden to a higher standard that does move “like shifting sand” and has stood firm for the ages.
        I remember having a discussion once with my dad about pain when I was little. I mentioned I wish God didn’t make us have to feel pain. My dad aptly pointed out that without pain, we would not know that we were hurt and thus saves us, most times, from deeper and more serious trouble.

        Posted by Tom VanAntwerp | June 14, 2012, 8:39 AM

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