Oppose the San Mateo County Foreclosure Moratorium!

From a patrick.net reader

Analysis of Resolution
 
The resolution is non binding and although it makes little sense and directly
accomplishes nothing, it will prolong this pain and turn a bad housing market
into a deep recession.  It has the indirect effect of appearing to endorse bank
workouts that the councilwoman has not read and does not understand.  The banks
won't reveal them to anyone because they negotiate them on a case-by-case basis
to extract maximum value from the borrower.  Interestingly, the reason these
borrowers are being foreclosed on is most certainly the deceitful marketing
practices of loan brokers and banks.  What makes you think that when these same
morally impaired agents return to the scene of the crime, that they will seek
to assist victims and preserve evidence?
 
Even a rudimentary understanding of how this crisis evolved would make a person
understand that workouts aren't going to allow borrowers to stay in their homes
long term.  The way these borrowers got into their loans in the first place was
by lying about income in stated income loans, and by being offered option
payment loans or ARMs with "teaser" rates that rendered a normal amortized
payment of $3,500 a month a mere $1,500 a month.  The borrowers were qualified
for the loan based on the $1,500 monthly payment.  It's just not possible to
have a person who makes $28,000 a year afford an amortized payment on a
$700,000 loan.  The buyers to at least some extent were hoping to "strike it
rich" and many have engaged in criminal fraud by lying about their income on
loan applications.
 
This isn't an anomaly.  People with incomes from $20,000 a year to $250,000 a
year have been encouraged to misrepresent income and assets on loan
applications and have been given loans that exceed all rational lending
standards.  The fact is that these foreclosures are going to happen unless the
government steps in and gives each borrower $300,000 or $400,000 dollars of our
tax money.  There's simply no other way.  Someone has to pay for it.
 
Most of these borrowers put nothing down.  The wildly conservative apparently
put a huge 5% down.  If these borrowers walk, they lose nothing.  The people
who lose are the Wall Street investment bankers, mortgage brokers and investors
who perpetrated this fraud.  These people are highly clever and they have their
eyes on the US Treasury and Congress to make laws reimbursing them and limiting
their losses.  By 2011 the cost of this will likely extend into the trillions
with a "T".
 
California has an anti deficiency statute in its Code of Civil Procedure that
stops lenders from seeking a deficiency judgment against the borrower where a
foreclosure sale fails to cover the outstanding debt.  Lenders doing workouts
want to accomplish two purposes: (1) put the foreclosure off two years in the
hopes that the inventory won't be so high then, and (2) try to get the borrower
to waive his anti deficiency statute rights so that it can garnish his wages
for seven or eight years under the new and very harsh bankruptcy rules.
 
Banks are not non-profit social services.  Banks seek by any means possible to
harvest as much wealth from their customers as is possible without losing them
-- unless it is to death or exhaustion, in which case maximum value was
extracted.  Banks are not going to rework loans with oppressive rate resets
into calm, conservative 30 year fixed rate mortgages.  Banks are going to
renegotiate the terms and refinance the borrower so that he pays the maximum he
can afford for a couple of years and then his payments spike again giving the
bank an opportunity to collect on the enormous debt owed -- when prepayment
penalties, unpaid interest, etc. is added in.
 
This is a highly complex problem and the people the councilwoman seeks to
control are in the middle of a carefully crafted game that is about two-thirds
along the way to its endpoint.  They have an agenda and a PR machine for
describing it in terms that bring tears to the average person.  They need
government endorsement of their tactics.  They knew two years ago how this was
going to end and prominent brokers have bragged, "this won't fail, it can't
fail.  It's too big.  When the foreclosures start, they will be forced to step
in and bail everyone out with taxpayers' money."
 
They really already have.  The entire S&L crisis cost taxpayers $125 billion.
But just in the months of August and September 2007, the FHLB loaned more than
$160 billion to mortgage banks that couldn't get funding from anywhere else
because everyone knows how bad the debt is.
 
The attached report from Goldman Sachs gives some idea how bad this is going to
get.  These lenders want to squeeze every last drop out of borrowers even if
they are living in their cars.  I believe that a resolution like the one you
propose will do more harm than good.
 
For many loans, the servicers (what you would call "the bank") don't even have
legal power to do workouts.  These loans have been transformed into securities
owned worldwide and those investors have a legal right to the proceeds of the
loans and/or the foreclosures.  The bank "services" the loan by billing,
collecting payment, foreclosing if necessary.  But it doesn't "own" the loan.
Investors own the loan and different investors all over the world own those
loans.
 
Some investors "hedged" by buying put options on mortgage lenders,
collateralized debt obligations, even default insurance from insurance
companies.  The ability of those investors to figure out their losses or gains
and to plan for the future is contingent on their legal right being enforced.
 
Regulation of this industry is the answer and not meddling in property and
contract rights that already exist.  It would be like if there was some sort of
a financial crisis and people started saying, "well, maybe we can pass a law
requiring Councilwoman Jacobs Gibson to allow 10 people who are having
foreclosure problems live in her house with her for the next ten years."  I'm
sure that would make the councilwoman very concerned. Trying to interfere with
the rights of our kind foreign creditors is very much the same thing.  Without
them, we'd have been in dire straits for the past five years.  Foreign
creditors have provided a lot of very low interest loans to Americans and the
American government.  They have truly been defrauded with these mortgage bonds.
They are the last people we should have the nerve to try to defraud twice.
 
Another problem is that the more city councils and and government entities that
make these sorts of threats, the more likely international investors are going
to bail on the United States.  Since the US savings rate has been negative for
four years now (longer than the last time it went negative in 1932), we
desperately need international investors.  We need $2 billion a day to finance
our current account shortfall.  If foreigners get spooked in buying our debt
(including credit card loans, auto loans, mortgages, etc.), rates will
SKYROCKET because there's no real money in the United States to buy those sorts
of assets.  There's money, but not enough and that would mean that the people
selling those loans would have to offer higher rates to entice investors to buy
them and that means higher market rates for loans.
 
What irks me terribly is that while banks are fleecing Americans and stocks and
housing is rising fabulously because of grotesquely loose and irresponsible
lending standards, everyone is happy, "hey, this is great, isn't it?  My house
just rose in price over 18 months by 30% and that's more in dollar appreciation
than my salary!  My wife and I are buying two Escalades with a HELOC and then
we're going to Tahiti!"
 
Then, when the hangover comes, everyone is stunned.  "What do you mean house
prices don't rise 15% a year every year?  Isn't there some way to FIX that?  I
mean we NEED that appreciation because we simply don't make enough money to
live so lavishly without home prices rising at a fast clip so we can borrow
money from our homes to finance all sorts of things.  Can't we get the Fed to
print more money?  Couldn't the government just GIVE us money, like issue bonds
and then take the proceeds and give it to homeowners who are starved of real
price appreciation and can't buy a new car this year?"
 
Yes, Councilwoman Jacobs Gibson, the government can do that.  But the problem
is inflation.  The Iraq war is already poised to cost $1 trillion and the
Federal Debt is climbing rapidly.  If it weren't for China and Japan and the UK
buying up so much US treasury debt, we'd be seeing double digit 30 year
mortgage rates right now.  The government is going to need very soon to spend
LESS money and not more.  And devaluing the dollar is one of the only ways to
bring things into balance with all of this incredible waste.  It's the method
of choice for cowards.
 
Have you noticed that the Canadian dollar is at almost US$1.06?  It's worth
MORE than a US dollar.  It's the highest it's been since 1957.  The Euro is at
$1.45.  If China loosens its peg, you can expect inflation to SKYROCKET here
because we import so many finished goods from them.  You think we can make
those things in the United States?  Chinese folks are getting $2 a day to make
the stuff and you're going to pay an American $14 an hour?  How do you think
that's going to affect prices?
 
People screaming for "drastic actions" to fix this may be able to keep home
prices from falling a lot by printing a lot of money, but that's going to bring
the price of everything else up hard.  I don't think that people without a
background in economics will understand until they are looking at buying a
latte at Starbucks for $20.  If the price of everything rises faster than your
income, you are poorer even if you don't understand why.  Our dollar has
dropped 40% in value in six years and we may be heading for a real collapse if
Americans don't tighten their belts and behave like adults.
 
What we need are grown ups who are willing to take their medicine and do what
is necessary to preserve the nation's dignity and preserve the trust of others.
When people don't take their medicine and seek government bailouts, it spooks
investors and the only thing holding this whole house of cards together is the
$2 billion a day that flows into the United States from outside.  We should be
very kind to these people lest they cut us off.
 
For these reasons, I respectfully request that County Supervisor Rose Jacob
Gibson withdraw her proposed resolution.

Please contact the councilwoman at rosejg@co.sanmateo.ca.us or
RJacobsGibson@co.sanmateo.ca.us  You can let the other members of the Board
of Supervisors for the County of San Mateo know how you feel at:
 
Mark Church
1st District
(650) 363-4571
mchurch@co.sanmateo.ca.us
First District is:
Incorporated: San Mateo (west portion, adjacent to Hillsborough), Burlingame,
Hillsborough, Millbrae, San Bruno, South San Francisco (east of El Camino Real)
Unincorporated: Burlingame Hills, Highlands/Baywood Park, San Francisco Airport
   
Jerry Hill
2nd District
(650) 363-4568
jhill@co.sanmateo.ca.us
Second District is:
Belmont, Foster City, San Mateo      

Rich Gordon
3rd District
(650) 363-4569
rgordon@co.sanmateo.ca.us
Third District is:
Pacifica, Montara, Moss Beach, El Granada, Princeton, Half Moon Bay, Redwood
Shores (community of Redwood City), Harbor Industrial, San Carlos, Woodside,
Portola Valley, Atherton, Devonshire, Palomar Park, Emerald Lake Hills, Sequoia
Tract, West Menlo Park, Stanford Lands, Ladera, Los Trancos Woods, La Honda,
Skyline, Pescadero, Menlo Oaks      

Rose Jacobs Gibson
4th District
(650) 363-4570
rosejg@co.sanmateo.ca.us
Fourth District is:
Incorporated: Redwood City, Menlo Park, East Palo Alto.
Unincorporated: North Fair Oaks, Oak Knoll      

Adrienne Tissier
5th District
(650) 363-4572
atissier@co.sanmateo.ca.us
Fifth District is:
Incorporated: Brisbane, Colma, Daly City, South San Francisco (west of El Camino Real)
Unincorporated: Broadmoor, Country Club Park

Attachment of Goldman Sachs report