Alyssa Katz -- Our lot: how real estate came to own us
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This is a good analysis of how mortgages and home ownership affects
and even rules our lives.  But, more than that, it's about how the
institution of home ownership and the market for mortgages has been
shaped, for profit, by powerful parties both in private industry and
inside the U.S. government.  It's also an account of how we and our
lives have been shaped by those institutions.

The sections on the creation of the subprime loan balloon are
astonishing.  Katz tell us what that froth was created from:
fabricated information about borrows on loan papers, appraisers who
were willing to give the exaggerated estimates of property values
that they were asked for, attorneys and title agents and banks who
signed the papers and pretended not to notice.

And, so many of the firms involved (mortgage brokers, investment
banks, Fannie Mae and Freddie Mac) made huge profits from these
transactions.  So, they became addicted to the volume needed to
produce those profits.  As long as the money (= credit) flowed, and
while they could package and sell the loans, it did flow, they
pursued that volume, even though doing so required making loans to
people who had little likelihood of making the required payments on
those loans.

The sections on Fannie Mae and Freddie Mac give you an appreciation
for how much damage can be done (1) when there is a huge amount of
money and (2) when companies with lots of influence and the U.S.
Congress work together.  The details are fascinating, and Katz give
lots of them. It shows what happens when, instead of enabling people
to earn a decent living, the U.S. government helps them try to
pretend that they are better off by giving them lots of cheap
credit.  Basically, the chapter on Fannie Mae is a lesson in how to
create a financial disaster.

I'm from the California central valley, so that chapter about the
effects of the real estate boom and bust on communities around
Sacramento like Lincoln and Elk Grove hit home to me. The local
paper today had an article stating that there is an 80% vacancy rate
in industrial property in Elk Grove.  There just must have been an
incredible amount of over-building.

There are some crime stories also.  Given the huge amount of money
that the financial industry and the U.S. government (through quasi-
governmental organizations like Fannie Mae and Freddie Mac) were
making available, it was inevitable that someone would dream up
schemes to use that money in order to launder money and to siphon
off fees for transactions, doing so by "flipping" houses through
purchases by fake buyers at inflated prices.  And, the mortgage
brokers and real estate appraisers and lending institutions all when
along, because all along the way, they also collected fees.

This book can also be viewed as a specification of what it takes to
produce extensive real estate fraud or to create a financial
disaster: (1) Inflated appraisals, demanded by mortgage brokers,
justified by pointing a sale down the street built on another
inflated appraisal. (2) Lenders who are remotely located and did not
know the property or its value. (3) A huge amount of funds available
from investors who were desperate for higher earnings due to
prolonged, artificially low interest rates.  Imagine dealers
(e.g. mortgage brokers) thinking: we have *got* to figure out how to
use that money (and skim off a fee while we do so).  (4) Lenders and
investors who are removed from borrowers by several degrees of
separation, and who can unload risk, for example by securitizing and
selling the loans.

Add to this the fact that the real estate lobby and the finance
industry lobby are both huge.  And because of that, Katz admits that
it is unthinkable that the U.S. government would set reasonable
limits on lending.  The bailouts of financial institutions during
this crisis shows that the U.S. government will step in to support
lenders, to support lending, no matter how egregious; and shows that
the U.S. government will subsidize economic activity at any cost.
These markets and industries do not correct themselves.  And, the
U.S. government will not correct them either.  Nor will it do
anything or admit doing anything that slows down economic activity,
which would mean less wealth for the rich and fewer jobs for the
rest of us.  But, the U.S. government will step in with lots of
money from taxpayers to save the system when it goes off the rails
and into the ditch.

From one point of view, given what we know about the U.S. economy,
what else would you expect other than government policies that push
and support both home ownership and the home construction and
financing industries.  We don't enable those in the middleclass to
earn more, because all that wealth is going to those who are already
in the top 2% wealth bracket.  So instead, we'll enable them to
believe they are well off by giving them huge home loans and by
enabling them to take all the equity out of their homes (that was
supposed to be their savings, remember) in home equity loans.  As
Katz suggests, we've shipped all the other reasonably well paying
jobs over-seas.  What we've got left is jobs cutting up chickens and
cleaning up hotel rooms (both non-tradable goods) and building
houses (also a non-tradable good, i.e. we can't ship that work to
the far East).  So, if we don't protect home construction, we'll
have nothing left.  We'd better subsidize the home construction and
home marketing and home loan industries, even if it means creating
the kinds of disaster that we just went through and are *still*
going through. Sigh. Here we go again.

On the lighter side, if you go to http://youtube.com and search for
"Bird Fortune subprime crisis financial adviser" and you'll find
very humorous "analysis" of the financial crisis by John Bird and
John Fortune.  Yes, we should be mad as hell about what has been
done to the financial system and the economy and especially mad at
those who have done it, but it's good to be able to laugh about it
once in a while, too.

06/23/2011

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