179 Sink Hole Drive

Macroscopic understanding of a particular circumstance or problem is sometimes best understood using microscopic analysis.   If one tiny seemingly inconsequential event occurs over and over again the microscopic becomes the macroscopic.

I’m considered a bit anal retentive by many of my business peers and employees due my insistence on cleanliness and order, and become irritable when every tool is not replaced in its respective spot.   In a machine shop entropy is the rule, fighting it takes constant vigilance.

The current economic crisis and housing debacle is clearly one created by stewards who have simply watched the entropic march go on pass them ignoring simple details that warned catastrophe was imminent.   No self-respecting businessman responsible for his business’ success would ever tolerate the evolution to disorder as have stewards of the mortgage industry.   What has allowed executives of this industry to tolerate such a progression?

In a small business like my machine shop, the steward is clearly identifiable, and the ramifications of bad decision will rest squarely on my shoulders.   Reward or failure is attributed directly to me, and which ever I obtain is based solely upon my competence, integrity, and diligence.

The banking industry has been one where loans were given to people who could not afford them, then sold to other institutions, and subsequently packaged with other bad loans and sold again as investment securities.   The whole house of cards was backed by federal guarantees.

The banking industry  has prevented  its stewards  accountability by enacting corrosive policy protecting executives from failure by insuring their losses would be covered by the federal government.   Additionally, the political establishment has gone further to encourage the issuance of bad loans to people it thought disadvantaged to promote its altruistic ideals void any measured responsible tactic.

Politicians are now attempting to blame capitalism’s greed for this debacle.

Our financial markets have not failed because we embrace capitalism; they failed because we did not embrace capitalism.

Much of corporate America has not been forced to follow the doctrine of capitalism, especially those corporations where CEO’s and board members have not had vested interest in the organizations which they have been responsible.   Much has been the case in the mortgage industry protected by U.S. Government guarantees.

My small business machine shop example is the one imagined and protected by capitalist American traditions.   To suggest in any way that blame for this current economic crisis rests with the conservative tenets which laud these capitalist American traditions is either deliberately dishonest, completely ignorant, or both.   Capitalism and Conservatism are not ideologies that reward corruption, they are ideologies which rein it in.

Unfortunately, politicians on the right and left are trying to pin this economic mess on greed, insinuating it is the natural by-product of capitalism.

Capitalism is the ideology which forces businesses and executives to answer to markets.   We the people are that market.   The banking system has failed not because the people have had their say, but because politicians placed arbitrary demands on the industry and encouraged banking industry workers to answer to government instead of answering to people.

So back to my microscopic analysis experiment:

There is a 5000 square foot house, newly constructed but not complete, in an older neighborhood of Yorba Linda, Ca.   Most of the homes in this tract are built on half acre lots, and few have sold for more than a million dollars.

I’m in the market for such a home and I am knowledgeable of all homes available in this city thanks to ease of gathering information on the internet.

This particular house caught my attention because it was incomplete, but had potential.   While it was in a nice middle class neighborhood, it was not in a location you would expect to find homes over 2 million dollars.   I was certain its asking price of 2.25 million dollars was way out of line and it would never sell for that price.   Larger houses in better neighborhoods on 1 acre lots were available in this price range.

I kept my eye on it out of curiosity, and to my amazement it sold for full asking price.   Periodically I would drive by to see how the home would progress.   Completion required two or three hundred thousand dollars for landscaping and some work on the homes façade was still required.

Month after month, no one moved in and construction never resumed.

After a few months I decided to look up the home and found that it had gone back to the bank who loaned money on it.   It was no surprise to find ailing Washington Mutual the mortgage holder.

A couple other odd details: The purchaser had a foreign name, and the original owner/builder has maintained a lien on the property, making it difficult for the lender to resell it.

Why would someone purchase an incomplete house for 2.25 million dollars when a nicer completed home in a better neighborhood with twice as much land was readily available?

Why would a builder maintain a lien on a home he received full asking price for?

All of the information here is of public record, not knowing all details it would be irresponsible for me to postulate what may have transpired between the builder and the buyer to complete this deal, nefarious it may seem.

On the other hand, it is not irresponsible to ask why Washington Mutual loaned so much money on a home clearly not worth the amount borrowed.

It will be interesting to see if the original owner buys the home back at a fire sale price because the banks are in so much turmoil that they will all be enthusiastic to clear their balance sheet of foreclosed properties.   With a lien on the property the builder is first in line to acquire it back.

179 Sink Hole Dr. is an experiment in the microscopic analysis.   The macroscopic analysis would be to investigate the thousands of similarly made bad loans where politicians are now screaming that American taxpayers must help to keep people in their homes.   When our politicians get what they want they may or may not help some poor borrowers, but they will definitely help shrewd builders who know how to work the system.

Taxpayers will foot the bill while politicians blame capitalism for forcing us to do it.

How is it with no extended training in mortgage principles, no terrific knowledge of banking systems, and only an introductory understanding of economics can I analyze a mortgage transaction from afar and recognize it not viable when some bank’s executive cannot?

I can because I am a capitalist receiving no favorable treatment from the corrupt political elite.   If I make a bad decision I lose money.

That’s what capitalism really is, and it works every time it’s tried.

179 Sink Hole Dr. is a fictitious address for a real property in Yorba Linda, Ca and the actual transaction described here.   The real address has been withheld to protect the privacy of anyone who will eventually purchase and live in this home.

 

Copyright 2008 Jim Pontillo

26 thoughts on “179 Sink Hole Drive

  1. Jim,

    These are crazy times in deed. I think the public will be paying for this mess for years to come and it will be painful.

    Be glad you didn’t buy that house. You could probably pick it up for 1/2 price now

    Loren

  2. Yes, this is about the worst mess I have seen in my life.

    The banks were advertising 125% mortgages with no down payment here in Nevada a few years ago. Some buyers were actually receiving money back on the property, and then moved out of the house eight months later never making one payment. They also left the state, at that time. They thought they were so smart. True story.

    Bill Clinton sign the deregulation that allowed this to happen. The democratic congress continued the process. Greenspan set the interest rate so low contributing to the debacle. And there are many others that contributed to this mess, Real Estate Brokers, Mortgage brokers, etc.

    My generation bought a house they could afford with a down payment and some knowledge that their income would be sufficent to make the payment.

    Some of these buyers should be held responsible for the amount owed (after all they signed the mortgage) and the amount the property will eventually sell for.

    I know for a fact that some of these buyers have good jobs and should be made to pay.

    Carol

  3. Matt,

    As ususal, you are a moron.

    It wasn’t free markets that destroyed the mortgage industry. It was politicians demanding that poor people who couldn’t afford loans were given them anyway, something free markets would have never allowed.

    Why do you think your boy Obama, and his buddy Chris Dodd have recieved so much campaign cash from Freedie Mac and Fannie Mae?

    Because these corrupt guys “took care” of the corrupt CEO’s of these quasi-government institutions and their corrupt practices.

    Ever hear of “redlining”?  That’s the policy loan institutions were forced to stop if they wanted to stay in business.  Politicians caused this mess.

    Idiot.

  4. The housing crisis happened because the mortgage industry was deregulated and greedy mortgage brokers sold houses to people they knew could not afford the bill, because they wanted to get a big fat commission.

  5. And I’m not seeing any proof that Obama received corrupt donations from the banks.

    There’s something I don’t understand about your argument, Mike:

    This is the fault of politicians, who deregulated the economy, which is good because the free market is good. But these politicians are bad for encouraging the free market. Because the free market led to the housing meltdown, which is bad. But the free market is good, so it did not cause the housing meltdown; the politicians who empowered the free market caused it. Right?

  6. If the corrupt companies are bribing the government to remove regulations on the free market so that the companies may act more freely, isn’t it part of the free market system that corrupt companies pursue corrupt policies?

    It’s hardly as if selling loans to the poor is something the free market would never do. The poor are a viable source of money, and when they cannot pay a loan, you can repossess everything and take all their money. Loan agencies and banks have often given and will continue to give loans to people who cannot afford to pay them back.

  7. Crumb,

    Do your homework. You are lazy. You just talk what you feel without ever doing ever any research.

    Regulation and accountability are two completely different things.

    As for deregulation, it was signed into law by Clinton.

    There were some 12 or 13 government agencies responsible for watching over the loan industry. None of them did their job.

    As for “redlining” which you ignored. It was a policy of loan institutions to withhold funds from people who appeared unable to pay their loans. The government declaring “equal opportunity” forced institutions to make these loans and if they would not they would withhold funds for future loans.

    As usual, you’re big on talk, small on facts.

    Now give us three more posts full of crap because you won’t look at the facts.

    That’s the difference between conservatives and communists. Conservatives will go after any irresponsible actors, even fellow Republicans. You guys will toe the party line no matter what.

    No integrity.

  8. Hey Crumbcake,
    You gonna take that crap lying down?

    You just got the blogospheres’ version of a white glove face slapping!
    Now where’s the witty rejoinder? Ya gotta have sumpthin! dig deep damn ya! Bring out the big liberal bazooka. You know, something like “It depends on what the definition of the word IS is”

    Hey I’m trying to help ya here. I’m throwing you a life preserver. Don’t be too proud to take it.

    Here’s another one for ya,
    John Kerry walks into a bar, bartender says “hey, why the long face?”

    wait, that doesn’t work does it…I’m all out…yer on your own…….sorry.

  9. It doesn’t matter who performed the deregulation. It still happened.

    As for redlining:

    http://en.wikipedia.org/wiki/Redlining

    “Redlining is the practice of denying or increasing the cost of services, such as banking, insurance, access to jobs,[2] access to health care,[3] or even supermarkets[4] to residents in certain, often racially determined,[5] areas. The most devastating form of redlining, and the most common use of the term, refers to mortgage discrimination, in which middle-income black and Hispanic residents are denied loans that are made available to lower-income whites. The term “redlining” was coined in the late 1960s by community activists in Chicago. It describes the practice of marking a red line on a map to delineate the area where banks would not invest; later the term was applied to discrimination against a particular group of people (usually by race or sex), no matter the geography. During the heyday of redlining these areas were most frequently black inner city neighborhoods. Later, through at least the 1990s, this discrimination involved lending to lower-income whites, but not to middle- or upper-income blacks. (ref: Immergluck, Dedman.)”

    HMMM! What an entirely business-motivated and not at all political policy! But wait! There’s more!

  10. http://www.encyclopedia.chicagohistory.org/pages/1050.html

    “Redlining is the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or are poor. While discriminatory practices existed in the banking and insurance industries well before the 1930s, the New Deal’s Home Owners’ Loan Corporation (HOLC) instituted a redlining policy by developing color-coded maps of American cities that used racial criteria to categorize lending and insurance risks. New, affluent, racially homogeneous housing areas received green lines while black and poor white neighborhoods were often circumscribed by red lines denoting their undesirability. Banks and insurers soon adopted the HOLC’s maps and practices ”

    http://www.investopedia.com/terms/r/redlining.asp A Forbes website

    “The unethical practice whereby financial institutions make it extremely difficult or impossible for residents of poor inner-city neighborhoods to borrow money, gain approval for a mortgage, take out insurance or gain access to other financial services because of high default rates. In this case, the rejection does not take the individual’s qualifications and creditworthiness into account. ”

    http://www.investorwords.com/4111/redlining.html

    “Illegal practice of discriminating based on geographic location when providing loans or insurance coverage.”

    http://cml.upenn.edu/redlining/intro.html

    “Urban historians frequently point to redlining as one of the causes of urban disinvestment and the decline of central cities during the middle decades of the 20th century. Redlining is the figurative or literal process of drawing red lines around areas to which lenders refuse to make loans, or make loans on less favorable terms. Areas that are home to racial minorities, particularly African Americans, have historically been the target of redlining practices.”

  11. One more because I care:

    http://public-gis.org/reports/redindex.html

    What the Fair Lending laws require.

    ” Congress has enacted two major pieces of legislation that seek to eliminate racial discrimination in residential mortgage lending. The Fair Housing Act, enacted in 1968, broadly prohibits discrimination in all aspects of housing sales and rentals and housing finance. The Equal Credit Opportunity Act, first enacted in 1974 to prohibit discrimination based on sex in all types of credit transactions, was amended in 1976 to reach discrimination based on race or national origin. Collectively, these two statutory schemes, which overlap in the area of mortgage credit, are often referred to as the Fair Lending laws.”

    So I guess Sake Mike should have done his research on redlining before he advocated a racist policy that still gave loans to poor [white] people as the solution to all our woes!

  12. A final rejoinder: If the free market requires the government to watch over it as some sort of ethics review board, then how can you say that deregulation and total laissez-faire is AWESOMEXROSS?

  13. Crumb,

    I did my homework. There is always plenty of propoganda out their to support any political view.

    The simple fact of the matter is, Congress forced the banks to give loans to people who could not afford them, and policies at Freddie Mae and Freddy Mac cause loans to be given on only stated income basis.

    I’m not saying the Republicans are faultless here. I’m saying this isn’t the fault of capitilism it’s the fault of government corruption.

  14. Can you show me five reputable sources that say that redlining was not a racist policy that denied loans to otherwise creditable minorities? Because it seems to me that all the government did in this case was force the banks to obey the Constitution. All men are created equal and all that!

  15. “The 1992 Federal Housing Enterprises Financial Safety and Soundness Act has also been helpful in this regard, by requiring government-sponsored credit agencies (Fannie Mae and Freddie Mac) to purchase more mortgages that banks issue in minority neighborhoods.”

    How Bill Clinton caused the current housing slump From 1951 through 1997 the United States had a sound housing market based upon the sound tax policy put in place by Congress under President Truman. When homeowners sold one home to buy another, they deferred the capital gain tax from the first home sale. The result was that homes were basically valued for their rental value. People accumulated wealth in one house, sold it, and then transferred that wealth to the next house. Not only did the housing market boom, but people got richer.

    But in 1997, Congress, under the urging of President Clinton, put in place an unsound taxation policy that encouraged speculation in the housing market. Anyone who had lived in a house for 2 years of the past 5 years could sell the house tax free. The new policy encouraged people to gamble on real estate. If they saw that houses were going up in price, they would buy in hopes of getting a taxfree capital gain. The result was what economists call a “bubble” during which house prices rose way beyond their rental values.

  16. Here is how Kenneth Harney described the effect of Clinton’s plan in an August 9 commentary in the Washington Post:

    [Property owners] can claim the exclusion [from capital gains taxation] even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses — particularly during the bubble years when values doubled in some parts of the country.

    Property owners in markets with high appreciation rates could sell their principal residences for hefty profits — pocketing the first $250,000 or $500,000 tax-free — and then move into their rental condo or vacation property for a couple of years and repeat the process.

    In effect, it was a form of financial alchemy where taxable profits could be magically transmuted into tax-free gains — at least up to the $250,000 and $500,000 limits.

    A few years ago, however, that bubble burst, as all price bubbles eventually do. Many of those who had bought homes at the artificially high prices of the bubble lost their life’s savings.

    Since World War II, we have had two kinds of Presidents. Some, like Harry Truman, were imbued with common sense and put into place policies that led to decades of U.S. prosperity. Others, like Bill Clinton, lacked common sense and put into place policies that eventually caused the U.S. economy to come close to economic collapse.

    Howard

  17. Banks are not and have never been ethical bastions of humanity. Its always been about the money.

    In the old days banks and mortgage lending firms generally carried their loans the entire term of said loan. Obviously red lining (right or wrong, it doesn’t matter) was a way to protect their long term investment by minimizing high risk demographics.

    In todays world, they trade and sell these loans off within days after closing, so they could care less about anyones intention of paying them back anymore. Red lining is not only a non-issue in this envirionment. but banks actually FISH for this clientelle with bait like “no money down – 100 percent guaranteed financing – no income verification – etc. etc.
    Their risk is literally non existant and now the carrot is the commission, which is tacked on upfront and wadded up into the full loan amount which is passed on. In fact inflating the value of the property only increases this amount so you can imagine all the artfull maneuvering and home equity scams to evolve out of this.

    It had to come crashing down somewhere somehow.

    So who’s fault is it?
    The government created what they thought would be non discriminatory lending practices.

    The banks reacted by selling off what they knew were bad loans because they could still eek out a small profit if they sold by volume like Wallmart.

    The homeowner just wanted something they couldn’t afford. Who doesn’t.

    The whole shitteree is a recipe for disaster if you ask me……some surprise this house of cards finally collapsed.

  18. I ask one main question to you all, where is the proof in black and white for us all to see. For us all to fork out 700 Billion Dollars for a Bailout that was caused by de-regulation of the banking system? Is this just another scare tactic put forth by the Bush adminstration so he can become the dictator that he wants to be? Just some thoughts people, think about it for just one second he is able to do this with the law he signed into affect. it sure seems fishy to me being this close to the election.

  19. good lord,,more dictator talk. All of our rights have been taken away, yada yada yada.

    GWizard, while I don’t agree with the positions of the other liberals here on this board, I do give them credit for being able to form coherent, thought provoking comments on occassion and they at least try to back it up with some thoughtfulness and “facts” but my man, you are way out of your league here.

    Go back and let Rosie tell you how it was the first time in history that fire has melted steel. Quick, run along before Karl Rove finds your IP address, tracks you down and eats your liver.

  20. Oh, and just so you know, I have no special love for GWBush. What this administration did to this country is terrible. It makes my blood boil. Most of all, when they had the moral authority to really fight the war on terror and the support of the free world behind us, they squandered it.

    The the alternative? These ass clown democrats…well I won’t begin because I don’t like speaking truth to power.

    Now I fear my sons, one 7 and one 4 are going to be fighting this same war. Well, at least they teethed on 7.62 rounds. Joking – they have lead.

  21. Did the other republican dads give you a hard time when you teethed them on UN-loving 5.56 NATO rounds?

  22. Here I was thinking that libertarians were loners living in a shack in the woods, stocking up on shotgun shells and gasoline!

  23. Nah, thought sometimes when I turn on the news these days it makes me want to hole up in a shack and learn how to make delicious squirrel recipes :(

    I just want these loser politicians to read the constitution, understand the environment and intent with which it was crafted, and do their freakin’ job.

    I am sick of most of these assholes whether they have a D or R behind their name.

    I’m sick of the media, Brittany Spears, People Magazine and all that other garbage.

    We have problems and we need to fix them in ways that the fixes don’t create more.

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