Debt Trap Mass Exodus

CBS4 is reporting on Miami's Middle Class Exodus.

In Broward County, foreclosures in 2006 were 8,995; in 2007, it was 23,476. For Miami-Dade County, there were 9,814 foreclosures in 2006; in 2007, there were 26,338.

In April of 2005, the Miami-Dade Housing Authority created a list for anyone who needed affordable housing. Forty-thousand people signed up. Three years later, 25,000 on the list are still waiting for a phone call.

Patrick Mason owns "Carolina Living," a magazine that markets to people from out of town. His research shows for the first time ever that Florida is now the number one exporter of people to South Carolina.

Robin Hood Liberates Foreclosed Units

The article also discusses Max Rameau, who views himself as a modern day Robin Hood. Rameau "Liberates" vacant foreclosed houses and turns them over to the homeless.

"We're liberating units. We're not stealing anything. These places are locked up and enslaved and we are liberating them."

So far, Rameau has "liberated" a half a dozen foreclosures to struggling families. He has plans for dozens more despite threats from the law.

Rameau added, "We need to take back land. We need to take back housing. And we need to take control of our own destiny and our own situation."

Cloud Over The Sun Belt

The Washington Post is writing about Housing Crisis Casts a Cloud Over Sun Belt.

When residents of Maricopa, Ariz., south of Phoenix, vote in the presidential primaries Tuesday, it will be against a backdrop of vacant storefronts and sprawling, terra-cotta-roofed subdivisions that are studded with for-sale signs as far as the eye can see.

The state government is staring at a billion-dollar shortfall in its $11 billion budget. Forecasters expect a region that grew 7 percent in 2006 to contract this year. Retail sales, which rose 16 percent in 2006, are dropping. Dennis Hoffman, an economics professor at Arizona State University, said he had never seen such a sharp turnabout in 25 years studying the local economy.

"We're in so deep that it doesn't seem like anything will help," said Rebekah Ao, 33, a pregnant homemaker who lives in a new four-bedroom home in Avondale with her husband, Otto, a truck driver. The Aos, with $50,000 in income, owe a total of $607,000 on mortgages for two houses they bought since they moved to the Phoenix area about two years ago.

Rival stimulus plans being considered in Congress promise a cash infusion of as much as $1,200 per couple and $300 per child. The Aos would be happy to have the money. But for them and millions of others whose financial problems are rooted in decreasing housing values, it will not make a lasting difference, according to many analysts. The reason: The stimulus package, and even the deep interest rate cuts made by the Federal Reserve in recent weeks, cannot quickly reverse plummeting home values and make bad investments good.

My Comment: Fiscal "Stimulus" Was Doomed To Fail from the very start. The plan is now $150 billion up from $100 billion It would not matter if it was $400 billion. Higher numbers will not save many houses but could weaken the dollar. It's a lose-lose scenario.

"Our economy out here is based on residential growth. That's our engine," said William A. Gosnell, a principal in Lee & Associates, one of Phoenix's largest commercial real estate firms. But with housing inventories and foreclosures up and prices down, residential construction slowed to a crawl, crippling the overall economy in the process.

My comment: Correction, your economy WAS residential growth. It was also one giant ponzi scheme as well. Phoenix was attracting retiring boomers, so was Las vegas, so was Florida, so was suburbia USA and supposedly so were a number of inner cities as evidenced by massive numbers of condo towers everywhere.

No one bothered to figure out there were not enough retirees to go around. Each city thought they were different. What happened instead was massive overbuilding of housing and commercial real estate everywhere.

The cooling market has prompted Martin DeRito, owner of DeRito Partners, a retail developer and brokerage firm, to back out of a couple of development deals, leaving hundreds of thousands of dollars in earnest money and pre-development expenses on the table.

My Comment: Martin DeRito walked away from hundreds of thousands of dollars. That was a smart exodus. We are at the tip of the iceberg of potential walk-aways.

The struggles of Rebekah and Otto Ao in dealing with a crushing mortgage debt show how deep the problems go.

They bought their first home in 2005, for $269,000. They paid for it using an Option ARM, which allowed them to make a monthly payment of $850, which was less than what they paid for rent in Los Angeles. Only later did they realize that meant that their loan amount would grow over time, not shrink, as would their payments.

"When we saw the payments were so low we decided to buy another house," Rebekah Ao said. "With the market going crazy, we figured we could sell the other house in a couple of years."

They now owe $287,000 on the first one and $320,000 on the new home, which they are renting. Their credit card balances, which they once kept at zero, have ballooned to more than $14,000 as they struggle to make ends meet.

"It hurts to know that you are on a road that leads to a dead end," Rebekah Ao said. The Aos are weighing their limited options. Foreclosure? A sale that takes in less than they owe? "But right now," she said, "we're just throwing our money away every month."

The Dead End Road

It makes no sense to keep throwing away money when the end result is just going to be bankruptcy or foreclosure. There are no options to weigh. The Aos need to take the first exit. For some reason they remain on the road to nowhere. Eventually they will figure it out and plan their own exodus from the debt trap they are in.

Focus Property Group Defaults On Interest Payments

The Las-Vegas Review Journal is reporting Developer stops making interest payments on $500 million in land-backed loans.

Focus Property Group, one of the largest developers in Southern Nevada, has stopped making interest payments on $500 million in loans secured by 4,800 acres in the Las Vegas Valley, Pahrump and Victorville, Calif., company executives said Monday.

The company said 2,100 acres of the land involved is in metropolitan Las Vegas, 1,700 acres in Pahrump and 1,000 in Victorville. The company started notifying lenders late last week that it would not make its February interest payments.

Focus Property's disclosure is the latest sign of the housing and lending crunch that has spurred massive defaults on subprime and other residential mortgage loans in Nevada. Nevada has the highest foreclosure rate of any state and there is a massive inventory of vacant single-family homes in the valley.

"We haven't sold a piece of single-family residential (land) since early 2005," Focus Chief Operating Officer Tom DeVore said.

Forced Exodus at Macy's

Yahoo!Finance is reporting Macy's to Cut About 2,300 Jobs.

Macy's Inc. said Wednesday it will cut about 2,300 management jobs as the department store operator consolidates three regional divisions and decentralizes buying in a bid to reduce costs and boost sales.

The announcement came as Macy's announced separately that it had a steeper-than-expected drop in sales in January at established stores and that earnings in its fiscal year would be below Wall Street estimates. Shares fell almost 5 percent on the news.

Look carefully and you will see it was 2,300 managers that got the pink slip. Management jobs in retail in this environment cannot be that easy to come by.

Can't pay? Just walk away

Exodus by walking away picks up steam. CNNMoney is reporting troubled homeowners walk away.

Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail.

"I stopped paying my mortgage in October, after shelling out about $70,000 in interest [over 15 months]," said one borrower, David, who doesn't want his last name used. "Now, I'm just waiting for the default notice."

Skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007. Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income. Now the IRS will ignore it.

My Comment: That law backfired just as expected. I find it amazing that the NAR and the NAHB actually lobbied for that provision. See Mortgage Forgiveness Act - The Seen and Unseen for more details.

The trend of walking away is most pronounced among real estate investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA). But families are doing it too. "If they have to stretch to make mortgage payments for a home that will not recover its value, then yes, they may walk away," he said.

The stage is set for this kind of thing particularly in California, where huge numbers of buyers used low or no-down deals to buy homes. The trend has even spawned at least one new business, San Diego-based YouWalkAway.com, which for a fee of $1,000 purports to guide clients through the process of ditching their mortgages. It launched in early January, and says it has already signed up 180 clients.

California is a bit of a safe haven for these borrowers, since banks that repossess and then sell a foreclosed property for less than the mortgage that was owed on it cannot come after borrowers for the difference - as long as it's the initial mortgage, one that has not been refinanced. So if a borrower owes $200,000 and the bank sells the house for $170,000, the borrower comes out of it debt-free.

If You're Going To Walk, Walk Sooner

Those deep underwater and electing to walk away are simply making a rational decision. For anyone who is going to walk away eventually, they may as well do it sooner rather than later.

There is nothing amoral about walking away no matter what anyone says. The law allows walking away, just as the law allowed banks to ignore the risks and lend to those it should not have.

Macy's made a business decision that will result in a forced exodus of 2,300 managers. Homeowners should have the right to make the same business decision for their families. Indeed, The Business of Walking Away is starting to boom.

Walking Away From Credit Card Debt

Credit card companies attempted to make people debt slaves forever by passing a Means Test for Chapter 7.

The means test was added to the Bankruptcy Code to create objective standards for determining which individuals are "worthy" of relief in Chapter 7. It applies only to individuals and only those individuals whose debt is primarily consumer debt.

The means test is calculated comparing the debtor's average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor's state of residence. If the debtor's income is less than or equal to the state median income, the debtor "passes" the means test and may file Chapter 7.

Means Test Avoidance

The way around the means test is easy. Lose your job and you have no income. Those without a job will qualify for chapter 7 if they stay out of that job long enough to get below the median income. For some it will be immediate, for other it will amount to not looking for a job for as long as five months. And that's just what will happen, with credit card balances building up the entire time. This is just one of the ways the bankruptcy reform act will blow up.

A second way the bankruptcy reform act will blow up is that some number of people with tens of thousands in credit card debt may just decide to lose their job accidentally on purpose.

The third way the bankruptcy reform act will fail is that with interest rates that amount to usury people will just start saying no to credit card debt.

The fourth way the bankruptcy reform act will fail is in the nature of the means test itself. The means test is based on income, not assets. This will encourage cash advances right before declaring bankruptcy. Those cash advances might go in handy for something like making a lease payment on an apartment.

The Allure Of No Debt

The loopholes for walking away from debt are massive. So walking away will spread from housing to credit cards to autos. The formula for walking away from credit card debt is easy: No job, no income, no debt (via Chapter 7).

The allure of no debt is compelling. The public has finally figured that out and a mass exodus from the debt trap has just begun. Psychology has changed and all attempts by Bernanke to reverse that psychology will fail.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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