Monday, September 15, 2008

Scam Artists' Bonanza: Home Builder Bailouts

--Rampant Fraud Schemes, Resulting from Sub-Prime Mortgage Crisis, Zero in on Home Owners

First it was Bear, Stearns. then Fannie and Freddie. Then, Lehman. Now the housing collapse has spread to many of the nation's top builders, as well. All points leading to a stupid question...

One of the mysteries of life is how can a 2-pound box of candy make you gain 5 pounds?

This is the kind of mystery so many home builders seemingly are trying to solve in these panic days of the sub-prime mortgage crisis, and the resultant collapse of home sales. If the shoe fits, wear both.

To set the scene:

1) Builders can't sell homes to real home buyers. Often this is due to antiquated floor plans as well as home buyers inability to qualify for a loan. Most builders adhere strictly to the letter of the law. But, sadly, with many other builders it seems to be a matter of thinking that safe sex means a padded headboard. They take "chances."

2) Thinking that a kiss is nothing more than the interchange of unisexual salivary bacteria, they feel emboldened to take these "chances." Plagued by interim construction loans hanging over their heads, builders turn to house flippers, housing speculators, scam artists, and other non-occupant buyers as their primary customers. Reality being their only obstacle to happiness, they try to do away with it. To them, an old axiom of frugality is satirized and becomes: A penny saved is beyond ridicule.

3) To avoid losing money, builder sells at a discount,, not only to investors, but also to "straw" buyers, and all kinds of scam artists. These people must represent that they intend to occupy, though they have no intention of doing so. Never argue while frying pork chops; distractions and flying hot grease particles do not mix; In no way can the health of your eyeball be assured. This is where the troubles begin.

4) Through the "Good Old Boys Network"--often replete with scam artists--rigged appraisals are set up. Example: a home selling for $300,000 might be over-appraised by $80,000 (not too difficult to do in a fast-falling market). Once the loan closes--at appraised value--the buyer, frequently a scam artist, pockets this $80,000 over the purchase price--often with a kickback to the Builder.

5) Multitasking is a way of screwing up several projects at the same time. This might well be a crowning example. The big variety of buyers--whether qualified, legal, or not--seems to be proof of this, at least as it applies to home builders. The variety of house closings became so complex that law enforcement was virtually invited to the party. Never moon a werewolf. You'll only have 2 options. He'll either tell you to pull your pants back up, or haul you off to the slammer. This could be the moral of the story.

Money can't buy you friends, but it does attract a better class of enemy. This is what many "adventurous" builders are now finding out. Still in the enemy category, many of these buyers (scam artists?) are now plea-bargaining with the prosecution, and turning state's evidence against the builders. After driving builders to drink, they are now stealing the corks off their lunch.

These days, so many builders are hung out to dry--right along with their lending institutions--that they can only ask themselves: What would the Lone Ranger do?

43 comments:

Earl T. Clydson said...

On top of everything else today it's A.I.G. too.

Gene Kranik said...

Revealing piece on how this all got started at the grass roots. Yes, it was the builders themselves in the beginning. Then the speculators and scam artists jumped in, and were aided by the banks and lending institutions. Now they are all going down together. Woe is us.

Mike Mancuso said...

Nice probe straight through to the core of what's going on right now with the big invesment banks. When you understand the underpinnings you understand a lot. Who's responsible for this?

Jack Payne said...

Earl, you may have put your finger on the worst part of this financial meltdown. When an insurance giant goes down (something that didn't happen during the Great Depression of the 1930s), we'd all better get the rubber life boats ready. The State of New York is going to try to bail A.I.G. out. Bad mistake. This will only set the stage for more tumbles.

Woe is us is right, Gene. Batten down the hatches.

Jack Payne said...

Mike, you can lay the primary blame right at the doorstep of Congress. When, way back in 1980, when they decided to micromanage the savings and loan business, they managed to kill a whole industry. Then, they began jumping up and down about red-lining and such--denying minorities loans for houses--and viola, They created a new monster: a financial industry scared to death to deny anyone a loan. Such idiocies as no down payment loans started. A good example is California alone, when these went from only 3% of all home mortgage loans in 2002 to 60% by 2005 (height of the housing boom).

Another monkey wrench was created earlier. From 1997 to 2001 Bill Clinton's pick to oversee Fannie and Freddie was young Political family Nepotee, Andy Cuomo. A kid in his 30s he apparently knew nothing about establishing tight controls to govern growth of these two giants. Without accountability, when the housing boom came along in the early 2000s, the two behemouths, naturally, grew like stuck pigs. And, like overfed pigs--buying up packages of these sub-prime mortgages--their phisiology swelled like a baloon. Thus, just like any overfed, stuffed pig, both died of a heart attack or stroke. Almost simultaneously. Just last week.

Lindy said...

This has got the living daylights scared out of me, Jack. I've got a good sum of money in R.E.I.T.s. I don't know whether to take my mony and run, or what. What do you advise?

Warren M said...

I don't know which way to turn either, Jack. I left Bank of America's investment arm years ago because I din't like the big overcharges on commissions. I went to Merrill, Lynch. Now Merrill Lynch is back with B of A. What't going on with these musical chairs? I'm ready to start pulling my hair out, what little I've got left.

Barbie said...

I'm from Florida and it seems like builders here are going down like ten pins. It makes you wonder who is going to be left to build homes.

Lynn said...

All right. I will say it too. I'm fear stricken today, and don't know what to do next. Any help, Jack?

Ione Hesber said...

You sure did a good job of explaining the basics underlying this current Wall Street mess, but the question remains, what should we all do to protect ourselves?
Unfortunately I am heavily into financial stocks. Should I get out? What should I do?

Theresa H. Hall said...

Everyone needs to relax. Just like 1984, the book by Orsen Wells, everything we hear is called double speak. this entire charade has been planned for quite some time. We are and they are only now, walking the walk. You'll see if you do not panic that in the end, all will be well. Should you panic, you might indeed make some bad decisions. Relax, breathe and think.

McAlee said...

I hear the Good Old Boys Network is breaking down in Florida. I hope so. This should be a good sign.

Jack Payne said...

Sorry, Lindy, but I can advise nothing. I only write on these subjects, and, if you wish to follow "trails of thnking," feel free to do so. But, as to outright advice, I just do not get into that.

Don't pull youself bald, Warren. Not necessary. B of A seems to be one of the saviors so far, buying up Country Wide, now Merrill Lynch. With B of A you still have F.D.I.C. protection on each account under $100,000. That's got to be a little more reassuring than having your $ trapped in these investment banks where one misstep and it's bye, bye, dough.

Jack Payne said...

I heard that, too, about Florida, Barbie.

I have to tell you the same thing that I told Lindy, Lynn and Ione. I don't give advice. All I can say is what I am doing. Short term I am converting what I feel to be some "threatened" assets into bank CDs. Long term I am looking into energy: biofuels and natural gas leases, primarily.

As to bank CDs, as long as you keep your deposits in any single account below $100,000 you are fully protected by F.D.I.C. insurance. So, why worry? Even if you get into one of the more risky big banks now, like Wachovia or Washington, what's the difference? They'll have to pay a higher rate of interest due to higher risk, and your accounts are still fully protected.

Jack Payne said...

"Relax, breathe, and think." Good, simple advice, Thersea.

Don't get too overjoyed by the so-called "breakdown" of the Good Ol' Boys Network in Florida, McAlee. Many of these chains are merely being re-organized under different names. It's to fuzz identities. That's the way the con men work.

Alan said...

I hate myself for nit picking but can't quite resist pointing out that 1984 was by _H. G._ rather than Orson Wells.

ida Lupinsky said...

From the stories of the great depression as told to me by my grandparents, I can see ugly parallels. It might be time to get a mean German Shephard, a shot gun, and a bigger mattress.

Jack Payne said...

I hate to get into nit picking over nit picking, Alan. But, I believe "1984" was written by neither Orson Wells, nor H.G. Wells, but by George Orwell.

polybore said...

Well to continue the Orwellian theme.

If you want to imagine the free market, imagine a boot, stamping on a human face forever.

Polly said...

How does A.I.G. tie in to all of this?

Jack Payne said...

Sorry, Polybore, but I just don't get your message. Something about the free market and a boot on a face? Forever? (That's a long time.)

Odd, isn't it? How a financial stock market storm which started in the housing market can leap all the way across the spectrum, and into the insurance market? Now, with the U.S. Government's bailing out A.I.G. to the tune of $85 billion, this means you will be protecting my heirs after my death through my life insurance policies with such giant subsidiaries as Metropolitan Life and Northwestern Mutual. Thank you, Polly.

Bern said...

This is amazing. This started out with a blog post on home builders and has now stretched all across the whole financial sector into insurance. I can only wonder, where will it go next? Will it stop?

Terry said...

I have been diverted this week by all that' going on in the stock market. But, I didn't forget you, Jack. Here I am...even though things are so bad that I don't even know what to add. I do think you hit it right with this post on the builders, the place where it all started.

Jack Payne said...

Where will all this stop? Bern, I don't have the foggiest idea. Will it stop? Most likely. Eventually. How? My best guess at this point is that the Feds will set up some new kind of RTC (Resolution Trust Corp.) to buy up all this worthless paper at a big discount, and then peddle it at an even bigger discount--trying to keep losses to taxpayers to a minimum. This is what was done in the 1980s to put out the fire of the Savings & Loan Industry collapse. It eventually worked, though it did throw us into the 1990-1991 recession which cost Bush, Sr. the 1992 Presidential election.
At this point my hope is--as radical, socialist, and wrong this solution is--is that it will work as well as it did for the S & L bailout.

Jack Payne said...

Terry, I'm glad to see you back. You had me worried. How could I carry on without you? It's said hard work never killed anyone, but why chance it?

Gene Kranik said...

Was just watching CNBC and Wild Bill Seidman was on. He's the former head of the SEC. He said exactly the same thing you said yesterday, that some kind of new RTC had to be established to gather up all this worthless paper and sell it off. Remarkable I thoght. Maybe you ought to be advising the U.S. Treasury or Federal Reserve instead of writing about con men.

HenrysSpeedo said...

Why bother with blogging, Jack?Just polish up your crystal ball and you'll make a fortune. Just yesterday you suggested a way out of the Wall Street collapse was to set up a new RTC. Today the rumor is all over Wall Street and the New York Stock Exchange shot up 360points.

K. Whitton-Williams said...

Thanks for your comments on the posting on my blog. . . It's going to be really uphill from here. . . I got a UBS mutual fund report in the mail yesterday and the title was "the myth of the five-year return." (I'll probably scan and post that one, someday) The probably should have written. . . the myth of any return . .

Jack Payne said...

Ah, yes, Gene and Henry, it's hard to be humble when the clearly-visible halo of invincibility hovers over my angelic head.

Anonymous said...

I don't think you realized it when you wrote this piece on home builders that this was going to happen now. Latest word tonight is that the credit markets have seized up and stopped because nobody can properly evaluate these crazy mortgage packages which contain so many sub-prime loans.
The politicians, in their late night meetings had better come up with some kind of miracle by tomorrow.

Dee said...

Jack this is some crazy stuff taking place in the hot US of A. What with the inability to "evaluate these crazy mortgage packages" as anonymous says - hey anon show yourself - does anybody really appreciate the extent of what the hell is going on?

Seems these things were split up all over the place and sold and re-sold all over again. Worthless paper in the hands of many unknowns creating what? A confetti of debt, confusion and ignorance. But it will all hit the ground eventually and when it does it will be cleaned up and you can start again but until then you have got to be careful and sensible.

After all it is a cycle - though this time it is crazy in its breadth.

Swubird said...

Con Man::

I, for one, am not too sympathetic to the plight of your average builder. I find them to be low, scumbag, rip-off artists who are out to gouge you as much as they can. To say that they operate to within the letter of the law is misleading. The law allows a builder to charge whatever they want to charge. Want to pay two points plus costs to buy your home? Then work with the builder. They'll be glad to rip you off.

The best thing you can do when dealing with a builder is to have a preapproved mortgage loan going in to the deal. Plus, if you can afford it never finance built-in appliances on a thirty year loan. The cost is astronomical.

I could go on and on, but suffice it say to that I don't trust home builders.

In my opinion, the real problem with the current mortgage market comes directly from Fannie Mae's creative mortgage products, and generous underwriting standards. And as long as that is the case, we'll always have problems. The CEO of Fannie Mae should have been fired a long time ago.

We could talk about subprime, but I have to shut up sometime.

Love the thought-provoking post Con Man. You know how to get the juices flowing.

Happy trails.

Doug said...

I am kind of worried about this short sale fix. This doesn't make sense to me. Free markets have to be able to move in both directions.

Jack Payne said...

In this case I know "Anon," Dee. He can't emerge and identify himself. He is a top exec at one of the banks in the U.S. whose name you would know instantly. He guards his life living in the shadows vigorously.

Hang tough, K. So much shakiness in 401 Ks right now is directly connected to the threat of money market funds slipping below their traditional $1 per share payout, and threatening the entire financial system with a financial freeze up. Now that the Feds have incorporated a 1-year insurance policy on this, the threat is removed for a while, which should drive stocks up, at least temporarily.

Swu, Franklin Raines, who started out as Bill Clinton's OMB Director at a mere $150.000 or so annual income, took over as CEO of Fannie Mae for 7 years, ran it into the ground, and plundered it for $100,000.000 in personal wealth. Where is the Enron-style Congressional Investigation of this?
There is none. Simply because too many Congressmen, themselves, were the participants of Fannie Mae gift-giving. It's called "politics."

Jack Payne said...

I share your concern, Doug, over the short sale restrictions put on 799 financial stocks. As you say, a free market can only operate properly when stocks are allowed to go either up or down according to the law of supply and demand. When artificial impediments are put in the way, look out.
A "put" has to mean something. A "call" has to mean something. For every buyer there must be a seller and vice versa.
Why they are not considering re-instating the "uptick" rule, I don't know. That would not have been nearly as intrusive. Guess we can only hope for the best.

Frank Taloni said...

What I don't understand is whatever happened to sensible lending? The 20% down, fixed rate mortgage comes to mind. How and why did regulations become so loose?

Kathleen said...

If we could all just learn to live a bit more simply, none of this would matter. I think we have ourselves to blame as consumers, at least to some extent.

I agree that these builders should go down. Most of them have no concern for anything but the almighty dollar. But, the banks are on to this, and they're not giving loans for that very reason. They know these homes are not worth the appraised value - at least now they do.

PLUS - it's common to see homes built on land that settles - they're built with toxic materials that harm human and environmental health.

Builders with a conscience could make a huge difference. We need an entirely new breed of same.

To me it's only natural that something like this would happen.

Barry said...

So why are we bailing anyone out with borrowed money?

Jack Payne said...

All politics, Frank. The hue and cry of "let them buy a home at any price" became too loud for the politicians to resist.

Kathleen, you are too good to be true. Your appeal to the "simple life," is too just plain sensible--that's why it's ignored by the intllectuals in Congress. But, don't kid yourself about the lending institutions. They were greedy too, and every bit as cupable as the builders. Sure, they are bending-over-backwards fussy about making these loans now. But, that's called, "locking the barn door after the horse is out."

Jack Payne said...

Easy, Barry. The U.S. Taxpayer is the largest body of wealth remaining on the Planet Earth. (No, I'm not talking about U.S. Treasury wealth--non-existent--but individual wealth, which can always be exploited by the government for higher taxes to pay for whatever government wants it to be paid for.)

It's strictly a desperation, last resort measure. (In football terminology some would call it a "Hail, Mary" pass.) If it doesn't work, nothing will, and, some believe, we will all be thrown back into the stone ages of barter, horse-drawn buggies, and clay huts with straw roofs.

We narrowly avoided that during the Great Depression of the 1930s. Let's hope we can do it again.

Brandon said...

Watch out for bad auto loans as well! They are being pumped out just as fast, if not faster than home loans were.

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Dee said...

Jack did you see this poor lady who got a 30 year mortgage? She's 90 years old for chrissakes. I wonder what the rate of interest was. http://www.cnn.com/2008/US/10/03/eviction.suicide.attempt/index.html