The day before leaving town to vacation in an opulent $9 million, 5-bedroom home in Hawaii, the Obama administration pledged unlimited financial support for Fannie Mae and Freddie Mac. The mortgage giants are already beneficiaries of $200 billion in taxpayer aid. On Christmas Eve, regulatory filings reported that the CEOs of the two firms are in line for $6 million in compensation. Merry Christmas!
Executive compensation is the subject of many academic studies, but one focused on Fannie Mae from two Harvard Law School professors is especially well-named: “Perverse Incentives, Nonperformance Pay and Camouflage”. Executives are able to take unlimited risks and reap unlimited upside rewards knowing that US taxpayers will foot the bill on the downside. The mortgage-backed securities issued by the two firms remain at the center of the causes-and-effects of the financial meltdown.
The compensation for Fannie Mae’s senior managers is recommended by the Compensation Committee “in consultation and with the approval of the Conservator”, which is the U.S. Federal Housing Finance Agency (FHFA). The FHFA was created in July 2008 when Bush signed the Housing and Economic Recovery Act. At the time, the Congressional Budget Office estimated that the $200 billion Act would save 400,000 homeowners – in the first six months, exactly one homeowner was able to refinance under the program. The Act also was supposed to clean up the subprime mortgage crisis – which it did not do as evidenced by the collapse of the global financial markets a few months later.
Back to the current problem of paying $6 million to run a bankrupt company whose every financial obligation is guaranteed by taxpayer money. Who is on the compensation committee that recommended this pay day? Dennis Beresford from Ernst & Young (E&Y); Brenda Gaines, recently from Citigroup; Jonathan Plutzik, from Credit Suisse First Boston; and David Sidwell, from Morgan Stanley.
And to the rest of you out there reading this, take some time to contemplate the words of Bill Moyers as he concluded a rather shocking essay of the role of lobbyists in the recent “healthcare reform” legislation: “Outrageous? You bet. But don't just get mad. Get busy.”
The European Commission has just made a Google Earth overlay available showing annual greenhouse gas (GHG) emissions by 10 square kilometer quadrants. The overlay can be manipulated to show estimates from every year beginning in 1970. One of the most fascinating features is the GHG emissions on the oceans, from shipping lanes. All are green (fewer GHG tons), but one route stands out as by far the busiest, from Hong Kong and Japan through the Straits of Malacca and the Suez Canal to northern Europe.
The application is useful for broad reviews of GHG emissions by same-sized areas, though the zoom feature does not provide high resolution enough photography to discern differences at the smallest area level.
This week, Time magazine named Federal Reserve Chairman Ben Bernanke “Person of the Year 2009.” CNBC’s panel of experts gave Bernanke the “Man of the Year” title (no misogynists there!) in 2008. And well they should since their sponsors are among the biggest recipients of the Paulson-Bernanke-Geithner bailout. As I select the link from their website to imbed in this story, an ad from Wells Fargo (NYSE: WFC) is displayed in the right half of the screen. Click on “home” and it’s an ad from General Motors (OTC: MTLQQ).
I imagine Bernanke is quite embarrassed this holiday season as a result of the many, many less than flattering comparisons he is receiving. CNBC’s sister network, MSNBC, took exception to anything flattering in the designation by reminding everyone that being named Person of the Year is not an honor. Time’s definition, according to MSNBC, is: “The person or persons who most affected the news and our lives, for good or for ill…” They list a few of the previous winners, including Adolf Hitler (1938), Joseph Stalin (1939), and Ayatollah Khomeini (1979). One writer likened Bernanke receiving the award to “celebrating an arsonist for his heroics in putting out a fire that he set.”
Regardless of Time managing editor Rick Stengel’s qualifying statements, the tone of the write-up suggests, to Charles Scaliger at The New American at least, that Bernanke has a “cult of personality” within the Washington, D.C. Beltway. If you’ve never met Bernanke, which I never have, it’s hard to imagine there is the kind of personality there that one could be cult-ish about. Former Federal Reserve Chairman Alan Greenspan, who I also never met, regardless of his other shortcomings had the ability to say what it took to get the economy to do what he wanted it to do – he didn’t always pick the best things to get it to do, but he was able to get a message across. Bernanke, on the other hand, never seems quite comfortable in front of Congress the way Greenspan used to appear. A nervous central banker is very bad for the economy.
The designation – whether or not it is an honor – came the day before the Senate Banking Committee approved President Obama’s nomination of Bernanke to four more years as Chairman of the Federal Reserve. That nomination and approval represent further steps in what Rolling Stone writer Matt Taibbi calls “Obama’s Big Sellout.” The President, and 16 out of 23 Senators on the Banking Committee, seem to hold the mistaken impression that those who got us into this mess are going to be able to get us out. Republican Senator Jim DeMint of South Carolina was among the dissenters: "We can't have a Federal Reserve that the majority of Americans no longer trust, and that's what we have today." Bernanke himself told Congress less than ten months ago that he didn’t know what to do about the economy. Maybe the eventual good that will come from Bernanke’s 2009 affect on our lives will be the demise of the Federal Reserve system in the United States and an end to the mountains of fiat money that it produced in vain efforts to solve the financial crisis that will forever be linked to Ben Bernanke’s name: Person of the Year “for good or for ill.”
The press’s love affair with President Obama goes so far as to give him credit for actions of his predecessor, George W. Bush. Over the last week, the New York Times and The Guardian,
Britain’s “quality leftist daily gave the President credit for working out a deal with auto makers to improve fuel efficiency by 30%.
Not quite. The Obama Administration worked out a deal with the automakers under which they would not sue if the already approved 2020 fuel efficiency standards were advanced to 2016. In fact, the 30% improvement, which was in the 2020 standards, was passed by Congress in 2007 and signed by President Bush.
This is not to deny credit to President Obama for working out the agreement with the auto industry that removed the possibility of legal challenges to advancing the Bush 30% improvement by 4 years. The government’s substantial financial stake in General Motors and Chrysler probably helped seal the deal.
The Canadian planning blog “Planning Pool” congratulated the Charlotte, North Carolina light rail line, noting that it “experienced an 800% increase in ridership last year” (“Transit Success in Sprawl City,” December 4).
The impressive increase was made possible by comparing apples and oranges. Last year (2008) the Charlotte light rail service operated all year, while in the previous year (2007), service operated fewer than 40 days (the line opened in late November). Following its logic, the “Planning Pool” missed an even bigger story: apparently 2008 was 800% longer than the previous year (an increase from fewer than 40 days to 365).
Of course, it’s either apples or oranges and, one way or the other, a revision is in order.
First American CoreLogic, a real estate research company, recently released data on negative equity mortgages for the third quarter of 2009. The situation is stark. Nearly one in four U.S. mortgages (23%) is currently underwater, with the borrower owing more than the property is currently worth. According to First American, when mortgages "near" negative equity are tallied, the total number of mortgages near or currently underwater is around 14 million- "nearly 28 percent of all residential properties with a mortgage nationwide."
Being underwater does not necessarily mean that a borrower is at risk of default. Although foreclosures and payment delinquencies are currently at record levels nationwide in the wake of the popped real estate bubble, most borrowers facing negative equity continue to make their mortgage payments. While being underwater "is the best predictor for loan defaults," according to Sam Khater, economist with First American, "if you have your job and don’t encounter economic shock, you’ll most likely keep paying on your home."
But should you keep paying if you're underwater? Brent White, an Associate Professor of Law at the University of Arizona has examined the situation, and argues in a recent discussion paper that homeowners "should be walking away in droves." According to White, millions of homeowners "could save hundreds of thousands of dollars by strategically defaulting on their mortgages."
Such a strategic move comes with consequences for the borrower- most notably a negative impact on one's credit score. This has a quantifiable cost, but White states that "a few years of poor credit shouldn’t cost more than few thousand dollars," and notes that individuals can rebuild their credit rating over time, and can "plan in advance for a few years of limited credit."
Such costs are, argues White, "minimal compared to the financial benefit of strategic default." White makes use of the hypothetical example of a California couple purchasing an average priced ($585,000), averaged sized home in 2006 to demonstrate the case for default:
"Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.
Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments... If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity"
White argues that in such cases, borrowers are better off taking a short-term hit to their credit, and strategically defaulting to escape a long-term, crushing financial burden. By staying in the home, borrowers are taking money that could otherwise be saved for retirement or used for other purposes, and throwing it away to service a liability that is unlikely to show positive equity in their lifetime.
Such advice seems most likely to appeal to those upside-down in particularly hard-hit areas of the country, including California, Florida, Nevada and Arizona. However, as noted, most homeowners are sticking it out, and continuing to pay their mortgages. According to White, many who might otherwise make such a decision avoid doing so due to "fear, shame, and guilt," sentiments which are "actively cultivated" by the government and financial industry to keep homeowners from walking away.
It remains to be seen if underwater borrowers will overcome fear of the consequences and take White's advice to strategically default. Mortgage lenders most likely hope that his ideas remain firmly in the minority- as one mortgage executive stated in comments reacting to White's report, the argument for strategic default is "incredibly irresponsible and misinformed," and, if widely embraced, has the potential to "'tear apart the very basis' upon which mortgage lending rests". Losing otherwise performing mortgages to strategic default, whatever the economic sense for borrowers, could be yet another blow to an already reeling industry.
In the new Wall Street math of the post-9/08 world, it seems that some people turn to humor and others to rage. First they burned down our 401k plans: some people found this funny and made jokes about their “201k” plans. The French got angry and took CEOs hostage. Now, Goldman bankers are buying semi-automatic weapons to protect themselves from the angry mob. Matt Taibbi is desperately seeking humor in this, currently rating it a 7 on a scale of 1 to 10. Alice Schroeder, the story’s originator, finds it humorless, suggesting there could (should?) be “proles…brandishing pitchforks at the doors of Park Avenue.”
In true on-the-ground reporting, a Bloomberg reporter wrote a story after a friend told her that he had written a character reference so that a Goldman Sachs banker could get a gun permit. Alice Schroeder (author of “The Snowball: Warren Buffett and the Business of Life”) also recounts a few examples of Goldman bankers using their other-worldly prescience to protect themselves: Goldman Sachs Chief Executive Office Lloyd Blankfein – only too well known now for saying that Goldman is doing “God’s work” – got a permit “to install a security gate at his house two months before Bear Stearns Cos. collapsed.”
All of this contributes to the view that Goldman Sachs is, indeed, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I’m certain that Rolling Stone and Bloomberg have taken action to protect their right to be critical of Goldman. I’ve spent plenty of time on the phone with their fact checkers to know they put a lot of effort into being able to support every word they print. Blogger Mike Morgan, who founded www.GoldmanSachs666.com, had to defend his right to be critical of Government Sachs by going to court last April when Goldman lawyers Chadbourne & Parke threatened him with trademark infringement.
But it isn’t just Goldman and it isn’t just our 401k retirement plans that have been damaged. There are fundamental problems in the way our capital markets are being run. The people running the system have known about these problems since at least the Crash of 1987 – I warned the U.S. central depository for all securities (Depository Trust Company) about it in 1993. Brooksley Born warned a presidential working group about it at a Treasury Department meeting in 1998 – and it contributed to the crash of 2008. As you read this today, nothing has been done to stop it from happening again. The real question is: which group will be the first to turn to action? Those with a sense of humor, those with a sense of security provided by a handgunor those with the sense to make changes?
Part III in the video series on East St. Louis explores ideas put forward for (re)development of the city, including cultural tourism based on the city's African American heritage and use of vacant land for farming to create a local food source for the St. Louis metropolitan area.
Part II gives views of downtown today, shows how its history can be seen in the city, and explains why the city could still be a good place for new development.
Part I discusses the origins and development of East St. Louis as an industrial city.
Michael R. Allen is an architectural historian currently serving as director of the Preservation Research Office, a technical assistance and preservation consulting firm. Allen also serves on the boards of the St. Louis Building Arts Foundation and Preservation Action.
Alex Lotz is a graduate of the Film Production program of Chapman University's Dodge College of Film and Media Arts.
There is considerable discussion about tasking the Federal Reserve Board with monitoring and even taking actions to prevent asset bubbles. Before they move too far, the Fed needs to understand what happened in the housing bubble to which they responded after the world economy was decimated.
Any initiative on the part of the Fed to seriously understand, much less do anything about asset bubbles requires that their causes be comprehended at more than a superficial level. To this day, the Fed appears to presume that the housing bubble was simply the result of financial factors, such as loose money and loose lending. In fact, however, the housing bubble was far more complex than that.
The averages on which the Fed and much of the business press have based their analysis hide the dynamics that were at the heart of the price explosion. The housing bubble inflated with a vengeance in only one-half of the major US metropolitan markets, and inflated very little in the others.
There is no doubt that the bubble would not have occurred without the loose monetary policies. However, where the bubble inflated the most, it was in a metropolitan environment of excessively strong land use controls or artificially constricted land supply (called compact development or smart growth). In these markets (such as in California, Florida, Phoenix, Las Vegas, Portland and Seattle), regulation is so strong that when the loose credit induced expansion of demand occurred, the housing market was not permitted to respond with a supply of new affordable housing, and there was a rush to purchase existing stock, which drove prices up.
On the other hand, in the traditionally regulated markets, including fast growing metropolitan areas like Atlanta, Dallas-Fort Worth and Houston, there was comparatively little escalation in house prices. In short, one-half of the country had a housing bubble, the other half did not. In the more highly regulated markets, the Median Multiple (median house price divided by median household income) increased to from 4.5 times to more than 11 (compared to the historic ratio of 3.0). In the traditionally regulated markets, the 3.0 standard was generally not exceeded. Thus, as Nobel Laureate Paul Krugman of Princeton University and The New York Times noted more than three years before the crash, the United States was really two nations with respect to house price escalation, and the difference was land use regulation.
We have estimated that the house value losses were overly concentrated in the compact development markets, accounting for 85% of the peak to trough declines. Without these artificial losses, which were the result of unwise policy intervention, the international Great Recession might not have been set off or it certainly would have been less severe. All of this is described in the last two editions of our “Demographia International Housing Affordability Survey” and related items (the 6th Annual Demographia Housing Affordability Survey will be available early in 2010).
The purpose of compact development and smart growth is to stop the expansion (the ideological term is “sprawl”) of urban areas. Clearly, given the distress that has occurred in the US housing market and the wave of additional losses in both the domestic and international economy that followed, the price of stopping urban expansion (or attempting to) has proven to be immensely larger than any gains.
At least in housing, until the Fed understands what happened, it will be powerless to effectively apply whatever new powers it employs to control future housing bubbles.
In the 1990s, just about the only site amenity that most suburban developments offered was a fancy entrance monument. Usually, there were no other additions beyond ordinance minimums and even those weren’t generally elaborate. Some of these monuments did cost millions, but once past the gilded gates, the seduction ended, and residents were greeted by familiar monotonous cookie cutter subdivisions.
As neighborhood planners, we educate our developer clients regarding the virtues of building site amenities that improve Quality of Life (trails, gazebos, decorative ponds and fountains, etc). You would think these amenities were an easy sell to the cities approving the developments. After all, great developments create a great city, right? It’s not that simple, because all of these amenities require maintenance, and that places a burden on tax payers. No city wants to create a tax burden for all, when the likely benefit accrues to the few within the development.
The solution to that problem was simple: The Home Owners Association. We are not talking about the type of Stepford-like association where lifestyles and flower plantings are strictly dictated, but the more limited type that adds a small monthly fee to service the common outdoor site amenities. In other words, only those extra amenities are cared for. Private yards still remain the financial burden of the individual homeowners. In the North, with snow removal, these neighborhood association fees are likely to be higher if the trails and walks are cleared. Since these Associations do not have to maintain private yards or address maintenance of buildings typical of townhome projects, the monthly fees are minimal. Some associations were formed in the North that did give options for snow removal on private driveways, at a very reasonable cost (after all, why not clear a few extra driveways while you are out clearing the trails?).
The developer could now offer a much higher living standard and create more valuable lots that would be easier to sell. The majority of the neighborhoods we designed in the late 1990s through 2006 (the recession) offered the advantages that these minimal cost Associations could provide. We encouraged developers to spend less on elaborate entrance monuments and instead spread real value through the development where people lived.
How HOAs May Be At Risk The recession has not just brought about massive foreclosures and reduced home prices. It has escalated real-estate taxes (the home value may be 40% less but the tax remains at pre-recession rates) and put the very idea of a Home Owners Association at risk. With failed development, there are often also failed Associations. With little or no maintenance of a development that was once cared for by private funding, cities may have to take over the burden until the economy recovers, and in some areas, if it recovers. Comprehensive associations that maintain all of the grounds (where there are no privately maintained yards),including the building exteriors and rooftops, as well as the streets, are at the greatest risk. The limited Associations that were typical of the neighborhoods we designed are not as much of a problem, but could easily be lumped into “all Associations are bad news” category in the minds of those approving future developments, after the economy returns.
This affects all types of residential development.
Developments that exceed minimum standards typically offer site amenities to make the development more enticing. Someone must maintain these extras. Fear of HOA failures will certainly be more on the minds of cities after the recession, but without HOAs, who will maintain the amenities? A two million dollar entrance monument does not make a neighborhood sustainable. Spreading value through the neighborhood with features that enhance quality of life, is a better investment. The Homeowners Association must not fall victim to the recession.
Infinite Suburbia is the culmination of the MIT Norman B. Leventhal Center for Advanced Urbanism's yearlong study of the future of suburban development. Find out more.
Authored by Aaron Renn, The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism.
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