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Tuesday, Nov 24, 2009
What about the story of Lehigh Acres?
Lehigh Acres is an area near Fort Myers in Florida, and Fort Myers/Cape Coral is one of the hottest foreclosure hot spots in the country. The area became a Mecca for speculators. Lehigh Acres and Cape Coral were created by infomercial kingpins of the 1950s, these product pitchmen who had spent time during the winter in Florida and saw an opportunity to sell real estate the way they had sold rat killer and cosmetics on their TV shows. They decided to start selling land on the installment plan. So what you had in these areas in Florida, and still have, are just tens of thousands of these little housing lots in the middle of swamp that were created to sell on TV.
There were these organized investor schemes, these seminars that would go on road shows all over the country, encouraging middle-class Americans to make it in real estate -- to be like Donald Trump. Buyers would have to put almost no money down, because they were getting set up with these construction loans. The idea was that they would get tenants in the homes and the tenants would eventually qualify for a subprime loan and owners could sell to them -- but of course this isn't how it worked out. These homes never ended up getting sold for the most part.
What I found was entire towns -- I visited a town in Pennsylvania just outside Philly -- where you'd have nine or 10 families from this one town and another six from down the road, and more from the next town over, all of them had gone to a seminar at a hotel in King of Prussia and seen how they could make this 14 percent return on Florida real estate. And these families just lost everything. They were really hoping only to send their children to college and to just get that leg up and this was how they hoped to get it. And so we talk about real estate investors and speculators and there's often this stereotype of someone in that show "Flip This House" who sits in his SUV and is on his cellphone all day. But a lot of these investors were in fact ordinary middle-class Americans who had never invested in real estate before.
Is there anybody in this whole saga who stands out as both well intentioned and well informed, who was prescient about what was going to happen and said, "Stop"?
Oh gosh, quite a few along the way. So many consumer advocates, community organizers, folks in Washington, they've been working on this stuff for years and never drank the Kool-Aid. They were fighting discrimination but also really knew when the policies and the industry were going too far and called them on it, too. The kind of conscience and hero in my book is a now-deceased activist named Gail Cincotta, who is really central to all these progressive policy changes to help fight discrimination in mortgage lending, get the Community Reinvestment Act passed, urge more lending to credit-worthy and qualified low- and moderate-income people. She would go and testify in Congress year after year about how these programs were going and she would just call them out on it constantly and say, What are you doing? These loans are not helping people, they're proving really harmful and you have a responsibility to do something. But by that point, this monster had already taken on a life of its own.
Is there anybody in Congress whom we should listen to, who has the right prescription or has been consistently right in the past?
For better and for worse --I think almost entirely for the better -- we have Barney Frank. He is a favorite whipping boy on the right; for the believers it's all the Community Reinvestment Act's fault, it's all Freddie Mac and Fannie Mae's fault, and he is their prime evidence of that. He had an ex-boyfriend who worked for Fannie Mae and that's part of the conspiracy theory behind this. That's all baloney as far as what drives his policy decisions, what he's trying to do. Frank, I think, is somebody who cares deeply about housing and about having a sane and functional mortgage market and he's trying to do the best he can within what's really possible in Congress right now.
I think part of the problem is that the Obama administration has been trying to play a very evenhanded role in setting the agenda going forward. So, for instance, Frank has been trying to push legislation that would outright bar a lot of predatory lending practices, but it was just a non-starter, certainly in the Senate. It passed the House thanks to the efforts of Frank and others, but in the Senate, Chris Dodd particularly, and others there are just really refusing to confront these issues head-on. So we're sort of left now with the Obama administration's new plan to overhaul the financial industry and its proposal for a new consumer financial products safety commission to carry that load going forward.
Has what the Obama administration has done to date about housing and lending helped or hurt?
Neither, which I guess is to its credit. I mean, it is trying to -- not that successfully -- keep the banking industry afloat while also keeping homeowners afloat. And the problem is you’ve got a zero-sum game.
So have we hit bottom yet?
Ask Jim Cramer [laughs], he says we've hit bottom. I'm not Jim Cramer.
Should I invest in real estate now?
Actually, that's a really great question. There's a lot of really great buys around the country right now because a lot of players who, in the past, did have money to throw around in real estate, are staying on the sidelines. So what you have in fact are sort of private equity funds coming in, I guess you could call them vulture funds, they're just coming in and buying up whatever they can. And prices for foreclosures -- you can pick up places, especially in cities, for very very little money right now. And what you see is actually some kind of half-crazy or half-enterprising young people investors, entrepreneurs, some with good intentions and some that just want to make a buck, coming and buying up stuff cheap and fixing it up. There's both good and bad coming out of that right now.
Sounds like the beginning of the next bubble, right?
[laughs] Well, the bubble's only going to inflate if we choose to put air into it again. And if you look at what the Obama administration is putting out there, as far as what they want to see happening going forward, it puts a lot of very almost excessively thoughtful constraints on how that market will work. They've called for all these Ph.D.s to roam around and study exactly who will run into trouble if they have a pre-payment penalty or an adjustable rate and then regulate the product accordingly. It's very, very, very wonky. That's no guarantee that it'll work. So I remain kind of admiring of the effort to craft this plan, but very skeptical that it will actually work as advertised.
