March 30, 2012

The Mother Of All Scams

It’s Friday desk clearing time for this blogger. “Donald Trump is sinking millions into real estate investments, taking large risks in 2012 for the first time since ‘getting clobbered’ in the 1990s, the Wall Street Journal reported. ‘In the 1990s Trump, previously one of the biggest risk takers in the real estate business, was unable to pay hundreds of millions of dollars worth of debt,’ the Journal said. But those days are over. ‘Call me in five years,’ Trump told the Journal. ‘I view my prior investment as a sunk cost.’”

“For Donald Trump, it was a stunning landmark of the 21st century: a luxury high-rise shaped like an ocean liner and bearing his name that would turn Fort Lauderdale Beach into an international draw. In splashy brochures, Trump beckoned investors to buy into a resort that would represent ‘the finest and most luxurious experience I have created.’ Now, with the hulking, empty tower casting a shadow over one of Florida’s most popular beachfronts, investors are demanding details of the massive project’s collapse and debts of $185 million.”

“Trump, who ended his licensing agreement with the developers in 2009, has asked to be dismissed from the lawsuits, saying he only lent his name to the project. But after reviewing a host of advertisements featuring Trump and the resort, two judges have refused to release the real-estate mogul from the cases. ‘He’s going to have a hard time explaining how he didn’t approve of those ads,’ said Alex Davis, a Michigan businessman fighting to recoup a $100,000 deposit on an oceanfront studio.”

“A Toronto developer has plans under way to develop what they believe will be the first condominium building comprised of safety deposit boxes. The price of the three-inch high, 10-inch wide, 24-inch deep gold box is $3,600, with an annual fee of $109, and taxes of $64. The platinum box, which is the same length and width, but eight inches high, has a price tag of $5,500, with an annual fee of $273 and taxes of $97. As is common practice with condos, Parallax is selling the boxes as presales. ‘You have a purchase price upfront, and when you sell it, you recoup it. There’s ability to make money off it,’ says Parallax Investment Corporation’s Nigel Lawson.”

“The only thing hotter than Winnipeg’s record-breaking spring temperatures is its red-hot resale-homes market. The average selling price of an existing home in the city grew at the fastest pace in the country during the first two months of 2012, according to the report from RE/Max Canada. The report said the shortage is sparking widespread bidding wars on properties priced under $500,000, which is helping to drive up selling prices at a surprisingly fast pace.”

“‘Existing homeowners have realized substantial equity gains, especially in recent years, and many are taking advantage of the combination of historically low interest rates and equity to upgrade,’ said Michael Polzler, an executive VP with RE/Max.”

“On the surface at least, the brutal crash in the U.S. housing market, which began six long years ago, shows few signs of abating. But some industry players say early signs of a rebound are emerging. ‘We think we’re probably past the bottom now,’ says Ralph Young, chief executive of Edmonton-based Melcor Developments, which has roughly doubled its U.S. property holdings over the past year.”

“Kimberley Marr, an Ontario based real estate broker, and the author of How to Buy U.S. Real Estate: A Canadian Guide, says if you’re interested in buying U.S. property, this is the year to do it. She says home values won’t fall much further, if at all. In particular, Marr says demand for homes in the $400,000-plus range in more desirable neighbourhoods is firming up fast. ‘Inventories are down dramatically compared to a year or two ago, especially in cities like Miami, Phoenix and Orlando. I am actually seeing bidding wars now for homes in the $450,000 to $460,000 range. I was in one bidding war earlier this year with four Canadians competing for a property listed in the seven-digit range,’ she says.”

“Lori Nelson didn’t choose to leave Phoenix’s construction industry - it left her. Her three-decade career in construction ended abruptly when she was laid off in 2009, as one of 93,600 people to lose construction work in Phoenix since the industry peaked in 2006. That was the largest job drop in a single market, according to the Associated General Contractors of America. The burst of the housing bubble was largely to blame, noted Ken Simonson, chief economist for the Associated General Contractors of America. ‘Up through about 2005, there was a widespread view that people could always sell a house whenever they wanted,’ he said. ‘And then the music stopped.’”

“The Lake Havasu and Kingman area peaked in December 2005 at 7,600 construction jobs and fell to 2,300, a loss of 5,300 workers or 70 percent. After benefiting from years of retirees moving to the Sun Belt, Lake Havasu is no longer building new homes because people either cannot afford to retire or cannot sell their homes and move. ‘They’re stuck up in iceberg-land,’ Simonson said of people living in cold climes.”

“Bank-owned homes in Middle Tennessee have been selling at an average markdown of nearly 40 percent from their original purchase prices, according to RealtyTrac. Local foreclosure expert and short-sale specialist Jim McCormack thinks the price declines reveal how exaggerated home prices were during the boom times, not how Middle Tennessee is flush with bargain deals. ‘The original purchase prices back then were phony,’ he said.”

“Jesse Hamby, who worked for a local subprime lender at the height of the housing bubble, said he understands why foreclosures have lingered. Communities were swiftly building homes for borrowers who were taking out no-money-down mortgage loans, he said. Some of those fixed rates Hamby saw in 2007 will expire this year. ‘Some people don’t realize they’re underwater until their homes are appraised,’ he said. ‘Every Saturday, you couldn’t traverse the roads without seeing moving vans. People couldn’t afford those properties, but they weren’t savvy enough to understand that.’”

“Not just buyers, but Mumbai developers too are feeling the pinch of the overheated real estate market owing to poor sales. This is evident as three property exhibitions have been cancelled in Mumbai until further notice. A study by real estate research firm Liases Foras had shown the weighted average price of a flat in Mumbai now costs more than Rs 1 crore. Liases Foras estimates that even if interest rates come down to 9 percent from the current 14-15 percent, the realty market needs to undergo a 33 percent price correction to go back to 2009 levels.”

“Pankaj Kapoor, MD of Liases Fores explains: ‘This tells us that land has almost been treated as a derivative that is traded with. It changes hand from owner to builder to PE funds and rises in value through the process. But nothing is created. With all capital being lost, realty has become the mother of all scams.’”

“Every Tuesday evening dozens of homeowners who cannot pay their mortgages gather in a cramped community centre near Madrid’s main bullring to discuss strategy to fight their banks. Newcomers, many of them immigrants from South America, take turns speaking about how close they are to eviction. In the early 2000s it was easier for a poor immigrant to buy a house than to rent. Landlords in Spain typically ask for a 6-month or even 1-year rental deposit, whereas banks pitched home loans with no downpayment.”

“Some brokers set up storefronts and painted themselves as non-profit groups aiding immigrants. ‘The risk management was zero. They gave loans for everything,’ said Jose Antonio Garcia Rubio, economic secretary for the United Left, a minority political party.”

“Carlos BaInos, whose Association of Victims of Foreclosures helps them negotiate with their banks, says a new law to allow people to hand in the keys to the bank with no penalties might set off a dangerous wave of defaults. ‘The banks are largely to blame, but the home buyers know they share the blame too. I tell my clients learn your lessons, don’t get over your head in debt. Everyone was buying a house, even people who shouldn’t have,’ he said.”

“London outperformed the rest of the country, with a monthly price rise of 1.4 per cent and an annual rise of 4.2 per cent, with average property prices now £354,300. A beach hut with unforgettable views, but no running water, has been put on the market for an eye-watering £145,000. The one-room wooden building on the beach at Mudeford Spit, Dorset has stunning views across to the Isle of Wight, but has no mains electricity or toilet. Despite this it is expected to attract a lot of interest after a neighbouring beach hut sold recently for £126,000.”

“To their friends and neighbours, Samuel and Lorna Moore enjoyed a lifestyle similar to the rich and famous, splashing out thousands of pounds on luxury status symbols including a helicopter and top-of-the-range rally car. Their company later went into liquidation, owing millions. Sister companies controlled by the family are believed to owe up to £20m to the Presbyterian Mutual Society (PMS), whose collapse required a bailout by the taxpayer.”

“The PMS also loaned money to Moore Associates (NI) and Li Developments — both part of the SHM Group controlled by Mr Moore — in early 2008, close to the peak of the property boom. But then the bubble burst, with the value of development land plummeting by up to 90% while properties saw their value halved. Last December the PMS appointed receivers to properties owned by Moore Associates (NI) and Li Developments. The portfolio, which stretches from Dervock in north Antrim to Fivemiletown in Co Tyrone, includes a row of vacant terraced houses in Ballymoney.”

“Yesterday the Belfast Telegraph spoke to Samuel Moore about his family’s financial situation. Mr Moore said he did not wish to comment on any of the issues put to him by this paper which included his family’s debts and their portfolio of empty properties strewn across Northern Ireland. But Mr Moore did say that the purchase of a custom-built World Championship specification rally car in January 2008 was made while ‘things were going well.’”

“The Anti-Eviction Taskforce protests are happening with ‘increasing frequency’ and argues that there is ‘no moral reason why any individual or family should be threatened with eviction from their home’. Independent TD Joan Collins says their aim is ‘that there will be no evictions or repossessions of family homes in Ireland.’ Does that mean that broke developers living in plush multi-million euro pads get to keep their ‘family’ home? Perhaps not – other protesters say that they are against the ‘forced removal of ordinary people from their homes.’ Still, how does one define ‘ordinary’? Does it include the accountant who made a ‘last-ditch bid to save €2m family home,’ as the Irish Independent headlined recently?”

“Similarly, the notion that people will be ‘removed, thrown out on the streets and left to fend for themselves’ is emotive nonsense. There is a welfare safety net in Ireland. Many people opted not to saddle themselves with massive mortgages during the bubble years. Instead, they rented. Will Deputy Collins give these people a free house as well?”

“Stories of individual difficulty can tug at the heartstrings, but the narrative being spun quickly unravels when one looks beyond the surface. Take the high-profile case in Laois recently, where a crowd of people prevented a repossession order being carried out. The property in question had been bought in 2003 and a top-up loan taken out in 2006. Shortly after that, the person fell into arrears. Despite being in arrears for six years – twice as long as he was meeting his mortgage repayments – he was allowed to remain on in his property.”

“Another person writes: ‘In 2008 I believed that if I didn’t get on the housing ladder now, I never would as prices were increasing by the day … the house I chose cost €315,000, very cheap for the time.’ One can sympathise, but the reality is that the bubble had burst by early 2007 and prices were tanking in 2008, when it became obvious that further big falls were inevitable. Nor was €315,000 ‘very cheap’ – average house prices peaked at €311,000 in February 2007.”

“Forget all the populist Land League rhetoric. Loans to Irish residents increased from €110 billion in January 2003 to €350 billion by December 2008. The mortgage market just went nuts. As for the banks, remember that the Irish taxpayer now owns AIB, Permanent TSB, EBS, Irish Nationwide and Anglo. The taxpayer has pumped billions into the banks, and it is in the taxpayer’s interest that as much of this money as possible is recouped.”

“That doesn’t mean turfing out people who have fallen into arrears – it is only right that an effort be made to accommodate those who may, in the long run, be able to emerge from their current difficulties. Many people borrowed sums that they will never be able to repay, however, and it’s time that everyone – house owners, bankers and politicians – faced up to this ugly reality rather than simply wishing it away.”

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