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Squatters "Hold Houses Ransom"

Posted by: Chris Palmeri on November 18, 2008

Many weird stories have popped up at a result of the real estate bust, but none stranger than this recent item from California’s Riverside Press-Enterprise.

A character named King Solomon II is filing deeds of sale on foreclosed homes and then renting them out to other people. This is a big problem when the actual owners want to move in. They’ve got to evict the renters from their house.

King Solomon II, meanwhile, is claiming through his niece that he lives in a sovereign nation (Nevada) and refuses to pay taxes or homeowner’s association fees.

The case illustrates how relatively easy it is to file a claim of ownership.

Reader Comments

Phil Collins

November 18, 2008 3:23 PM

These are the opinions of Robert Sheridan, a Chicago-area real estate broker & developer.

November 10, 2008
Fasten Your Seat Belts
From where we sit, it looks like it’s going to be a tough ride for the economy well into 2010—or later. It may not be a recession for all of that time. It may just feel like it. Either way, it’s not good news for anyone.

Here are the main culprits causing many of the hardships:

1. Foreclosures

• They’re already greater than almost all projections and they’re continuing. Here’s the problem: foreclosures depress prices; as prices fall, more homes go “under water” (in other words, the house is worth less than the mortgage). That fact alone has the potential to further increase foreclosures. In general, lenders have been behind the curve in their willingness to reduce the principal on existing home mortgages and amend those mortgages, thereby avoiding foreclosures and keeping the present owners in their homes and making monthly mortgage payments. A federal program is needed. The recently enacted plan (which is voluntary) will probably not work.

• Foreclosures drive down prices. Lower prices mean:
– More houses are now “under water.”
– The value of CMO (collateralized mortgage obligation) bonds drop further, causing more bondholder write-downs.
– Would-be buyers continue to sit on the sidelines because they believe prices will go lower—and so far they have been right.

• Based on the imbalance between sellers (more of them) and buyers (fewer of them), it will take lower prices—10-20% (depending on the market)—before supply and demand starts to even out. The risk now, as I see it, is that prices could fall even further because of the general state of the economy, lack of credit and the foreclosure issue.

2. The Credit Crunch

• The changes Congress made to the original Paulson proposal (outrageously arrogant and plagued by conflict-of-interest potential) to permit the Treasury to make capital investments in banks was a dramatic improvement over the first proposal. Unfortunately, even with the injection of significant taxpayer cash to the major banks, it’s not going to help soon. The banks will sit on the cash. They will lend, eventually, but eventually means that many small- and medium-sized companies will go bankrupt in the interim. We may see record-breaking bankruptcies with a sharp increase in unemployment. My guess: Unemployment will be in the 8-10% range.

• This is not exactly an environment in which to encourage home-buying, despite a return to affordable prices. Further, mortgages are still very hard to obtain. From reckless lending, with little or no down-payments required, we’ve now swung to a climate in which almost any excuse to NOT make a mortgage loan is good enough to say: NO. If the lender will make the mortgage loan, down-payment requirements are way up—20-40%. Tough.

• Need a jumbo loan (more than $417,000 in most markets)? Nearly impossible. If available, they’re very pricey with very high down payments required.

• Sanity (as well as fear) has returned to lenders. An 80%-of-loan-to-value mortgage used to be considered “normal and safe.” But not today, if the lender thinks prices are still falling. If prices drop another 10%, what was an 80% loan becomes an 89% loan. If prices drop 20%, what was an 80% loan becomes a 100% loan and lenders are not wading into those waters any time soon.

3. The Economy

• It’s amazing that some are still questioning whether we are in a recession. You know the saying “if it walks like a duck, and quacks like a duck…”.? Well, it applies to recessions, too. The real question is not whether we will have a recession, but how severe and long. My bet? Very severe and long. And that’s a best-case scenario.

• Because of bold action by the Fed, hopefully we will have avoided a depression, however, not everyone is convinced of that. I am somewhat amazed to hear financially savvy people ask: Is a depression just a bad recession? No. Not even close. A depression is like a vortex; it’s hard to stop the decline and therefore they last a long time. Today our unemployment rate is about 6.1%. In the Great Depression it was 25%! Consider of the implications of that statistic alone.

• It’s an incredible stroke of good luck that Ben Bernanke is Chairman of the Fed. In many quarters he is considered one of the outstanding students and economic authorities of the Great Depression, which is one reason why the Fed has moved with such bold and fast action.

4. Deleverging

• Six months ago a friend with a very long and successful track record as a stock portfolio manager, Neal Seltzer, asked: What did we learn from the LTCM (Long Term Capital Management) crisis (ten years ago) and their 30:1 leverage? His answer: Nothing! We, and our economy, will now pay the price for the 30+ times leverage ratio of the investment banks such as Bear Stearns, Merrill Lynch, Morgan Stanley, et. al.—the unregulated part of our banking system. What will that leverage shrink to? My guess: A good bit under 20 times capital. Businesses will suffer. The consumer (already tapped out before this recent crisis) will suffer. Deleveraging will be a pall on the economy and growth for several years.

Going Forward

All of this will make for a difficult period measured in years, not months, because of:

1. Falling housing prices, driven in part by a record-breaking number of foreclosures.
2. Major contraction of credit, including a near-freeze on credit for now, but and continuing very tight for months to come. How many months? Who knows? It This will take its toll on small- and medium-sized companies and the consumer. A period of very high bankruptcies lies ahead, causing big increases in unemployment.
3. A difficult economy. We are in one of the more difficult post-WWII recessions. It will be longer rather than shorter. No quick fix is likely.
4. Deleveraging will make for a sounder financial system, but it will be painful getting there. It will take several years. Clearly, this will prolong the recession and flatten the recovery.

It bears repeating: Fasten your seat belts.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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