Suing S&P Over The Mortgage Crisis Is Crazy

I often laugh at news stories over at The Onion, which is a news site full of satire.  The headlines and stories are presented as real, but you usually find that they’re written to bring out laughs and are not based in fact.

mb-gavel201302I thought I had to be reading a story on The Onion when I recently saw that the United States of America is planning on suing Standard & Poors for up to $5 billion dollars due to the credit ratings issued by the ratings company on mortgage backed securities prior to the housing crash.

Basically, they’re faulting S&P for giving high credit ratings, which made them seem like good investments, accusing S&P of giving these high ratings even though there was evidence that the underlying mortgages were quickly degenerating into riskier and riskier assets.

I get that, and I have no doubt that the lawsuit is based in some fact, but I still maintain it’s absolutely ridiculous if for one reason: The United States government is suing S&P, but who is suing the United States government?

See, you have to think that if the United States is suing S&P, that they had some misgivings about their ratings at the time.  So, I did some digging and found that they issued no warnings about the ratings that I could find as S&P was issuing the ratings.

But, then, they must have issued some sort of warning about the housing market in general, right?  You’d think so, but once again you’d be pretty much wrong.  Yes, there were some people here and there who warned about such things, but leaders in either party did nothing to address the issue.  The Fed practically said ‘No worries, everything is good’ just months before the entire mess came crashing down.

So why don’t they get sued?  Why does the government, who did absolutely nothing, get to come out now and start suing companies for five billion dollars?  Granted, from my personal perspective, S&P did have some responsibility, but what absolutely kills me is that so did the United States government, yet they get to go out, file a lawsuit, and drag out a mess that I think most people would just now soon put in the past.

It seems that the strategy for dealing with this problem is to continue to file lawsuits.  Let’s sue as many banks as we can.  Let’s sue the ratings agency.  Let’s figure out who else we can sue.

I’m sure the thought is that getting sued will teach these institutions a lesson.  That they will pay for their mistakes.  That they won’t ever do it again.

I think that’s fairly inaccurate on all counts.

One reason: Turnover.  Lets’ face it, most of the leaders at a lot of these institutions are no longer in place.  So, what this means is that the current leadership is having to answer for the mistakes of their predecessors.   They’ve having to institute changes and policy and strategy based on things that they probably have already tried to deal with in some fashion, but are now having to deal with again and again.

What this does is it holds up progress.

I don’t think banks and ratings institutions have fixed everything as far as the  mistakes that they’ve made, but if you look at all of them, there are policies and things that they now do which are designed to prevent such a crisis from occurring.

Can the government say the same thing?  What changes have they made?  Banks have tightened their lending policies.  Ratings agencies have created additional due diligence procedures tied to their ratings and tightened standards.

The government has done virtually nothing.  Oh, except to file a bunch of lawsuits.

Great strategy.  Really.

Don’t get me wrong.  I’m not about letting the banks and ratings agencies off the hook.  I just think that the strategy here needs to concentrate on moving forward.  It’s not 2007 and we can’t go back and undo the mistakes that were made which led to the problems of the next few years.  What’s done is done, so what we need to do is make sure it never happens again.

Is the government filing a federal lawsuit or twenty federal lawsuits or two hundred federal lawsuits, or however many they decide is the ‘magic’ number, going to accomplish that?

No.

Instead of allowing these companies to work toward strengthening their balance sheets, reduce costs, and work toward a better future, the government has effectively committed these companies to diverting massive amounts of resources toward these lawsuits.  Do you think S&P is not going to dedicate millions and millions of dollars and time of their leadership to these lawsuits? Money and time that could be spent bettering the company will instead be spent looking to the past.

And for what?

I don’t know, I guess I equate it to someone coming home from work and finding that their dog has pooped in the living room.  They go and get the dog and rub its nose in the poop.  It might make the owner feel better and the dog is sure going to feel bad about it, but if the dog pooped hours and hours ago, is he really going to learn anything?  Oh, and what if the owner gave the dog a bunch of junk food the night before, which was likely responsible for the dogs digestive issues that day?  What should happen then?

In this case, the government is sitting there trying to rub the banks and agencies nose in the proverbial poop left on the floor.  If that’s their strategy, don’t you think it’s time for them to get on their hands and knees and rub their own nose in it?

Only in America.

Readers, what do you think about the lawsuits?  Do you agree that these companies need to be punished?  What about the government?  And, if you do agree that punishment is in order, do you think that punishment is the best method to prevent the same mistakes from happening in the future?

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2012 Predictions In Review

With just a few days left in 2012, I think it’s appropriate to check on the list of 7 predictions which I had made at the beginning of the year.  Let’s see how everything turned out:

  1. President Obama will get re-elected – Got it right – I knew without a doubt that Obama would get elected when Romney’s video explaining what he thought of ‘the 47%’ was released.  It proves that Romney, and really the Republican party, is very much out of touch with the voters.  I don’t know that they have a consolidated message and even when they do, they have done a very poor job at translating that into a message that the voters respond to.  This win wasn’t so much a victory for Obama as it was a fear of Romney. 
  2. A downturn on strategic defaults and underwater mortgages – Got it right – I figured that the housing market had hit bottom.  Last year it seemed that while things weren’t on the upswing just yet, we had leveled off.  This year did see an actual upswing in most areas of the country, and part of that included less strategic defaults and less underwater mortgages.  I guess if home values rise, this naturally brings people at or above the ‘underwater’ line, which would give people less reason to walk away. I’m very happy to see this and I hope that the housing recovery market is sustained moving forward!
  3. The Eurozone crisis will not be solved but will get less attention – Got it right – Was anything really accomplished in the European crisis?  Not really.  I think they did kick the can down the road a bit, but as far as actually solving anything, I don’t think that happened to any real degree.  However, the markets and the economy really didn’t react in much of a negative fashion.  There was a couple of months in the middle part of the year where the market did have some rough weeks, and they were tied to the European problems, but that was shrugged off relatively quickly and I don’t think it played much of a factor overall.
  4. Blackberry will be history (or RIM will be out of business) – Not so much – Blackberry is still around, and I’ve heard that the next release (Blackberry 10) is thought to be very well designed, and if it is received well, could put Blackberry back on the map.  I personally don’t see much hope here.  In the consumer electronics market, more often than not when customers abandon a particular company to the degree that has taken place with RIM, it’s pretty hard to convince them to come back.  The only big exception in history that I see here is Apple, but I’ve seen Apple, and I’m sorry RIM, you are no Apple.
  5. Apple will either provide a dividend or make a big purchase – Got it right – Apple instituted a dividend for the first time in 2012.   No big purchases, but since it was an either/or type of statement, I got it right.  The stock for Apple has been on somewhat of a roller coaster ride, rising all the way to $700 per share and dropping down to the low $500’s.  I think investors are finally starting to realize that while Apple is a great company that makes wildly popular products, the amount of growth potential may be slowing.  Wall Street investors live and die by growth, so the perception that Apple may have finally hit a ceiling could make for a bumpy ride moving forward.
  6. Unemployment will fall, the economy will improve,businesses will get better, but consumer spending will lag – Got it right – The economy has definitely continued to improve, and business profits have improved, but not to the robust levels that would indicate a long term healthy economy.
  7. Oprah will lose her network – Not so much – She still has her TV network, but the fact that I had to look this up to see where this stood, well it’s still not doing so well.  I know Oprah said that she wanted to put more of her ‘presence’ into the network this year, and I’m guessing she did that, but to what degree this matters, I really do wonder.  Before she shut down her talk show, you used to hear about Oprah in some fashion all the time.  Her opinion and voice was right up there in the cultural fabric.  Now, I think her voice has lost a lot of luster, so while she still has her ‘own’ network for now, I clearly think it’s been a disaster.

Five out of seven, or just over a 70% ‘success’ rate was how it worked out for my predictions.  That’s not too bad!

How did 2012 turn out for you personally and how did things around the world play out from what you had thought would happen in 2012?

What topics do you think I should predict for 2013?

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The One That Thankfully Got Away

This is a story that goes back to when we were house hunting.  It got brought to light because, as you’ll see if you read on, it’s a very small world!

The backstory. In 2007, before my wife and I got married, we knew that we wanted to buy a home to start our marriage and eventually raise our family.  The condo that I’d previously held was nice enough but it wasn’t ideal for family living.

The housing market had already started to trend downward, at least here in Michigan.  Prices had already slipped on average 10-15%. At the time, I foolishly thought that they had neared or hit bottom, not knowing that the worst was yet to come.

As an aside, I sold my condo in just the nick of time.  I sold it for roughly $125,000 and it sold last year (through foreclosure) for $50,000.  No other property in this story lost anywhere near that percentage of its value.

I put up the condo for sale, and it sat around not doing much of anything, which was frustrating.  A couple of people came through here and there, but the lack of traffic was maddening.  The realtor assured me that’s just how it was.  So, imagine my surprise when one showing turned into an offer, one that was actually pretty good and that we accepted.

This meant that we needed to find a home.  And fast!  We knew that the possibility was there that we might need to look for a house, but the way things were moving so slowly, we hadn’t put that much effort into it.  We didn’t want to get into a situation where we spent a lot of time finding a house we liked, only to have it not be there if the condo took a long time to sell.

Once we received and accepted the offer on the condo, we kicked it into overdrive.  We knew the area where we wanted to be, taking into consideration proximity to our families, school districts, property taxes, the reputation of the city, and such.

We looked at dozens of homes, but really had it narrowed down to three particular houses:

  1. The house that we bought and live in today
  2. Another house that we would have likely moved into had our current house not worked out, but I know we wouldn’t have been happy with.
  3. The one that got away.

This is the story about house number three, the one that got away.

In the midst of going through all of the houses that fit various things we were looking for, we somehow came across a ‘For Sale By Owner’ (FSBO) house.  It’s been five and a half years, so I honestly cannot even remember how it came to pass.  I’m thinking that maybe our realtor had given us information about another house in the neighborhood and we happened to see the FSBO sign, but I really don’t remember.

In any case, from the outside, the house looked great, so we took it upon ourselves to call the number and arranged for a showing.  What we saw, we really liked.

The pros: The house was very well kept up, it had large bedrooms, it had a new roof, and had many decorating features that were current and up to date.

The cons: It was a three bedroom ranch.  Ideally, we wanted four bedrooms, but we liked the layout of this house and thought we could make it work.  The other con: price.

Our ‘cap’ on a house was $275,000.  That assumed that we would have to put some renovations into the house, since many of the homes we saw would need some sort of work, whether that be a new roof, new carpet, or something else that would likely add at least $10,000 to the purchase price of anything that we bought.

I had this limit in place also assuming the price per square foot that we’d likely be paying.  This number was assuming we would have bought a house around 2,200 square feet or so.

The house we were looking at was a ranch, and at 1,850 square foot, was big for a ranch, but still smaller square foot wise than many of the other homes we were looking at.

The price and offer.  At $299,000, the house was priced at a much higher per square-foot level than any other home we had seen.  Now, the house was in great shape and would need no renovations after we moved in, so that $10,000 cost I’d been anticipating would not be in play, but it was still way higher nonetheless.

We decided that we liked the home and wanted to make an offer, so we contacted the owner via e-mail and offered $251,900.  We thought this was a fair offer based on the square footage, comparable sales in the area, plus we knew that by selling it themselves, they would be keeping a good portion of the money that would otherwise go to a realtor.

Their response.   She reviewed the offer and explained that they had paid $270,000 several years before (which I already knew due to public record), and also explained that by having put in many of the improvements (roof, carpet), that they would be selling it for a loss at anything less than $285,000.  She then indicated that was their final offer.

I had been working with our realtor, who although he stood to make nothing on this since it would be handled privately, was still gracious enough to offer his opinion.  He agreed that the price we were offering was fair, and that even their counter-offer was over-priced.  He also knew how the real estate market was going and did not think the house would hold it’s value.

Still, we countered with one last offer of $259,900.  She sent a message thanking me but declining the offer.  With no further counter (plus knowing that the counter was our absolute highest price on that house), we knew we were done.

By the time this came to a conclusion, we had already found the house that we live in today.  We attempted to play the fact that were looking at this other house as leverage to accept the private sellers offer, but it didn’t really work, largely because she held a belief that her house was ‘better’ and ‘worth’ the difference.

The aftermath. We actually paid more for the house we’re in, but at 2,300 square feet, it was competitively priced from a per square-foot level, plus it also fell into the ‘not needing any work’ category.  So, it was worth it, and now that we have our family, we know that the other house would have already seemed tight by now.  With two kids, three of the four bedrooms are used, and we like having a spare room.  Plus, our yard is over twice as big, we have a three-car garage (the other had two), we have over 20 mature trees on our property, and we live on a lower traffic court.

Even though our house lost value after we moved in, it was to a much smaller percentage than either the condo or ‘The One That Got Away’.

We tracked the history of that house, and what we found was this:

Our offer was in April 2007.  They kept it up for sale by owner for a few months afterward.  In November 2007, they listed it with a realtor for $279,000.  They started dropping the price around $5,000 a pop every month or two until June 2008 when it was down to $240,000 (things had been declining big time by then).   It sold in September 2008, almost a year and a half after our offer, for $220,000.  Zillow estimates it today at $204,000.

Our New Pre-School Mom.  The reason I’m telling this story is because we just got an e-mail that a new kid will be joining the co-op pre-school class for Little Boy Beagle come January.  This also showed the name of the mom, and it’s no other than the woman who lived there, and who we did the negotiations with.  I’m not sure if she’ll even remember us, but the name has always stuck out in my head.  If she did remember us (or if we mention to her who we are), it would be interesting to see her reaction.  Had she accepted our final offer, they would have yielded $40,000 more than they ended up getting, and a year and a half sooner.  Actually, it would have been more like $50,000 because they ended up having to pay the realtor fees after all.

Obviously it was not our fault that they did not accept our offer and that the market fell so that they had to take that much less, but people are irrational and she could deflect some of the ‘blame’ for that on us.  You never know.

What Would Her Story Say?  In circumstances like this, I often wonder how she would write this story.  Would she regret not taking our offer?  Would she feel at any point (then, now, or both) that we’d been low balling her?  Or maybe it didn’t matter?  Maybe the house that they eventually moved into was purchased at such a significant discount that it offset the lower price they eventually had to take.

Maybe one day we’ll find out.

Readers, do you have any stories about homes and ‘the one that got away’?  Looking back, do you regret it not working out or did it end up working to your advantage?

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Sharing Something I Love With My Son

I’ve always thought that the construction of new houses is pretty cool.  Crystal over at Budgeting in the Fun Stuff is putting a series together on their new house, which is currently under construction.  It’s pretty awesome.

Don’t ask me why I like it so much.  I just always have, ever since my parents had their house built in 1989 when I was just 14 years old.  I just liked walking through, watching the progress, and enjoying the transformation from nothing plus a bunch of materials to equal a space for people to live and call home.

Now, I am hoping to share that with my three year old boy.

Our neighborhood is about fifteen years old so there hasn’t been much opportunity to see houses being built on a day to day basis.

Until this year.

When we moved into the neighborhood in 2007, the very first house in was in pretty rough shape.  It was pretty obvious the owners had neglected it and it wasn’t a great presentation of our neighborhood since it was pretty much the first house you saw.

I work a mile, due west, from our neighborhood.  It’s a mile ‘as the crow flies’ but it is really about a two and a half mile drive. Still, a month or so after we moved in, I happened to look out the window and saw a pretty big cloud of smoke.  I figured maybe there was a car fire from a nearby freeway.

Turns out it was a house fire.  The house had somehow caught fire and suffered pretty extensively.  When it was all said and done, a good portion of the roof had burned away, most of the garage was burned out (I’m guessing the fire originated there or caught something there), and the rest of the house suffered extensive smoke and water damage.  It was immediately condemned.

I don’t know if the fire was ruled accidental or what, but I did hear that the family was in the process of being foreclosed upon, so even after they moved out, they lost what was left anyways.

After about nine months, the house was demolished and the ‘hole’ filled back in.

I found out from our homeowners association that a local ‘small-time’ building company purchased the empty lot from the bank, with the intention of putting a cheap house on the property and turning over for a small property.

Turns out, they weren’t allowed to do that.  There are restrictions on what type and what size of house can be built, as well as what materials can be used.  Our neighborhood isn’t prestigious, but it’s a nice looking neighborhood, and as soon as the association caught wind of what was planned, they put the hammer down and made sure that the house that the builder was planning on building wasn’t built.

The building company put the lot back on the market, for over twice what they’d paid for it.  By that point, the real estate market had descended into free fall, so it sat ‘For Sale’ for years.

Finally, the housing market started showing signs of recovery, and it was in early spring of this year when a ‘Sold’ sticker appeared on the sign.

A couple of months ago, I started seeing some activity around the lot indicating that they might be looking to build.  They marked off all the utilities, they did some surveying, and sure enough, a couple of weeks ago they put in some temporary fencing around the perimeter of the property.  Not long after that, they staked out where a new house would go and the new basement was dug soon after.

I decided to make it a thing to take my son to the construction site every day (or as close as we can).  He loves trucks and books about construction, and I know his dream come true would be to have his own personal fleet of earth moving equipment, but I digress.  In any case, he was excited when I brought up the idea.  The first day we just looked at the empty hole.  I explained that they were putting a new house there and that the hole was for the basement, which was the first step.  We walked around the hole, I let him throw a couple pebbles in, and explained that there would be a house here.  He’s excited about it and now he asks to go look at it.

I’m excited to share that with him.  We’ll likely get to see and walk through the site for the framing and rough utility portion.  At a certain point, I expect they’ll lock the place up so that we won’t be able to walk the inside, but we can still peek in through the windows.  In any case, I think it’ll be a fun few months to watch the progress of the new house being constructed.  I can’t wait!

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