Ghost malls, housing price depression, re-election, and stealth legislation

Thomas C. Miller November 14, 2011 H. R. 1755, the Home Construction Lending Regulatory Improvement Act of 20111, is a scam. Gary G. Miller (RCA, 42nd) has quietly amassed 79 cosponsors to assault the capital reserve requirements of banks and thrifts that lend money to real estate developers. These requirements were instated as a result of the savings and loan crisis and meltdown of the 1980's, when 747 failed S & Ls cost the US taxpayer $88 billion2. The mortgage and real estate development lending industry had run amok following its near failure in 1979, then the situation was exacerbated by the short-sighted passage of the quick fix, the Depository Institutions Deregulation and Monetary Control Act of 19793, which ultimately led to the subsequent meltdown. Order was restored via a gradual increase of capital reserve requirements in section 314 of the Financial Institutions Reform, Recovery, and Enforcement Act of 19894, Public law 101-73, Statute 183, to restore the public's confidence in the savings and loan industry5. Why would Mr. Miller aim to repeal these regulatory corrections? "To meet the credit needs of the Nation's home builders."6 And we all recognize that as "Jobs!" Don't we? When this bill was introduced, stealth was the aim and practice to slip this deregulatory bonanza under the radar. A complex story was thought too detailed for close scrutiny, but youll be kidding only yourself if you wish to deny that you as the taxpayer will not be left paying the bill if this scam plays out. The historical precedent is proven. Once introduced, Mr. Millers bill was quickly assigned to the Financial Services Committee. But there have been no hearings. There have been no mark-ups. It is not on any calendar available to the public. And meanwhile, another 46 congressmen have signed on as co-sponsors. They must have some knowledge that we the people are not deemed privy to. Why would a House bill be a threat? Doesn't it have to pass the Senate and be signed by the President? Yes, but there are ways to do this with stealth. A quick report out of committee sans hearings, a slip into a stack of last minute bills near the close of congress, unfamiliar representatives reading the vague summary while listening to a sound bite from Gary Miller and seeing 79 cosponsors, then assuming, "Well, if it came out of committee with that many cosponsors, it must be all right..." Or perhaps another way to slip under the radar could be an insertion of the text in whole as an amendment to an unstoppable bill, such as an emergency budget bill to keep the government (specifically the Department of Defense) running. Re-election is costly. Two groups that have traditionally been happy to grease the palms of politicians are real estate developers and banksters. When they thrive, the politicians they favor thrive. Building homes employs construction workers, and purchases materials including lumber and such, and of course, transfers land from holder to developer to purchaser, each transfer adding to the "economy", and by some conservatives correlation suitable for unquestioning voters, "jobs." But real estate developers aren't getting the loans they wish to develop more housing tracts (and, incidentally, strip malls and such commercial real estate not mentioned in the bill, but under the same lending regulatory control), partly due to, developers believe, those pesky regulations requiring 100% capital reserves. If an S & L counts mortgages as assets, why

shouldn't your future obligation toward those mortgage payments be considered money in the bank? (Or S & L...). The fact that 69% of the housing market in Mr. Miller's own district is "distressed" should not bear upon this discussion7. Home-(wanna be)-owners are good for their debts! But, I digress. Re-election is costly... Among Mr. Miller's contributors8 is one Jeffery Burum, currently indicted, and wearing tracking ankle bracelets for the largest corruption case in the history of San Bernardino County, California, (and possibly the state)9. He is certainly not typical of most real estate developers. Few could turn a $17 million purchase into a $102 million out-of-court settlement (that's $85 million, or 500% profit, without any development at issue, only liability regarding flood control and competing liens, and multiple water districts, and retired judges, and city as well as county government entities involved, and also interstate highway construction...) by suing the County government the way he did, but that was in the next congressional district over, not in Gary Miller's, and quite a story on its' own. I single Mr. Burum out as an example of how real estate gets developed in the first place. Somebody has to purchase land. Such large amounts for development are the realm of S & Ls and the like, usually not individuals. Suppose $17 million in mortgage debt (let's say, 34 loans of a half million dollars each, still outstanding) backed the $17 million lent. We trust that none of those loans will default and have to be written down. This is of course the absurdity addressed by reforming the regulations from the trivial 20% backing required prior to the S & L meltdown to the current requirement for 100% capital backing. In reality, S & L's might have other backing than mortgages (as good as the paper they're written on. For example, banksters might wish to include non-performing assets, such as REO, or Real Estate Owned, but not sold, nor sellable at the banks' inflated opinion thereof), and not be over their lending limits, but that's not how the developers see it. If they're not getting development loans, it's not because they're risky loans, it's because of all that excess backing required! A read of the H. R. 1755 co-sponsors reveals 24 names with current election season contributions from the National Association of Homebuilders10 (so far...), a heavy hitter political action committee, and closer scrutiny reveals in most cases, each co-signer has accepted donations from individuals or associations of real estate development and/or banking concerns. (It would actually be surprising to find a congressman not accepting donations from these two industries.) You can find the extent of each cosponsors' acceptance of influence at OpenSecrets.org. Pick any random name on the list. For example, I'll choose Ted Poe (RTX, 2nd), one of the first to sign on as a cosponsor after the original bill was submitted and sent to committee in early May. He has accepted at least $22,000 this election cycle so far11 (for his 2012 campaign) in contributions from both individuals and PACs representing real estate, construction services, general contractors, and commercial banks. He is typical of the cosponsors. What's good for real estate development is good for campaign finance. Housing prices are shooting through the roof! (Not!). The halving of average value has crumbled the savings dreams of many, and currently eleven million homes, or over 22% of the US housing market has a mortgage that is underwater12. But even so, developers would claim we need more housing. Despite nearly 19 million empty homes, apartments, and condominiums of the nations'132 million13, and a seven-month high in foreclosure filings in October (230 thousand)14, developers must build homes to stay in business. Never mind the homeless number

is under 650 thousand15, or, in other words, there are 29 empty housing units for every homeless person. Never mind, because those people don't buy developers houses or take out banksters' loans. Let's see what might happen if developers remove those pesky capital reserve limits. Today's modern construction should guarantee a home that at least remains standing for the length of a thirty-year note, so one would expect a worse case scenario of a 3.3% replacement rate for the crappiest of construction (I know. I commonly see the bulldozers tearing down those thirty-year old clunkers...) or 4.4 million homes each year. That is the upper maximum. Current housing completions are estimated at 647,00016, so we're staying well below that, but the question is, far enough below? The reality of homes lasting a century or more was achieved more than a century ago, so a more realistic need for construction might be much closer to the amount being completed now. But if I remember economics of supply and demand, the market that produces surplus will be left with either inventory or a price reduction. Perhaps the halving of home values reflects such an invisible hand of correction. We'll probably never know, because politicians, for all their lip service to laissez faire, just can't seem to keep their paws out of the picture. For example, Mr. Miller, in addressing the National Association of Realtors this weekend, stated "A healthy housing industry helps everyone in the country. The housing market has led this nation out of every downturn we've had in the past. Congress needs to focus on stabilizing the market, and that must be dealt with today and in a comprehensive fashion that will serve home owners today and in the future," said Miller. Miller talked about the future of the secondary mortgage market and said that while private capital must be the dominate source of mortgage credit, government involvement is necessary to ensure investor confidence and mortgage liquidity. NAR supports the principles of a bill introduced by Reps. Miller and Carolyn McCarthy (D-N.Y.) earlier this year, H.R. 2413, the "Secondary Market Facility for Residential Mortgages Act of 2011," that offers a comprehensive strategy for reforming the secondary mortgage market and gives the federal government a continued role to ensure a consistent flow of mortgage credit in all markets and all economic conditions.17 All italicization is mine. Stabilizing? Consistent flow? Ensuring investor confidence? Wait, wait, don't tell me, I've heard that last one before... but from the framers of public law 101-73... you remember, the one that H.R. 1755 would, how do you say it, "correct?" And this correction would come in the form of freeing banksters' hands to loan more against their (phony baloney) reserves. Extra cash for developers equals more housing, or surplus, on a very depressed market. Now just how does that portend a profitable development? Am I missing something? Indeed, I'm missing the key backing of the Federal Deposit Insurance Corporation (FDIC), successor to the Federal Savings and Loan Insurance Corporation (FSLIC) in federal socialization of loss to facilitate privatization of profit. Should these homes not sell, and become REO or unsold inventory to the S & Ls (more modernly referred to in H. R. 1755 as "Banks and Thrifts"), to the eventual collapse of those gambling investing institutions, taxpayers will pay the loss. The developers will have been paid to build homes the market can't move, and provided

jobs along the way for workers, who can now choose from the abundance of unoccupied foreclosed bank-owned properties glutting the market. At such bargains, these construction workers will probably consider taking mortgages at prime rate (no sub-prime scandal here!) based upon their projected income. But their jobs will only last as long as there are more houses to build... And they'll be able to build equity in the safest of all investments... real estate. Ghost malls conjure the image of depression recession economics resulting from the 2008 meltdown, initiated by the bursting of the sub-prime mortgage housing bubble, for which we still await prosecution of ANY known culprits. (It is interesting how many of the 1000s of S & L fraudsters DID go to prison.) I walked the 80% empty mall in a town last month, and noted all the anchor stores had pulled out, leaving no draw for vendors of pretzels and potted bamboo to benefit from shoppers in search of clothing and furniture. That mall currently offers approximately half a million square feet in various fractions for lease immediately. This mall is not alone. But, I also have seen new commercial construction. This seems odd. Certainly markets ebb and flow with populations and trends, and those old malls won't stand where customers are lacking. But the newly built commercial space is also vacant. Hauntingly empty, construction continues. Mystifying me most are the quarter section sized (160 acres for you non-farming types) distribution warehouse facilities (all tilt-up concrete) popping up like mushrooms throughout my state (California) to handle the projected increased demand of commerce. I've not been allowed into these to inspect, but although they appear complete, the truck loading docks (to service these connectors of rail to road) remain vacant also. They must have provided many jobs in the months they were constructed. How can empty homes, warehouses, or malls help the lenders? A larger portfolio allows more opportunity for accountants to apply their culinary talents to bound writings (i.e., cook the books). It diminishes transparency, and in some way allows hopeful dilution of poison "assets" (REO inventory, "distressed" notes, etc.) The machinations and consumer offerings are diverse, but the pattern has been seen before, in the mid-to-late 1980's. Lenders make money lending (or so they have thought), and given removal of regulation restricting the amount they can lend, they undoubtedly will try to expand. After all, it's only paper, and it's backed by the government... I begin to take stock of my own city, and note a 50% vacancy in commercial space available, but still, new construction. Huh? "If you build it they will come" seems more a prayer than prudent business planning, but somehow encapsulates my observations of real estate development in my area (one district over from Mr. Gary Miller's). The commercial real estate developer is not distinguished from the residential developer in the restrictions on capital reserves required of S & Ls by public law 101-73, but you'll find no mention of him in H. R. 1755. That bill is to help those lordly entrepreneurs who build the homes of our American Dream (but will simultaneously remove restrictions preventing the freedom of banksters to finance more ghost malls and empty distribution centers). So this tale of stealth intrigued me. Why introduce a bill, but not hold hearings? Originally what caught my attention was such a large number of cosponsors. As a regular reader of proposed legislation, it immediately caught my eye that so many cosponsors had signed on (33), and that

there was no summary from the Congressional Research Service. Hmmn.This legislation also lacked a Congressional Budget Office estimate of cost. Hmmmn. Well, it hasn't been reported out of committee, so I guess that explains the missing CBO estimate. I contacted the professionals at the Law Library Reading Room of the Library of Congress, and they responded "This proposed legislation is not citing any existing legislation or any current Federal regulations by Title or section number so it is not easy to determine if it is seeking to overturn some existing law or Federal regulations. With regard to the definitions sections it references Title 12 of the U.S. Code, section 1813. It is part of chapter 16 of Title 12 which covers the Federal Deposit Insurance Corporation."18 Stealthy. The CRS finally (nearly two months after introduction) printed a summary nearly as vague as the language of the bill. Hmmmmn. I searched throughout Mr. Bachus's committee communications. I found two quick references in passing from testimony of witnesses at other hearings19, one favoring the removal of limits on lenders, and one opposing the portions of the bill addressing changes in real estate appraisals. Congressional Record only documents the parliamentary particulars of introduction, committee assignment, and signing by additional cosponsors, now at 79 (minus original 33) meaning 46 congressmen have been let in on this little secret you and I still haven't access to. My original questions were: 1) What banking regulations will H.R. 1755 reverse (that were presumably enacted by a legislature that at one time thought these restrictions necessary to protect consumer interest)? 2) Who will be left holding the bag if these FDIC-protected lending institutions default by overleveraging their lending (by extending loans in excess of their (phony baloney) reserves?) 3) Will this create the opportunity for an extensive paper market that will be exploited by investors, akin to credit default swaps and the like? 4) Is this legislation potentially as damaging as the Gramm-Leach-Bliley Act?

Ive not been able to unequivocally answer any of these questions. I've postulated which section (314) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 this proposed legislation most likely aims to repeal. I've suggested two particular motives (re-election and greed) for this legislation, and I've informed you of the consequences likely (S & L failures and Ghost Malls) when you the taxpayer will assume the liability of the FDIC repayments. I haven't yet mentioned a recent case history of what results with this kind of legislation applied in another country. Just eight weeks ago, South Korea regulators stepped in and suspended operations in seven savings banks20 due to risky reserve-to-asset ratios caused by similar high risk real estate speculating lending. What else can I tell you? Not much. Perhaps it is time some of you also start asking these questions of your legislators. Ill now add another to ask yourself:

5) Does it worry you that there are at least 80 members in the House who accept campaign contributions from commercial and residential real estate developers and banksters, that are willing to attempt to reverse these restrictions, by stealth, and allow banks to return to outlawed casino practices that will leave us, the taxpayers, holding the bag? (Another case of capitalization of profit, socialization of loss). Notes 1 Details available at the Library of Congress "THOMAS" website, http://thomas.loc.gov/home/thomas.php
2

"Financial Audit: Resolution Trust Corporation's 1995 and 1994 Financial Statements" (PDF). U.S. General Accounting Office. July 1996. page 9. http://www.gao.gov/archive/1996/ai96123.pdf
3

THOMAS, Op. cit. Ibid.

italicized text taken from H. R. 1278, The Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
6

Quote taken from full title of H. R. 1755.

From Congressman Miller's July 28, 2011 press release Congressman Gary Miller Introduces the Neighborhood Preservation Act, available at http://garymiller.house.gov/News/DocumentSingle.aspx?DocumentID=254442
8

via the lobbying group Potomac Partners, see http://www.opensecrets.org/lobby/firmsum.php?id=D000036778&year=2009 and also http://www.opensecrets.org/politicians/contrib.php?cycle=2008&cid=N00006954 to follow the chain.
9

A brief note to launch one into the volumes of print surrounding this epic case might be found in State AG committed to tackling San Bernardino County corruption case, at http://inlandpolitics.com/blog/2011/09/09/the-sun-state-ag-committed-to-tackling-sanbernardino-county-corruption-case/
10

see http://www.opensecrets.org/orgs/recips.php?cycle=2012&id=D000000086
11

see http://www.opensecrets.org/politicians/industries.php? cycle=2012&cid=N00026457&type=I&newmem=N

12

see Foreclosure activity hit 7-month high in Oct. By Alex Veiga, Associated Press, October 10, 2011, accessed at USATODAY.com at http://www.usatoday.com/money/economy/housing/story/2011-11-10/foreclosures/51151090/1
13

see U.S. Census Bureau News, November 2, 2011, CB11-170, available at http://www.census.gov/hhes/www/housing/hvs/hvs.html
14

see Veiga, Op. Cit.

15

from fact sheet at the National Alliance to End Homelessness website, available at http://www.endhomelessness.org/section/about_homelessness/snapshot_of_homelessness
16

see U.S. Census Bureau News, October 19, 2011, CB11-174, available at http://www.census.gov/const/www/newresconstindex.html
17

passages intact from Housing Must Be a National Priority by Sara Wiskerchen, November 13, 2011, available at http://www.realtor.org/press_room/news_releases/2011/11/housing_must_be_national_priority
18

email response from Librarian 1, Public Services Division, Law Library of Congress, received June 6, 2011, in response to Library Question #6729217. Italicization mine.
19

favoring removing lending restrictions: see testimony of V. Michael Rossetti, given at the Field Hearing entitled "Potential Mixed Messages: Is Guidance from Washington Being Implemented by Federal Bank Examiners?" August 16, 2011, Newnan, Georgia, to the subcommittee on Financial Institutions and Consumer Credit, available at http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=254890 opposing proposed changes to regulation of real estate appraisal: see testimony of Sara W. Stephens, given at the Hearing entitled Mortgage Origination: The Impact of Recent Changes on Homeowners and Businesses July 13, 2011, to the subcommittee on Insurance, Housing and Community Opportunity, available at http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=250158
20

see 7 South Korea savings banks told to suspend operations at http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1153913/1/.html