Sub Prime

All the activity next door makes me listen to the financial and economic news with a little bit different ear. It becomes more of a real problem when you see it happenning.

I will set aside for a moment the reports that the "Credit Crisis" is sending ripples through the economy at large, causing our economy to falter and possibly sending us into a recession. That doesn't seem possible, but I'm no expert. For me personally, business is better right now than it has been in 9 years.

This all started when some financial geniuses decided that the "sub-prime" market was ripe. My understanding of the term "sub-prime" is that people that have crappy credit ratings and no money for down payments are eligible for these loans, and nothing better. So some greedy corporate schemers rubbed their hands together and devised their plan to make billions in profit. They hatched their plan into the perfect environment. The stock market had underperformed, and people were looking for the next good place to invest their money. They knew that the government enviroment nowadays is geared toward leaving corporations alone when they aren't writing legislation to specifically benefit them or removing regulatory hurdles. Bush is pro-business, everyone believes. So they geared up some new "products" - loans custom made for unsophisticated borrowers with bad credit, and they flooded the country with one of the most aggressive ad campaigns seen in years. I'm sure you've seen all the stupid banner ads with people dancing spastically, saying "Interest rates are going down again!" and "You're eligible for a home loan!"

So they got these poor saps to sign fat contracts for loans with a fatal flaw embedded in them. Sign up and your payment is x per month, but after about a year it becomes almost 2x per month. "My house payment went up and we can't afford it!" was the common cry that went up all over the land. "Stupid people got in over their heads," was the callous comment heard most often around the water cooler.

I disagree. A complete lack of regulatory oversight as well as sheer stupidity on the part of the lenders is the problem here. If you're approving someone for a loan, you know how much they make. If you slip a provision that jacks up the payments after a year, you could probably do the math and figure out that they won't be able to pay and that it's a bad investment. Lack of regulations lets you hook in people without even making them come up with a down payment. So even if your plan was to set up people for failure and then take possession of their homes, it's still a bad plan, because you're not even going to profit from their down payments.

Then the perfect storm happend to make this into a full blown crisis. Lots of people rushed to make these loans, they started going bad in huge numbers all at once, and the bottom fell out of the housing market. It takes a long time to sell a house right now, and you will never get the full price in today's market. So suddenly it's not a bunch of ignorant borrowers that are feeling the pinch, it's big banks.

What a fiasco. Imagine rich investment types, used to pulling in 6 and 7 digit incomes watching their net worth evaporate away in a matter of months. These are the type people that used to fund political campaigns, so is it any wonder that they are also the people with access to power and influence? So who gets the first big bail out? Bear Stearns, an investment bank with some of the bluest of the blue bloods gets access to a line of credit to stabilize it while it is on life support. I have no doubt that the other lenders that pushed us into this mess will get similar support and bailouts in the months to come.

Meanwhile, let's hope that the people that got fooled by these bad loans in the coming months can afford their rent if the economy does slip into a recession.

Masters of the Universe? Time will tell.

The Moat Next Door

More in the continuing saga of the empty house flipping next door.

I haven't written about our "neighbors" since January 14th (two entries) http://atresfreq.blogspot.com/2008/01/house-next-door-unplugged.html. Before that you can check out my earlier posts: http://atresfreq.blogspot.com/2007/07/house-3.html, http://atresfreq.blogspot.com/2007/07/house-next-door-2.html, and http://atresfreq.blogspot.com/2007/04/our-neighbors-house-in-middle-of.html.

Things don't seem to be improving for our poor hapless "investors" that purchased the house next door and thought they would hang some baubbles, double the price, and skip along down to the bank with their check. Fools. Dreamers and Fools is what this business attracts.

The house has sat idle for quite a while, with the realtor sign finally coming down at some point and no work activity. Some time in March, a new sign appeared in the front window that stated that the bank had moved to winterize the piping to "protect their investment". Seems that action was a little late. You generally do that at the beginning of winter, not at the end. The scary thing is that the house burst all its pipes last winter and the owner didn't even try to drain or prep the house for winter this year.

A couple of weekends ago, the son of the owner came out and was loading something into the back of a pickup with another guy. A couple of days after that, my wife called and told me that some workers showed up and came to our house and asked if they could use our electricity. Andrea told them no, and I was ready to go home and re-emphasize that if necessary. By the time I got home they had 6 pickup trucks in the yard with a generator chugging away somewhere. I left to go jogging about an hour later and I looked over and noticed that there was a trailer filled with cabinets, all bungied down. As I started running, it occurred to me that they were taking things out of the house, rather than fixing it up for sale. When I got back from my run, all the trucks were gone. I peeked in the windows and discovered that they had indeed taken all the cabinetry and sinks out of the kitchen and first floor.

A few days later, more trucks came and started removing carpet. Someone got stuck in the waterlogged front yard, and another neighbor helped pull them out. We have some nice new pretty ruts to look at, now.

A few weeks ago, while looking for a cat, I noticed that their pool equipment room had a foot or so of water in it. This little basementlike foundation had its little pool house on top that was removed and then a deck was put on top of it (which is not sealed to rain, I don't think). However, the stairs have always been open to rain and the foundation has a floor drain. That must be clogged with leaves. The last time I checked, this little room (after our 3" of rain this week) has 3' of water in it. I'm sure the heaters, filters, and pumps are ruined after spending 3 months underwater.

The pool is filling with leaves and looks like a giant glass of iced tea. I recently spotted a 12" across (the shell) snapping turtle in the pond. I'm guessing that the turtle fell in full-grown as opposed to getting this large by living his whole life in the pool.

There are some pretty daffodils still, missed by the "landscapers" whose main function seemed to have been to tear things out rather than planting anything. The grass looks surprisingly lush and I can't tell that there has been much damage from leaves choking anything out. The other side of the house away from us has deep ruts and big low spots from the construction over there, and there is still a lot of construction debris laying around. The "breezeway" that they installed from the house to the "guest house" or studio (whatever that box they built near the pool) has a large opening that would allow animals as big as a cat to get inside of the house. I wonder if anything has taken up residence in there.

We know they bought the house for a lot more than the person before, and we know that they were able to get a loan for even more than they paid for the house, probably to finance the improvements. After the freeze damage and the other problems, I'm sure they are thoroughly upside down on the house. They not only haven't paid any of their utility bills, but they also did not pay the last notorious contractors (the guys with the tricycle mower). So if the house happens to have any leins on it, it's in even worse shape than just trying to sell it.

The house wasn't ready for someone to buy and move in before this latest trend of tearing it up. Now it's in even worse shape. I don't expect to have new neighbors any time soon. I do wonder how long it will be before the house goes up for auction.

Giving Up?

I freely admit to spying on neighbors.

However, I'm not sure you should even call these ones neighbors. House flipper realtors don't really count as neighbors.

I saw a couple in a white SUV on the driveway, talking to the "owner" flipper. I watched from my window. The conversation did not look congenial.

At first, I thought maybe it was a potential buyer, then I started wondering if it was the realtor. The couple was a man and a woman, but the woman was a lot older than the man, so I didn't think they were husband and wife, but maybe colleauges.

It looked like the owner was sort of arguing, maybe not in a contentious way, just trying to get his points across, and the couple looked like they were utterly unconvinced.

Later, I noticed that their footprints in the snow showed that they went to the front doors of the house where the electricity disconnection notices were still posted. I also noticed that the owner backed into our yard and made a mud rut with his back tire.

The next day, the real estate agent's sign was removed.

News of the housing markets just keep getting worse. I went through the back yard around the pool last night, looking for a cat and noticed that there was 2½' of water in the pool equipment room. Obviously, the drains are clogged with leaves and debris. It's possible that the cabana that they removed used to keep the water out and the deck that they replaced it with does not. I wonder how much damage the water is doing to the pool heater and filter? More money just evaporating away.

I wonder if we'll see a foreclosure sale sometime?

Postscript:

I called the realtor. It was another exercise in unreality. The secretary had a guy call me back that didn't even know that their company was listing the property. He kept trying to engage me on the phone, even when I figured out that I needed to talk to Pamela. Truly Dave, you are an idiot.

Pamela is his kindred spirit. Maybe they are brother and sister, their mental processes were certainly a match. Pamela said that they were going to "re-list" it. This is another meaningless buzz word that can mean anything they want it to mean, similar to the way they would tell us that the house was "under contract", which we were supposed to interpret as meaning that they had someone interested in buying it, when it really meant "I don't want you to think we are losers".

Pamela (if that is her real name) said the house is now $900,000 (down from $1.2 million - 25% off! that's a real sale!). They would be willing to take $875,000, as is. That means that for $900,000 he'll finish working on the house. Then she proceeded to tell me about the granite counters they are going to put in the guest house.

If this isn't like putting makeup on a pig, I don't know what is.

House Next Door - Unplugged

It has seemed that the person that bought the house next door and the strange contractors that worked on it were complete insane, but they talked up a good story about how great! they were doing, and on some level, you want to believe them.

Apparently, they were not doing that great, as evidenced by the fact that last month their water was shut off, and this month, their electricity was cut off.

With the looming housing crisis, you have to wonder what will happen, and just how bad the place will look when it finally gets sold. I had a handyman/contractor come by last week to look at a busted storm window, and he said it would only be worth about $500,000 if it was in perfect shape, but he thinks $350,000 would be more likely, given the amount of work that needs to be done. I wonder if they still want $1,200,000 for it.

Flip that house

My boss used to live next door to my house, the house I grew up in. He bought the house from an uncouth and clueless bozo with a yappy dog that divorced soon after moving in. He lived there a while, moving out during a really contentious divorce that I found myself in the middle of.

They sold the house to a couple that allowed their children to run naked in the yard. The mother believed the angels were watching out over them, and sometimes she followed the angels into the woods, trespassing on another neighbor's land. They were loud and undisciplined and a thorough mess to live next to. They brought immigrant labor in to build a photography studio in the back yard, it was a large 2-story monstrosity that did not match the house and loomed over the poolside cabana.

They left suddenly about 3 years ago. The house sat vacant, and then was put up for sale after a few months. I think he wanted $500,000 for it (I'll check my notes). The grass in the yard would get to be about a foot tall, and then a crew would show up and chop it down and leave it all dead like a farmer's hay field. No one came by later to bale the grass, so it was quite a mess. One time we found three wet hungry kittens, lost from their mother after a mowing crew left. We still have them today - they are the best things that ever came from that house. I finally found out that someone had purchased it some time later, and the next phase in the adventure began.

Things between the new owners and us were contentious immediately. They had routed the septic system into the pond and I knew that a literal stink would develop over this when someone moved in. I had to do an inquiry with the state real estate commission just to find out who owned the property and to register my protest about the rerouting of the sewage into our pond. The new owner, a house flipper, at one point threatened to sue me if I didn't back down.

He went in and totally renovated the house. There were contractors over there for months. They tore out a screened in porch and made it into a room in the house. One of the contractors that worked on that told me that he found some files in the basement about someone that was a child molester and had gone to jail. I never got to see them and the guy didn't have many details. They reworked the first floor of the house, demolishing a brick bar and reworking the structural support of the second floor. The first floor was transformed into someone's idea of a home furnishing style magazine spread. Meanwhile, the basement, formerly finished, was ripped up to accommodate the changes. The upper floor, which had been redone by the lord of the flies people in jungle, angel, and baseball wallpaper themes, was not touched. The jungle wallpaper, probably done over too many sherries by a god-fearing housewife, was peeling off the walls and looked tragic. After seeing the house at this phase, my wife remarked, "No one is going to pay $800,000 for a fixer-upper." Eventually, the price was reduced to $750,000.

The house sat vacant for some months longer. We thought someone had bought it when the For Sale sign came down, but then nothing happened, no one moved in and there was no activity. Then some weeks later, these construction laborer types started pulling up in all kinds of pickups and got busy. They brought in a giant trash dumpster and started working day in and day out. How strange this was since the house was supposedly finished and there was an enormous amount of construction material going into the dumpster. I went over one night and peeked inside and there appeared to have been extensive water damage from upstairs to the central part of the house and from the first floor down into the basement. There was a ton of drywall missing, and it was a complete mess in there. The pipes had frozen, burst, then proceeded to flood for some time (days) before someone figured that out.

We met a friend that used to live in the house. He heard that the house has been sold again to another house flipper. They ripped into it, trying to fix the damage from the frozen pipes, but also making changes like putting plumbing into the "guest house" (the photographic studio abortion), pouring a concrete patio and tearing out a nice poolside cabana. My wife found on line that they bought the house late last year for $705,000. My friend was told by the contractor that they were going to fix it up and sell it for $1.1 million.

Meanwhile, the contractors started playing monster truck rally in the yard. Every time they pulled out it was a minute long squeal of tires and a trip through some portion of their yard or ours. Then Mr. Wonderful started bringing his dog and his ATV out and proceeded to rip up the entire yard with his exploits. My neighbor (who had been trespassed on by the Angel Chaser) told me that he heard automatic weapons fire coming from the house. We weren't there and a subsequent investigation by the police (with the crazy contractor being the only suspect) resulted in nothing.

I finally met the new "owner". He was actually the next house flipper. I had this really nice conversation with him, where he explained to me that there had actually been 3 house flippers owning the house (he was the 3rd). He said he paid $605,000 for the house and got $75,000 insurance for the water damage (which he said would not cover the costs). He showed me the house and told me that he was thinking about living in it himself. He showed me the work on the "guest house" which was being attached to the house through a concrete patio and a breezeway. He told me that this would add 2500 square feet to the main floor of the house and add $500,000 to the value. Looking around, I guessed he was putting maybe $20,000 into this modification. If wishful thinking can be taken to the bank, that man will be rich. I told him about the septic problem and he assured me he was going to repair it.

Despite that, we're running lab tests of the pond water as a baseline for the proof that their septic system routing into the pond was done incorrectly.

As we say, we have another in a lengthening line of idiots involved with the property. Maybe they can paint it tie-dyed and make it into a hippie commune. That would be fine with me except for the sitar music. My boss, who used to live in the house, confided in me his thoughts about the house. He was embarrassed, but asked me if I thought maybe the house was cursed or haunted. The barn he had made when he lived there has been eaten into a swiss cheese affair by the squirrels. I didn't believe it until I saw it myself one day. There must be some tasty starch in the particle board used for binder. The tennis court is completely overgrown and is crumbling away. Wild animals roam in the yard, including turkeys, deer, owls, and a friendly muskrat. I really like that. One day, our refugee kittens caught a cute furry little mouse and brought it terrified into the house. I grabbed it (disappointing the hell out of the cats) and my wife was aware of the episode. My wife is a tenderhearted animal lover, and I knew I would have to answer to her later, explaining what I did. We once tried to adopt and nurse some baby mice after their mother died in a tragic lawn mower accident, so I knew what her feelings about mousicide would be. If I returned the mouse to the cats, they would play with it for hours, no fun for the mouse, and just as likely to result in an escapee in our house as a meal for kitty. So, releasing it outside would probably result in it being re-caught by the cats. Dashing its head on the patio was sure to win me the disapproval of my wife. I finally came up with a solution. I assume it was captured in the empty house next door, so I returned it to its home.

No one has been over to work at the house for several weeks. There is an enormous pile of trash in the driveway, and from time to time, people show up and throw more trash, brought from somewhere else, onto the driveway. It will probably fill up one of those enormous dumpsters, whenever they get around to bringing out another one (I reckon there have been around 8 or 10 taken away from the house in the last 3 years - these are the big semi trailer sized ones).

We spent a nice weekend working on the yard and my wife expressed her concern about the trash pile and the foot high grass in the yard next door. I told her that I don't care. Let them trash the place. I enjoy having the wildlife and the quiet, and if no one moves in, that will be fine with me. I wonder if they are upside down on the loan. The housing market is terrible now and rather than doing something reasonable, people keep trying to scam someone into plopping down much more than it's worth though some scheme. That means we are likely to have someone with a lot of money and very little sense move in. Not my idea of an ideal neighbor. I keep wondering and waiting for the place to mysteriously burn down some day. It seems to me that this would be the only way for the house flippers to get out of this trap.

It's not over yet.