Sunday, June 16, 2013

Short Sale; Buy It Back

I just wrapped up a five-day visit with my daughter (Jo) and son-in-law (Peter) in Las Vegas. I was lucky to hit a "cool spell"; the daytime temperatures never got above 105 degrees. I'm telling you, they know how to do sunshine there. Because it's June and we're within a week of summer solstice, it starts getting light well before 6 am and lingers well past 8 pm. For this past week at least, it was Sun City every bit as much as Sin City.

Besides digging out from under a backlog of email, the most timely thing I did was help Peter scrape the lime scale off the housing of their swamp cooler so that we could use it to cool off the back porch and help take some of the burden off the whole house air conditioning. (I benefited directly from that repair, as I relied on the back porch table as the bivouac for my laptop for the duration of my visit.)

While I mostly hung out at Jo & Peter's house (near the intersection of Rainbow and Charleston, in the northwest quadrant of the city), occasionally we'd drive somewhere and I'd get inundated by billboard messaging, which is all the more striking when you're visiting a city of almost two million and live in a rural county with a population under 5000.

Within the genre of billboard advertising, there's considerable variety, and I want to hghlight a few that are not that prevalent elsewhere in mainstream America. Being Vegas, no small number of the displays—especially the ones nearer the Strip and the airport—promote shows and entertainment opportunities geared to pique your interest (there's a reason they call it "titillation"). 

There are a few billboards that inform readers (at 55 mph) of the chance to pull the trigger on semi-automatic weapons at a local firing range (which, invariably, is depicted by a buxom blonde in a black sports bra gleefully banging away with a machine gun). Who knew this was even a marketing niche?

What I mainly want to comment on though, are billboards promoting the services of lawyers. A popular one leads with the headline, "Enough said, call Ed," which I found intriguing because it gives no hint as to what kind of legal problems Ed will help with—excepting, perhaps, those where people talk too much (which, unfortunately, is not very defining).

The one that I found most disturbing read:
Short Sale
Buy It Back

This was posted by a pair of entrepreneurial real estate attorneys who want your business in giving banks the business. I figure this could only happen in America: brazen promotion of homeowners walking away from their debt and then taking advantage of the subsequent bank write-off to repurchase their house at a lower price. It's one thing that people do this; it's another that it's a marketing strategy.

Las Vegas was one of the hardest hit towns when the housing bubble burst in 2008. Real estate values plummeted as much as 60% there. While prices are slowly starting to rise again, there remain many in town who owe more on their mortgage than their house is worth, which financial state is colloquially referred to as being "upside down" or "under water." Owners in this condition have no net equity in their homes. As such, sometimes they simply default on the mortgage and walk away, leaving the house to the bank, for whom the property was the collateral on the mortgage.

There turned out to be enough of this that it resulted in Vegas experiencing a mosquito problem for the first time in its history, despite its inhospitable desert climate. Here's how it happened:
o  Vegas is one of the fastest growing cities in the US.
o  As such, a high percentage of home owners have only recently bought their homes, which translates into having only paid down a small percentage of the principal on their mortgage.
o  The housing segment that was most affected by the sub-prime mortgage crisis was that which was most leveraged: luxury homes. 
o  Many luxury homes in Vegas include backyard swimming pools.
o  People who buy luxury homes tend to be more money savvy and financially "creative" than most, and are also more likely to have multiple homes.o  Thus, the people most likely to be under water in Vegas were also the ones most likely to be in a position to walk away with minimal disruption to their lives.
o  When people defaulted on luxury home mortgages in Vegas they stopped taking care of their swimming pools.
o  The banks holding the mortgages suddenly owned lots (in both senses of the word) of luxury homes.
o  Banks don't like owning homes, they don't like being property managers, and they especially don't like losing money.
o  Because of this, banks rarely want to rent out homes they own (they'd rather sell them), yet they are slow to write down losses (which meant they were cautious about selling homes at a loss).
o  All of this was a perfect storm for mosquitoes, as the stagnant housing market translated into a proliferation of stagnant swimming pools, which—voila!—were magically transformed into perfect mosquito breeding grounds.

Insects aside, banks holding overvalued property (by which I mean the book value of the unpaid principal exceeded the market value) eventually bit the bullet and started accepting offers to buy homes in their mortgage portfolio where they'd have to eat a loss. This is known as a "short sale." While there's been no shortage of short sales across the whole US the past four years, they've been particularly prevalent in Vegas.

Is there any crisis that is not seen as opportunity for lawyers? As a profession they do fine in steady times, yet they do exceptionally well in chaotic times. When people are buying and selling at a frenzied rate (often under distress) each transaction is another chance for brokering fees. Other people's misery can be a gold mine for attorneys. While I knew that, I wasn't used to seeing it advertised on billboards.

I can understand this from a free market perspective—the two lawyers whose faces are on the billboard are simply informing the marketplace that they claim to have expertise in navigating a tricky spot that a lot of people find themselves in these days. What's bothersome is the moral/cultural perspective. 

The lawyers in question are trying to promote business by encouraging people to default on their mortgage, holding out the promise that you can have your cake (getting right side up) and eat it, too (you don't have to leave the home you're in).

Extending the "under water" metaphor, the lawyers are effectively encouraging people to get to the surface (where they could breathe better by virtue of a positive net equity in their home) by grabbing hold of a banker and pulling them down to propel yourself up. Just because you can legally break your contract with the bank and stick it to them to enhance your financial situation, I question this practice because it feeds the competitive urges that got us into this mess—an overheated housing market with people buying houses as much for speculation as to secure a home ("Quick, buy that house before the hoarders get it!")

Think about this. Lawyers are the best represented profession among people elected to political office in this country. It is also one of the highest paid professions, and lawyers have a lot of influence in the world. In turbulent waters, wouldn't you rather have the more powerful people serving as lifeguards, rather than as sharks?

1 comment:

Salim Reza said...

I closed 16 short sales, in 2012 about 10, this year I'm not sure I will have any. ...
short sale