Tuesday, July 15, 2008
No Speech: The New Free Speech
Thomas Jefferson would blush, or at least roll over in his grave.
Seems the authorities are shifting the responsibility for individual actions from corporate CEOs and their Boards of Directors squarely where it belongs: rumor-mongering traders.
So much of this blame-shifting is going on that even a loud-mouthed U.S. Senator is being blamed for the collapse of a lending institution rather than the incompetents who ran the lending institution.
In light of all this blame-shifting, we here at NotMakingThisUp thought it worth reminding readers of something the Powers That Be appear to have entirely forgotten about.
But before we get to that, we first want to tell the story of Eddie the Real Estate Broker.
In these parts of down county Vermont (not the actual state), Eddie (not his real name) is The Guy to go to when it comes to real estate. And Eddie recently told us about a “short-sale” he helped out on for a client.
A “short-sale” in real estate involves property worth less than the loan balance. Rather than foreclose on the property, the bank holding the mortgage agrees to take whatever it can get by selling the property in satisfaction of the loan balance.
The bank eats the difference between the actual sale proceeds and the loan balance.
These “short-sales” are happening more frequently nowadays, thanks in large part to the massive amounts of home equity loans that homeowners applied for, and banks agreeably provided, in recent years.
In this particular case, Eddie’s buyer paid $500,000 (not the real number) for the house and later got the thing reappraised at $750,000 (not the real number, but, yes, it was a 50% increase in the appraised value) for a home equity loan.
Eddie’s buyer twisted no arms to get the higher appraisal: the bank in question, which shall remain nameless, did what Eddie called a “drive-by” appraisal. According to Eddie, the place was never worth more than $500,000, and if the bank had bothered to stop and look around, they would have figured it out.
So the buyer is losing his house, and the bank is eating a good fat number on their loan.
Now, why do we here at NotMakingThisUp tell the story of Eddie the Real Estate Broker and the Short-Sale?
Because it is the story of this real estate cycle.
It was a cycle driven, as all cycles are driven, by human greed on each side of the transaction. On the one side was a guy who bought the house and got it reappraised so he could borrow more money against the house strictly so he could buy more stuff.
On the other side was a bank that willingly and eagerly loaned him the money on the basis of a “drive-by” appraisal, not because it was a good long-term thing to do, but so the bank could show higher short-term earnings.
But, as it turns out, the authorities wish it known that the problem at Fannie Mae was not Franklin Raines’ management of the company; and the problem at IndyMac was not that it led the field in “Alt-A” mortgages; and the problem at the bank here in Vermont was not drive-by appraisals.
It was, we now know, rumor-mongering traders and loud-mouthed U.S. Senators.
Which is why we say, “No Speech is the New Free Speech,” and offer this reprinting of the first article of the Bill of Rights as a public service:
Bill of Rights
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
Last we knew, that First Amendment wasn't a rumor.
I Am Not Making This Up
© 2008 NotMakingThisUp, LLC
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Posted by Jeff Matthews at 7:59 AM