KeNo's Housing and Economic Portal: Saturday October 31 Housing and Economic stories

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Debt City Dubai: Expats on the Hook - Debtors' prison here is real - (www.globalpost.com) Default on a loan or bounce a check in Dubai and you could end up in debtors’ prison. That was the very Dickensian prospect facing Simon Ford, a boyish British entrepreneur whose “alternative gift” business sold rides in hot air balloons and Formula 1 racing cars to the party crowd in this Disneyesque city-state. But the recession has hit Dubai hard and Ford’s business foundered. When his loans came due last June, he did what thousands of other expats have done. He packed up his family and fled — a few hours ahead of the law. Ford also left behind an anguished “open letter” to friends and creditors that neatly encapsulates the predicament of many expats in Dubai who took out loans during the flush times and now find themselves out of work and unable to keep up with the payments on their seaside villas and luxury cars. “I am not running away from debt, I am purely protecting those dearest to me and getting out of a country which, due to the lack of structured bankruptcy laws and a banking system which has zero flexibility on loan repayments, drives people to make horrible decisions,” he wrote in an open letter to local media. He promised to repay all of his creditors. Dubai authorities won’t say precisely how many people have been jailed for their debts, but local news accounts put the number at about 1,200 — more than 40 percent of the total prison population. Even trickier to gauge is how many others took Ford’s route and simply fled. Judging by the number of apparently abandoned BMW’s and Mercedes gathering dust on city streets and the ensuing chatter on expats’ discussion boards, the number is not insignificant. One recent escapee has written a book about his flight. Herve Jaubert, a former French intelligence agent who used to cruise around Dubai in a red Lamborghini, found the law breathing down his neck after his plans to manufacture “luxury submarines” became submerged in debt. Jaubert explains that he bolted last year after government interrogators threatened to stick needles up his nose. With 007 panache and a woman’s all-encompassing burqa concealing his frogman gear, Jaubert slipped into the sea, swam out to a police patrol boat and disabled its fuel line so that it could not give chase. He then used a rubber dingy to get safely beyond the UAE’s territorial waters where he was met by a confederate in a sailboat. Eight days later they landed in India. The book, “Escape from Dubai” comes out next month. But Jaubert’s website has been blocked in Dubai and sale of his book will no doubt be banned here. The Frenchman, now living in Florida, was tried in absentia and sentenced to five years imprisonment for fraud. A number of U.S. citizens have been imprisoned for bounced checks, but the American Embassy — apparently in keeping with the local custom of casting a veil of silence over disturbing news — declined to provide specific figures.

FHA Facing "Cataclysmic" Default Rates - (www.finance.yahoo.com) Given the choice between "complete collapse" and increased government involvement in the housing market, Whitney Tilson, manager of T2 Partners, is glad policymakers opted for the latter in 2008.

But there is going to be a heavy price to pay for the U.S. government becoming the nation's mortgage broker, says Tilson, co-author of More Mortgage Meltdown. Specifically, Tilson is worried about the potential need for a bailout of the Federal Housing Administration (FHA), which has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005. Created in 1934 to help low-income and first-time homeowners, the FHA has historically played a minor role in the U.S. housing market. But the agency has become the government's vehicle of choice for mortgage financing in the past year. Again, Tilson supports the concept of the government stepping into the breach caused by the near total cessation of private mortgage lending, as well as the curtailed financial activity of Fannie Mae and Freddie Mac, which became wards of the state in September 2008. But "there's a price to pay," he says, noting the FHA is facing "cataclysmic default rates" on loans written in 2006, 2007 and early 2008, as detailed by The NY Times. "Effectively we the taxpayers are now guaranteeing mortgages written by over 10,000 FHA-approved lenders," Tilson says. "The FHA's portfolio is exploding [and] the taxpayer is now on the hook for 100% of the losses." How big of a hook? The FHA's mortgage portfolio is now approaching $1 trillion. You can't assume all those mortgages will default but you can assume the FHA's exposure will only grow in the months ahead as politicians continue to look for ways to support the housing market (especially in an election year.) In other words, FHA is looking very much like the "new Fannie Mae."

Cluster of buyers spike foreclosures of million-dollar mansions in FL - (www.palmbeachpost.com) The gilded gates of Wellington's Versailles development are miles of highway and millions of dollars from cinder-block homes in Opa-Locka. But for some, it was a short jump from modest digs to million-dollar mansions in the upscale Wellington community — and from there, to $41 million in ruined home loans. Cosmetologist, barber, dental technician, seniors: A cluster of 25 South Florida buyers living within 15 miles of Opa-Locka all picked up millions of dollars in loans, drove 60 miles north, bought a slice of ornate paradise in Versailles, and then defaulted. Left in their wake are tax bills, green swimming pools and lowered property values. They even played a role in bank bailouts: Millions of dollars in these collapsed loans were bundled with others, then traveled up the fiscal food chain to eventually become part of the soured loan packages triggering taxpayer-funded bailouts for Goldman Sachs and Countrywide Financial Corp. Yet certain borrowers, now living in other new homes or richer by hundreds of thousands of dollars following unexpectedly robust sales, appear no worse for the wear. Versailles is holding its own, said homeowners association president Sal Van Casteren. But the former New York police detective says flatly that he believes the community was at one point targeted by fraudsters, flippers or both. It's a sentiment echoed by Lake Worth real estate agent Zeev Greenstein of Exit Realty Premier Properties. "These people got robbed in broad daylight," said Greenstein of the larger Versailles community. Golden opportunity With its ornate entrance and winding roads, the 451-house Wellington development "really does look like Versailles," gilded home to kings of France, said Michael Sichenzia, a former mortgage whiz who spent time in New York state prison for mortgage fraud and now investigates suspect deals. Despite being "a beautiful, beautiful place," said the reformed fraudster, when it comes to questionable mortgage defaults, "Versailles seems to be tremendously skewed." Along with other developments along State Road 7, Versailles mortgage deals have come under law enforcement scrutiny. A multi-agency task force last year issued a slew of indictments stemming from mortgage fraud; two Versailles transactions were involved. None of those indictments involved the cluster of South Florida buyers. Asked if any Versailles transactions were still being examined, a spokeswoman for the FBI said simply, "The investigation continues." How this cluster of South Florida buyers found their collective way from some of the poorer regions of Miami-Dade County to Wellington is a mystery. There was no single lender, title company or seller connecting all 25. Almost none responded to repeated requests for comment by phone and registered letters. Several have no working phone numbers. They all had three things in common, however: Their addresses when they purchased mansions revealed modest, even Spartan homes. They lived within miles of each other and several lived much closer. All defaulted. Every home went into foreclosure. Pieces of paradise: It's not clear how many — if any — intended to live in their palatial digs. Take Wedelie Etienne. Armed with loans totaling $1.17 million, Etienne bought a five-bedroom, four-and-a-half bath pool home. But Etienne already had a home, according to court records — an approximately $148,000, 25-year-old condo purchased just months earlier with $7,500 in financial aid from a Miami-Dade County homeownership program. John Law paid $1.15 million for his five-bedroom Versailles home, according to public documents; a price roughly double the estimated market value. "The house had never been lived in," said former tenant Steven Koch of Law's home, which he leased. Law's mailing address at the time of sale was a three-bedroom Opa-Locka home then valued at $142,552. And Law didn't move to Wellington to live in his Versailles home; he moved to rural Crawford County, Georgia. The Versailles home went into foreclosure.

Run on DSB bank makes Dutch central bank take control - (www.nrc.nl) The Dutch government has intervened in another bank. Not because of the credit crisis this time, but because of a run on DSB, a bank notorious for the way it sold loans to customers. The Dutch central bank took control of the consumer bank DSB on Monday after an attempted sell-off of the bank fell through over the weekend. DSB, named for its founder Dirk Scheringa, is famous in the Netherlands for its sponsorship of football champions AZ, but mostly for its cutting-edge loans, mortgages and connected insurance policies. The bank did not fall victim to the credit crisis, but got into trouble after a foundation standing up for DSB customers who felt duped by the bank encouraged all savers to withdraw their money. Pieter Lakeman of the foundation Hypotheek Leed (Mortgage Suffering) said on October 1 he hoped the company would collapse because bankruptcy was the best prospect for the people who took out excessive mortgages with the bank in recent years. DSB told critics at the start of October it had 1.5 billion euros in cash – enough of a buffer to withstand a run on its 4.3 billion euros in deposits. At a press conference on Monday central bank president Nout Wellink said around a sixth of the bank's total deposits had been withdrawn since the beginning of this month. According to owner Dirk Scheringa civil servants at the finance ministry worsened the run on DSB by leaking information about the impending curatorship to Dutch daily De Volkskrant over the weekend. Savers subsequently withdrew their funds en masse, leaving the bank unable to meet its payment requirements. On Monday morning the Amsterdam court imposed emergency control on the company. "A large outflow of liquidity has put the survival of DSB at risk," the court agreed with the central bank. Central bankers and people from the ministry tried to prevent bankruptcy by selling DSB to a consortium of other Dutch banks over the weekend. Negotiations with ABN Amro, ING, Fortis Bank Nederland, SNS and Rabobank failed, mostly because the banks feared claims from customers who felt deceived by DSB. For years DSB has been criticised for the way it sold loans, sometimes to customers unable to carry the interest burden. The catch with loans and mortgages taken at DSB was they came with expensive single-premium insurance policies. DSB received high provisions for the policies, while its customers were forced to loan more money than their homes were worth in order to pay for them. Despite the criticism and pending claims from customers, owner Dirk Scheringa became an accepted force in Dutch banking in recent years. He was invited to a hearing in parliament about the credit crisis last November, and DSB's annual report in July showed numbers far less alarming than some of its competitors. The net profit was down 17 percent to 45 billion euros, but it met solvency criteria without help from the government. The Dutch finance ministry bailed out ABN Amro and Fortis Netherlands last year and has guaranteed many 'toxic' loans to keep ING afloat.

Contemplating yet more "aid" to make housing more expensive - (www.heraldtribune.com) How badly did the U.S. housing market crash? Well, just look at how much federal aid it has taken to stabilize it, at least for now. The Federal Reserve has bought almost $700 billion worth of mortgage-backed securities, with more to come. The Treasury Department is covering the losses of Fannie Mae and Freddie Mac. Congress has enacted tax credits to spur home buying, including an $8,000 bonus to first-time buyers that expires Nov. 30 but may well be extended. The Federal Housing Administration has dramatically expanded its mortgage insurance portfolio. The Obama administration offers government-backed refinancing to middle-income homeowners who are up to 25 percent underwater in their current mortgages. Yet housing remains burdened by a huge backlog of unsold homes, which will probably grow since more foreclosures are on the way. And so the Treasury Department is contemplating yet more help, this time in the form of backstopping state-issued mortgage-revenue bonds, which are federally subsidized in that investors collect the interest tax free. During the boom, the states' housing finance agencies used these bonds to fund about 100,000 low-interest mortgages per year for lower-income home buyers. But since the bust, private bond buyers have shunned them, notwithstanding their tax-free status. At $4 billion this year, mortgage-revenue bond sales are running at a quarter of the pace they set in 2007, according to Thomson Reuters. The plan under discussion would have the government purchase about $20 billion worth of new bonds before the end of the year while insuring $15 billion in existing securities that states otherwise might be forced to redeem because they would not be tradable in the markets. Administration officials are considering steps to limit the risk to taxpayers by, for example, charging a fee to back those bonds that Treasury does not buy outright. It is also true that, in the past, borrowers of bond-backed mortgages, well selected by the states, have defaulted relatively rarely. Of course, past borrowers didn't face anything like today's unemployment and foreclosure rates. Indeed, those conditions partly explain why private investors have bowed out of the market. As compared to other more direct forms of housing aid, mortgage-revenue bonds also come with high associated costs, in the form of fees for lawyers, rating agencies and underwriters. Compared to the overall size of the huge housing bailout, this latest policy idea is pretty small beer. It does illustrate, though, that Washington is still in crisis mode when it comes to thinking about a vast, strategic sector of the economy. That's perhaps understandable, but it can't go on indefinitely. The financial crisis was partly the result of years of government-encouraged over-investment in residential real estate. When will the federal government start working on an exit strategy and a new, more rational housing policy -- one in which individual homeownership occupies a central, but less heavily subsidized, position? The answer, apparently, is not yet.

Iceland's Parliament May Demand Government Drop IMF Program - (www.bloomberg.com) Iceland’s parliament may demand the government abandon its International Monetary Fund economic program and forgo further loan payments after the IMF delayed a review of the program for eight months. The Left Green Party, the junior member of the ruling coalition, is split on the issue and will meet tonight to discuss its stance. Of the Left Green’s fourteen lawmakers, five have publicly criticized the program. Iceland’s three opposition parties are also mulling alternative solutions to the IMF program, party leaders and lawmakers said. The delays in the review, originally scheduled for February, are “embarrassing for us and it is embarrassing for the IMF,” Finance Minister Steingrimur J. Sigfusson, chairman of the Left Greens, said yesterday. “Iceland doesn’t have everlasting patience and if the review doesn’t take place soon, we will have to examine our position.” Iceland got a $4.6 billion bailout from the IMF and four Nordic nations last autumn to resuscitate the economy after its biggest banks failed. While $827 million was paid out, further tranches have been delayed pending IMF reviews. The fund is withholding the payments until Iceland settles U.K. and Dutch depositor claims in so-called Icesave accounts stemming from the collapse of Landsbanki Islands hf. The cost of hedging against losses on debt sold by Iceland’s government rose 59 basis points to 415 basis points, according to CMA DataVision prices for credit-default swaps at 5:20 p.m. in London. IMF, Icesave Link: “In light of what has happened in the past year we believe that there’s good reason to revisit the IMF program,” Bjarni Benediktsson, chairman of the Independence Party, said by phone yesterday. “We’re skeptical as to whether Iceland needs the high loans originally anticipated.”