Back in February the New Yorker wrote an article about how Florida was sort of the epicenter of the real estate madness, full of frauds and crooks, and that the entire state was essentially a giant ponzi scheme. The story mentioned one man in particular, Sonny Kim, who sold 90 properties, netting $4 million. Here is a link to a story in the local paper about Mr. Kim. The buyers were mostly in on the scam, putting no money down, getting liar loan mortgages from foolish loan officers, and then walking away, sticking the bank (meaning the taxpayers) with the house while Mr. Kim kept his proceeds.
Here is how it works: “A common scam works like this: Someone with cash buys a crummy house cheap. A mortgage broker signs on and finds an appraiser to inflate the value. The broker shops the loan application, with false data about the borrower and the house. Bank loan officers approve it.”
Sonny Kim bought one house for $100, and three months later “flipped it for the sum of three hundred thousand dollars, with the help of a no-money-down mortgage from a subsidiary of Washington Mutual Bank, which later foreclosed on the house.”
I saved the article, so that I could go back to it later and see what happened to these folks. According to the St. Petersburg Times, which broke the story, nothing has happened. Sonny Kim hasn’t been charged with any crime. The title agent who managed a third of Kim’s deal, and was arrested on other fraud charges, hasn’t been charged for these deals. Nobody at WAMU is in jail. So all the people who made money on these fraudulent deals are sitting pretty, spending their money on mojitos, while the taxpayers are footing the bill for the bailout. That seems wrong somehow.
In fact, here is a quote from another house flipper, who started his real estate career while on probation from a cocaine conviction: “I drive a Hummer and own a 1970 vintage Oldsmobile 442. I always wanted diamonds and now I own them legally and no one can take them away.”
Today’s Wall Street Journal reported that commercial real estate developers are aggressively lobbying for a government bailout, trying to get into a $200 billion program designed to “salvage the market for car loans, student loans and credit-card debt.” Because the developers have a ton of debt coming due next year, and the frozen credit markets will prevent them from refinancing that debt, they want the government to step in. If they cannot refinance the debt, then their lenders will take over the high-rises and malls and hotels that the developers currently own.
This is where the bailout madness must end. Real estate developers are in a completely different league than banks or car companies or consumer debt. The bailouts for those industries could at least be defended, since credit and employment and consumers are essential for the economy to work. But allowing developers to keep the speculative properties they built does nothing for the economy. It doesn’t prop up employment or consumer spending. All it does is shift dollars from taxpayers to a few very wealthy and connected developers. If developers were erecting new buildings, at least they could claim to support construction jobs, but in this economy, not a lot of new buildings are being built.
Here are several of the problems I have with a bailout of developers:
- As noted above, there is no economic benefit
- Developers usually finance each project separately, so even if they lose one to the banks, it won’t bring down their whole firm
- Developers push strongly against government regulation (zoning, height limits, etc.) when they are building, standing on the spurious rubric of “property rights.” So why don’t they rely on their precious freedom now instead of turning to the government?
- The same issue of the WSJ also had a piece on how some real estate developers saw the crash coming and conservatively boosted their cash reserves, and are now sitting pretty. So why should we bailout the developers who were not so prescient?
Finally, I should note that generally speaking, developers are wealthy and sophisticated individuals or families. They weren’t talked into these investments by shady mortgage brokers, and they already have plenty of resources to deal with their problems. In fact, let’s look at the three named developers in the article. There is William Rudin, whose family “is a large Manhattan office building owner.” If you are a large owner of Manhattan high rises, then you are very very rich. The Related Cos, a major developer has, according to its web site, a $10 billion real estate portfolio, and this privately held company remains under the control of rounder and CEO Stephen Ross. Vornado Realty Trust is a huge landlord, publicly traded, with a market cap of $9 billion. Vornado CEO Steven Roth was paid $1 million last year and exercised options worth $68 million. On December 8 of this year, he exercised more options, with a net gain of $13 million. Do these guys need a bailout?
The government can’t keep giving money to every industry that asks for it. Let’s draw a line, and let’s draw it at the hugely wealthy individuals who don’t need and who won’t help the economy.