Sunday, February 10, 2008

Chapter Twelve

Another financial disaster facing many people now that it is more or less three months into the pandemic is that many banks have reached the limit of their forbearance policies.

Before the pandemic hit in the US, there was already a great strain on the mortgage side of banking due to high foreclosure rates. This was in large part a result of several years of historically low interest rates combined with a lot of what is called subprime lending on mortgages in an extremely robust housing and construction market. Mortgages were being issued with financial terms called "arms." The mortgages started with interest rates below the prime rate, but their lending institution could raise the interest rate a certain percentage every given time period. People were beginning to panic at what their monthly mortgage amounts were turning into. Some made the poor choice of trying to use their home equity to pay for any shortfall, but that only sunk them deeper into the hole.

The other part of the problem was that the housing boom, which had lasted for several years, began to seriously falter. A strong housing market lead to higher prices. Higher home prices - bought and sold - led to higher property values. Higher property values led to higher property taxes being imposed at the local government level. Now add into this the other part of P.I.T.I (principle + interest + taxes + insurance = mortgage payment amount) that the consumer only has a minor control over - insurance costs.

Nationally, the cost of insurance had risen sharply as the recovery from such events as hurricane Katrina and its aftermath as well as preparation for future catastrophes took place within the insurance industry. In states like Florida, prone to weather related disasters, most of the major insurance carriers stopped writing new policies and many cancelled existing policies and pulled out of the state completely. As a consequence of fewer insurance options - supply and demand - prices skyrocketed; increasing 300%+ in some locations.

People tried to fix their problem mortgages by refinancing into more favorable terms before foreclosure occurred, but that option wasn’t available to everyone. If you had already damaged your credit score by making late payments, or your overall income had not risen to address the higher payment requirements, you had a hard time qualifying for a refinance of your mortgage loan. Those who couldn't get a refinance eventually defaulted which dumped more homes on the slowing housing market. This began to bring down property values. Many people wound up in upside down mortgages where they owed more to the finance company than the house was worth. This too caused some defaults as people chose to walk away from what they now considered a bad investment.

Now, three months into the pandemic, people who were teetering on the edge of foreclosure had actually fallen in. And many more people were in the hole with them due to lost income directly caused by the pandemic driven economic recession.

There had been noise from the Feds that they were working in closed committees on recommendations to address the imminent collapse of the country's banking system. At some point these recommendations had been put before the OCC (Office of the Comptroller of the Currency). The OCC was the only one that could force the privately held banks to comply as they are the financial regulatory arm of the federal government. One of the OCC’s primary responsibilities is to issue rules and regulations governing bank investments, lending, and other practices.

The OCC responded:

  • There would be a six-month moratorium on all mortgages and bank-held, collaterally secured loans.
  • At the end of the six-month period, the moratorium would either be lifted or re-issued or modified.
  • During the moratorium, banks could work with their debtors but any terms that were offered or accepted by any involved party were not legally binding until the OCC officially ended the moratorium - at which time legally signed agreements must be obtained. This would allow both parties to jockey for better terms once the economic realities were evaluated.
  • There was no direct financial penalty associated with not paying loan payments during the moratorium; no fee would be imposed for non-payment. However, banks were free to offer better terms and incentives to those who at least paid the interest due on loans during the moratorium.
  • Once the moratorium was ended there would be a slow rehabilitation of the banking industry. These details were still being worked out.

As Sissy turns off the radio she asks Scott, "Is this good news for us or not?"

"Maybe good. I’m not sure yet. I’ll have to run the numbers."

"You think we should stop making the mortgage payments?"

"To be honest, I don’t know. I think we need to at least keep paying the on the principle. I don’t want to give the banks any excuse to freeze our assets. I’m more worried about losing access to those funds than I am losing the real estate. How much we pay may depend on how far into the mortgage we are. Interest is all front-loaded on those types of loan. The newer the loan the more interest you pay, the older the more principle. I’m not even sure what kind of deals the mortgage companies are willing to make at this point."

"I noted they didn’t mention taxes and insurance payments."

"No they didn’t. With property values coming down, property taxes should come down next year, but that won’t show up until January. This year’s taxes have already been assessed and the County certainly isn’t going to cut us a break on those. I just don’t know whether they’ll raise the millage rate to compensate for the lowered property values. But if they know what is good for the city, they’ll lower the taxes or all hell will break loose once the new assessments get sent out. You heard those protestors on the news. If municipal services are going to be curtailed then taxes better start reflecting that."

"Insurance is what is worrying me. With the way things are, I’m not sure we could ever file a claim and expect to get anything. I couldn’t believe it when that rep from Nationwide said they have a legal right to access not only the names, but the confidential info such as the social security numbers and addresses of those on the Casualty Rosters. I know what they are doing. They are cross checking their files so they can quietly discontinue coverage even if the policy holder’s heirs are still living in the property."

"Unfortunately it makes sense from a business stand point even if it isn’t very humane. Besides, there has been a lot of policies lapse due to nonpayment." After a brief hesitation Scott says, "I want to cancel our health and dental insurance."

"Excuse me?"

"We pay nearly $800.00 per month between the two. I’ve been calling around. None of our providers are taking appointments. Three-quarters of them aren’t even taking calls or they’ve closed all together. Blue Cross was honest and said they are routing most of their members to local Ask-A-Nurse phone-in centers. I don’t want to keep throwing that much money down the toilet every month."

"Fine. Next problem. What about Sarah’s brances? She said a wire broke this morning when she was flossing her teeth."

"I know. She already told me. I just clipped the wire. When I tried to call her orthodontist all of his numbers had been disconnected. I’m not paying that bill anymore either. They can try and send a collection agency for the balance after this is all over. I dare them."

"I just hate not paying our bills."

"That’s why I am canceling the policies myself rather than allowing the accounts to default. I have no idea what things are going to look like in a year’s time, but I want to be in the best credit position as possible."

As many people notice, the moratorium does not cover certain situations. It only covered collaterally-insured loan holders. Those that pay rent or hold leases with specific payment terms, are still stuck. Many people are also waiting to see if the moratorium includes non-mortgage loans such as student loans and car loans or other rotating debts - such as credit cards - as they were not specifically mentioned by the OCC.

There is some thinking that debt holders (credit card companies in particular) will freeze current balances for those unable to make payments and accept lowered minimum payments with no penalties. This means that they will freeze your balance due on unsecured debt such as credit cards, adding no additional monthly interest, so long as the card holder continues to make a timely minimum payment. This payment will go directly towards paying off the balance due. The flip side to this would be that it will also freeze the card holder’s ability to use the account to put on more debt, in effect temporarily canceling the credit card. Those who continue to pay off their credit card payments in the original system will continue to have access to their credit balance; not that this does much good as many places no longer accept credit cards.

Utility bills are also not covered by the moratorium. Water and electric still need to be paid for and you can still have your utilities shut off for non-payment. This is one of the weakest points in our family's business continuity plans. Because of local regulations, most multi-family housing rentals have their water paid for by the landlord since the units are on the same water meter. And, if this is the case, state law prevents the landlord from disconnecting utilities; if they do, they face severe penalties. There is no real incentive for the tenants to conserve water use. Unbeknownst to the tenants, Scott has been installing a piece of equipment called a water governor at each unit. This piece of equipment measures the volume of water and then will cut off when a certain measure is reached. It has a timer on it that will then allow so much time to go by before turning back on and allowing water to flow again. This device is helping somewhat, but the utility bills are still eating into their business reserves. Scott allows the tenants to think it is a municipal issue and reminds them of the order to conserve water issued by the Southwest Florida Water Management District.

"I am sick and tired of my water going off all the time. Seems like every day it goes off. If you don’t fix this water problem, I am not going to pay my rent. How do you like that Mr. Landlord?!"

"I pay the bills and have receipts to prove it. Its not my fault if you are using too much water. I warned you about letting your sister and all her kids come over here and use the shower, do their laundry and fill that big tank to take back to their house."

"They don’t have any water at their place. They had their water turned off by the City. I pay my rent. I can use my water any way I want to."

"One, it isn’t your water. I’m the one that pays for it and it happens to be included with your lease but is not part of the rent. Two, no you can’t do just whatever you want with the water because the city has already given out water restriction rules and both you and I can be ticketed for over usage. Now, if your sister paid her bill she should have receipts. Just tell her to take them Water Department and they’ll turn her water back on."

"She ain’t got no money. Her ol’ man ran off."

"Fine. She wants to pay rent to me, or pay a fee, she can have water. Otherwise I’m going to have her trespassed next time she shows up and it sounds like she doesn’t need that kind of trouble on top of all the trouble she already has."

"Man, ain’t you got no heart?!"

"Look, I’ve got my own family to think of. I’m the one paying the water bills around here, and it’s not cheap. Tell me why your family should be more important to me than my own."

"Dude, she ain’t got no water and she’s got four kids."

"And I have five … Dude."

"That’s cold man. You’re just @#$%^&* cruel."

"Fine. I’m a cold-blooded bastard. Tell your sister instead of wasting gas driving over here, to walk to the water station two blocks from her house. The city is selling potable water for 25 cents a gallon. It’d be cheaper. Water is less expensive than gas."

"OK smart ass, what about washing clothes and giving the kids a bath?!"

"Do what my wife does. Save rainwater. No more excuses. I find out this happens again – and trust me I’ll find out – and it’ll be you who has to stand in line to buy water. Got me? No more warnings. And please be my guest about passing the word around the complex. I’m done messing around. We all have to live by the new rules. No one is exempt."

Later than night Sissy finally gets Scott to talk about what was eating at him.

"Do you think I’m heartless?

"What? Of course not!"

"Why is it that I’m the one that is the bad guy when they are the ones that are taking advantage of me? They are the ones that don’t follow the rules."

"OK, back up and give me a chance to catch up with this story."

After Scott repeats the conversation he had to have with one of his oldest and best tenants, "Its like they don’t care that this crap is happening to everyone. The only thing that matters is how they feel and how they are affected. They act like I’m Fort Knox and they should be able to make a withdrawal anytime they feel like it."

"Oh honey. Don’t’ let them get to you. They were wrong. You were, and are, right. They got caught doing something that they shouldn’t have and they didn’t like being told to stop. Especially since this isn’t the first warning you’ve given them."

"I know I’m right. But that doesn’t make me feel any better."

"I’d take your place if I could."

"Yeah, I know. Look, it’s not that I’m asking them to bow and scrape whenever I walk by. I don’t even want a thank you. But it would be nice of them to realize that I’m on the same damn sinking ship as they are. I’m barely keeping us afloat. I don’t need someone poking holes in the bottom of the boat while I’m dipping water out with a tea cup."

"Oh sweetheart." Sissy reaches over and gives Scott and hug. "I have a bad feeling things are only going to get worse before they get better. Then they’ll see."

"You haven’t heard the rest of it. While I was digging up a line at one of the other places, I ran afoul of the Water Department. They thought I was digging up their water lines because somebody in one of the duplexes complained that the water kept shutting off in the buildings when other people on the street would still have water. They thought I was illegally re-routing water supply lines. Took me forever to get it cleared up."

"What did you do?"

"One I had to prove I was the owner of the property … and thank goodness I carry a copy of all my licenses. Next I had to get them to realize the pipes were on my side of their water meter and that it wasn’t a water line I was digging up but a sewer line. At the street some of them look just about alike."

"Well all’s well that ends well."

"Well, not quite. You know those water governors aren't technically legal. One of the guys on the Water Department detail was actually a supervisor overseeing some water reclamation project. Anyway, of course he figures out what I’ve done. And I can’t lie about it. He asks how well it is working and whether any of the tenants are disabling the governors, etc. Well, at first I thought his questions were kind of strange. I was expecting a huge fine at the very least but here is this guy asking me how well my system is working like he is really interested."

"Does he have rental units of his own?"

"No. And this is something he told me I didn’t hear from him. The Water Department is looking at putting water governors on the water mains. They’ve ready had to disable some of the fire hydrants that are being vandalized. The guy said the city is a lot closer to utility failure than most people think. It helps that some of the heavy industry is shut down. They’ve actually turned the water off to some of the commercial districts around town. But residential water usage is still too high for them to keep up with."

"How close to failure is close."

"He said that they’ve got maybe … maybe … a two week window to do something or the whole system could crash."

"Oh. Oh no. That’s bad all right."

"They’ve started acquiring all of the spare parts they can find from all the local plumbing and parts supply houses – confiscating to be honest – and they have a couple of techs that can fabricate the rest of the system. If water usage begins to be controlled by putting governors on the main water mains then they’ll branch out from there and may even go as far as putting them at each water meter to keep individual houses and buildings from bleeding the whole system before everyone else can get their fair share."

"I guess it makes sense but do they have the man power for that?"

"They’ve got plans to contract out as much of the work that they can’t handle. First they need to see if it will work at the bigger stations. This is just one more reason why I’m glad we aren’t on public water. If I could just figure out why our solar panel won’t run our well pump, and then fix it, we wouldn't have to be worrying about any of this."

"If it wasn’t lack of power, it would be something else. What if the pump blew or the capacitor goes bad."

"Bite your tongue woman. Are you trying to bring trouble on us?"

After a few minutes of quiet, Sissy asks "You want some popcorn? Power’s on; we could drop a movie in the DVD – something full of action and testosterone – and chow on some chili cheese popcorn. I’ll even dig out a couple of cans of soda I’ve been saving. I think we are all due a completely mindless family fun night."

"Mindless fun … sounds good to me. See if there is anything the kids want to watch while I grab some pillows and the sleeping bags. We’ll all camp out in our bedroom for the night."

Scott heads to the linen closet while Sissy calls for the kids to come help her with the popcorn and movie choice. Sometimes you just have to shove the bad stuff down in the cellar and enjoy the ones your love.

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