Is anyone paying attention?

White House, mortgage lenders, borrowers, are you paying attention to what is happening?

How much longer do you want to just survive in this declining market? As long as the policies are not clear, government promises only that, promises, and borrowers not being able to make their payments the situation will stay as it is now: stale.

No signs of recovery, I don't care what the media or the bureaucrats say. The recession is far from over. No one that needs a house is buying. Only investors that can profit from the biggest slump in the Real Estate market that everyone remember.

And the problem as I see it is that no one is doing anything to solve the problem. Here is a little analysis of what happened and how we may get out of the hole.

How this happened?
It was a very simple dynamic. It is almost laughable that no one saw it coming:

1. Lot of money that was invested in the Dot Com bubble was moved out of the market. What to do with that money?

2. Investors everywhere, but specially China and Europe decided to buy America. Put enormous amounts of cash into the Real Estate Market. But wait a minute, any market can only take so much money, and once the market is saturated then some creative instruments need to be created.

3. Enter sub-prime mortgage lenders. With billions of dollars to invest on a saturated market they invented a new way: give away mortgage money:

• Bad credit history? No problem.
• No down payment money? No problem. 
• Not enough income? No problem. 
• No job? No problem. 

Any of the above was a red flag for a loan. Not anymore. It was a disaster in the making.

4. With the availability of credit for almost anyone, of course the Real Estate market was inflated beyond the wildest expectations. I saw property prices soar as much as 40% per year in some areas. To cite an example properties in Oakland, California, in very seedy neighborhoods raised from an average of $75,000 to almost $500,000 in about three years.

5. How could a modest employee making $35,000 a year buy a house for $500,000. Easy, with "creative" financing. To qualify the buyer the lender offered a ridiculous interest rate, some time as low as 0%. Using second lenders that were willing to put a sizable percentage of the loan (20 to 25%), they avoided the dreaded  PMI, an insurance to protect the lender in case of the borrower's default. PMI was required when the loan to value rate was higher than 80%.

6. The issue with those "creative" finance schemes was that eventually the low interest rate was to be adjusted to reflect the reality of the money market. No one was worried thinking that property values were going to go up forever. If the mortgage became a problem then the borrower sold the house, usually with a profit.

7. Until so many of those adjusted interest rates become due, and suddenly the market had a huge offering of inventory for sale. What happens when a market has too much inventory? An unbreakable law applies: The Laws of Supply and Demand. Too much supply and prices plummet. First the sub-prime lending disappeared, with some lenders filing for bankruptcy and others selling their loans to bigger banks or being acquired by them. Were are Country Wide, Washington Mutual, World Savings and many other smaller lenders? Property values started to drop almost as fast as they soared.

8. Suddenly millions of people had their homes at risk. What do you do when your home is at risk? You stop spending money. You don't buy a car, you don't travel, you don't go to restaurants. And then not only the Real Estate market is bad, the automobile market is also in recession, and many other niches as well. People buying less means that industries that depend on spending cannot survive.

9. Industries that were hurting did what they do always: they laid off their work force and freeze hiring. And now the problem is even worse. If the borrower could not pay the mortgage with her salary, most certainly she will not be able to do it unemployed.

10. Borrowers just stop paying the mortgage. Short Sale became the hot concept among Real Estate Agents, specially because no one was prepared to deal with short sales: Neither sellers, Real Estate agents, bank employees and investors. Loss mitigation departments are understaffed and overworked and replies for short sales can take many months, causing potential buyers to flee. And the Loss Mitigation department does not talk to the Collection department, causing all sorts of communication problems.

Today there are 16,552 residential properties for sale listed in the East Bay Regional Data MLS. This covers two counties, Alameda and Contra Costa. Of those 6,778 are potential Short Sales and 2,808 are Bank Owned properties. The remaining 6,996 are hopefully what is being called "Normal" sales. Some of them are so overpriced that the short sale is no apparent, but they stay in the market for so long that when they finally get an offer it will be a short sale. 1,873 properties have been in the market for six months or more.

What to do?

Is there anything that can be done? I believe that the answer is to move out of this depressed market as soon as possible.

Lenders need to be proactive to re-assess the values of the properties that are the collateral for the loans. This has to be a proactive approach. Don't wait until the borrower is belly up. Get a fresh valuation. If property value is lower than the loan then lenders have several options.

• Renegotiate the loan with the actual borrower. A negotiation could be in this terms: "Mr. Borrower, we know that the property you bought for $200,000 is now worth $80,000. We are willing to modify the terms of the loan in such a way that now you will pay a mortgage of $80,000 with the same interest rate as your current contract. The balance of the loan is due when the loans matures in 30 years. If for any reason you decide to sell the property we need to pre-approve the sale and all the proceeds of the sale up to the original loan amount will be used to pay your loan. No need for short sale or foreclosure. Keep the owner in the house and the book value of the property.
• If the borrower cannot keep the property, then a short sale is the next logical step. The process should be as fast as possible. With the current valuation put the property in the market. It is cheaper to pay Real Estate agent commission, than all the expenses associated with a foreclosure: clerks, lawyers, asset management companies, Real Estate agents, property maintenance companies, etc, etc, etc.
• If foreclosure is inevitable then the lender needs to act swiftly. Long market times only mean smaller price, regardless of the market trend, but specially in this depressed market.

Borrowers need to do their part too. They need to understand clearly what their financial capabilities are. This is not the time for everyone to have a petty personal gain. The whole country economy is at stake and we are all participants. If the money you make is not enough to keep your property, move out. Go to a place you can afford comfortably. The money you are using to pay an onerous mortgage can be used to promote the economy in other fronts.

Government, specially the Federal Government need to create the proper legislature, and stop making promises that they cannot keep. For the last 100 centuries governments have been unable to stimulate the economy by decree. It is not going to happen now either. Prepare a good law framework for the lenders and borrowers to work out their problems, and to prosecute the ones that inevitably are going to abuse the situation.

These are my ideas. They may not be perfect, but at least show a direction, instead of doing what all the participants are doing today: Nothing.

Feliz Bicentenario Mexico

200 hundred years since that cold morning at Dolores in what is now the State of Guanajuato. The local priest Miguel Hidalgo, warned by some of the officers of the Spanish army, that the conspiracy he was part had been denounced, called the people to arm themselves and start another war against the Conquistadores.

Yes, another war.

The call from Hidalgo was not the first, others before him had tried to break the ties of Mexico from Spain. Maybe the very first Criollo that rebelled against Spain and tried to make Mexico independent was Martin Cortez, the son of Mexico's Conquistador, in 1565. The rebellion was a failure and Cortez was taken to Spain to be judged. He was exiled to Oran and lost his estate. He was later pardoned and he died in Spain. The important thing is that he was the first Mexican with Spanish descent that rebelled.

After many other attempts a group of Criollos tried to sever the ties with Spain, at the time in the hands of the drunkard brother of Napoleon Bonaparte. The idea was to keep the colony until the legitimate King was able to return to his throne. This rebellion failed as well although the Viceroy Iturrigaray was involved in it.

Hidalgo, along with other influential Criollos like Miguel Dominguez and his wife, Ignacio Allende and Juan Aldama conspired to get rid of the Spaniard Viceroy, nominated not by the King but by the "Cortes de Cadiz". All the conspirators lived close to the city of Queretaro and the group included soldiers as Allende, politicians, government officials and merchants. The premise of the rebellion was similar to the one 1808, keep the colony safe from "Pepe Botella" the nickname that the Spaniards gave to Joseph Bonaparte.

A post officer discovered the conspiracy and alerted the local authorities, that were involved in it, and the whole process was triggered. Miguel Dominguez in his role as a Magistrate of the King in the city was involved in discovering the facts and arresting the actors. Behind the scenes he alerted, with his wife help, the other conspirators in the neighboring towns. Juan Aldama rode his horse from San Miguel el Grande several hours until he reached the town of Dolores in the early hours of 16 September 1810.

Hidalgo was a good politician and a liked people leader. Many peasants joined his movement, with the military leadership of Allende. They won several battles, notably the one for Guanajuato and its big corn storage, that provided the means for the informal army to move towards Mexico City. Maybe the landmark battle was the one called the battle of "Cerro de las Cruces" about 45 miles north of Mexico City were Hidalgo forces had an important victory. What happened after that is not clear, but Hidalgo refused to advance to Mexico City and Allende, while keeping the farce that Hidalgo was still the leader, took him virtually as a prisoner. The fare of the rebellion went down hill until in Acatita de Bajan, Hidalgo, Allende, Aldama and Mariano Jimenez were taken prisoners by the Spaniards. They were judged and sentenced to death in Chihuahua. That was the end of the rebellion.

In reality Mexico's independence war was never a continued process. There was no continuity in the effort, no higher authority like the Continental Congress in the American Colonies, no single leader like Washington. The turmoil lasted at least eleven years, under the leadership of many people: Jose Maria Morelos, Guadalupe Victoria, Pedro Moreno, Francisco Javier Mina and Vicente Guerrero. Maybe the most important one was Morelos that called a Congress in Apatzingan and prepared a Declaration of Independence in 1813.

And the fact is that none of the several leaders was really capable to complete the independence. The very capable Spaniard general, Jose Maria Calleja, commander of the Spain army and later Viceroy defeated them again and again.

To complete the process the muscle of the Spanish Army stationed in Mexico was required. Yet another group of Criollos, this time under the leadership of Agustin de Iturbide, the most decorated Criollo in the Spanish Army, decided to join forces with Vicente Guerrero, an obscure leader in the south, to give the act some legitimacy that it was done by native Mexicans.

And in 21 September, 1821, the combined army of Guerrero and Iturbide paraded in Mexico City, finalizing a series of rebellions and completing the independence war.

But the turmoil did not finish. All the leaders fought against each other for personal gain. New names were added to the list of leaders in sight of personal gain: Antonio Lopez de Santana,  Ignacio Comonfort, Juan Alvarez and others. In 1856 the whole country was set on fire by the Guerra de Reforma, were a group of liberals led by Benito Juarez, had to defend the country against a group of conservatives.

And just after the "Guerra de Reforma" was over the weak and incapable nephew of Napoleon decided to conquer Mexico for France. Another war and more leaders looking for personal gain. Sebastian Lerdo de Tejada and Porfirio Diaz rounded up a century of social turmoil, poverty and poor political organization.

And guess what? The next century was a century of social turmoil, poverty and poor political organization. New names arrived, most of them to fight basically for personal gain: Francisco Madero, Venustiano Carranza, Victoriano Huerta, Alvaro Obregon, Plutarco Elias Calles, Lazaro Cardenas. All of them fought in a series of civil wars that lasted well into the 1930's. After that the war moved from the battle field to the election process and the political murder arenas. And the new protagonists were ruthless with their adversaries and also looked only for personal gain: Luis Echeverria, Jose Lopez Portillo, Miguel de la Madrid, Carlos Salinas.

In summary, 11 years of bloody war to become independent of Spain, just to become dependent of England, the United States, France, and just recently, of Spain, that controls the banking and telephony industries in Mexico and Latin America.

Great!

Carmen Castillo

I knew her most of my life. My parents where friends with her and her husband, Augusto. She was born in the same city as my parents, Merida in the Yucatan Peninsula. She was older than my mother but they attended the same school and were trained by the same pianist.

Every year their teacher had a public recital. In the first one my mother participated, she opened the recital as the youngest student and Carmen closed it as the most advanced. She never stopped playing and it was a common occurrence in parties and birthdays that Carmen Castillo "La Nena" would play the piano.

A few years ago I started writing music, and my mother, shared my music with Carmen. In the last few times I went to Mexico CIty I visited her, and we would talk about music, about piano and about life. Carmen was very energetic and until a couple of years ago, well into her eighties, she still went once a week to visit old people and entertain them with her performance. She used to joke that the people she visited were not old, but that had accumulated youth.

Her mind was sharp and witty and the only thing you could do when you talked to her was to love her. And we were very much in love. One of the purest that I will experience since there was no other reason for the love than the liking of each other.

Unfortunately, for me, last Thursday, September 9th, Carmen held so much youth inside her that it was too much. She had to leave and go to that ethereal place were you are young forever and where music is reason enough to be. She left knowing that she was leaving and instructed her children not to prolong her life unnecessarily.

Carmen, te quiero muchisimo. Donde quiera que estes, espero que lo sepas. Descansa en paz Nena.