NewGeography.com blogs

The press’s love affair with President Obama goes so far as to give him credit for actions of his predecessor, George W. Bush. Over the last week, the New York Times and The Guardian,
Britain’s “quality leftist daily gave the President credit for working out a deal with auto makers to improve fuel efficiency by 30%.

Not quite. The Obama Administration worked out a deal with the automakers under which they would not sue if the already approved 2020 fuel efficiency standards were advanced to 2016. In fact, the 30% improvement, which was in the 2020 standards, was passed by Congress in 2007 and signed by President Bush.

This is not to deny credit to President Obama for working out the agreement with the auto industry that removed the possibility of legal challenges to advancing the Bush 30% improvement by 4 years. The government’s substantial financial stake in General Motors and Chrysler probably helped seal the deal.

The Canadian planning blog “Planning Pool” congratulated the Charlotte, North Carolina light rail line, noting that it “experienced an 800% increase in ridership last year” (“Transit Success in Sprawl City,” December 4).

The impressive increase was made possible by comparing apples and oranges. Last year (2008) the Charlotte light rail service operated all year, while in the previous year (2007), service operated fewer than 40 days (the line opened in late November). Following its logic, the “Planning Pool” missed an even bigger story: apparently 2008 was 800% longer than the previous year (an increase from fewer than 40 days to 365).

Of course, it’s either apples or oranges and, one way or the other, a revision is in order.

First American CoreLogic, a real estate research company, recently released data on negative equity mortgages for the third quarter of 2009. The situation is stark. Nearly one in four U.S. mortgages (23%) is currently underwater, with the borrower owing more than the property is currently worth. According to First American, when mortgages "near" negative equity are tallied, the total number of mortgages near or currently underwater is around 14 million- "nearly 28 percent of all residential properties with a mortgage nationwide."

Being underwater does not necessarily mean that a borrower is at risk of default. Although foreclosures and payment delinquencies are currently at record levels nationwide in the wake of the popped real estate bubble, most borrowers facing negative equity continue to make their mortgage payments. While being underwater "is the best predictor for loan defaults," according to Sam Khater, economist with First American, "if you have your job and don’t encounter economic shock, you’ll most likely keep paying on your home."

But should you keep paying if you're underwater? Brent White, an Associate Professor of Law at the University of Arizona has examined the situation, and argues in a recent discussion paper that homeowners "should be walking away in droves." According to White, millions of homeowners "could save hundreds of thousands of dollars by strategically defaulting on their mortgages."

Such a strategic move comes with consequences for the borrower- most notably a negative impact on one's credit score. This has a quantifiable cost, but White states that "a few years of poor credit shouldn’t cost more than few thousand dollars," and notes that individuals can rebuild their credit rating over time, and can "plan in advance for a few years of limited credit."

Such costs are, argues White, "minimal compared to the financial benefit of strategic default." White makes use of the hypothetical example of a California couple purchasing an average priced ($585,000), averaged sized home in 2006 to demonstrate the case for default:

"Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments... If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity"

White argues that in such cases, borrowers are better off taking a short-term hit to their credit, and strategically defaulting to escape a long-term, crushing financial burden. By staying in the home, borrowers are taking money that could otherwise be saved for retirement or used for other purposes, and throwing it away to service a liability that is unlikely to show positive equity in their lifetime.

Such advice seems most likely to appeal to those upside-down in particularly hard-hit areas of the country, including California, Florida, Nevada and Arizona. However, as noted, most homeowners are sticking it out, and continuing to pay their mortgages. According to White, many who might otherwise make such a decision avoid doing so due to "fear, shame, and guilt," sentiments which are "actively cultivated" by the government and financial industry to keep homeowners from walking away.

It remains to be seen if underwater borrowers will overcome fear of the consequences and take White's advice to strategically default. Mortgage lenders most likely hope that his ideas remain firmly in the minority- as one mortgage executive stated in comments reacting to White's report, the argument for strategic default is "incredibly irresponsible and misinformed," and, if widely embraced, has the potential to "'tear apart the very basis' upon which mortgage lending rests". Losing otherwise performing mortgages to strategic default, whatever the economic sense for borrowers, could be yet another blow to an already reeling industry.

In the new Wall Street math of the post-9/08 world, it seems that some people turn to humor and others to rage. First they burned down our 401k plans: some people found this funny and made jokes about their “201k” plans. The French got angry and took CEOs hostage. Now, Goldman bankers are buying semi-automatic weapons to protect themselves from the angry mob. Matt Taibbi is desperately seeking humor in this, currently rating it a 7 on a scale of 1 to 10. Alice Schroeder, the story’s originator, finds it humorless, suggesting there could (should?) be “proles…brandishing pitchforks at the doors of Park Avenue.”

In true on-the-ground reporting, a Bloomberg reporter wrote a story after a friend told her that he had written a character reference so that a Goldman Sachs banker could get a gun permit. Alice Schroeder (author of “The Snowball: Warren Buffett and the Business of Life”) also recounts a few examples of Goldman bankers using their other-worldly prescience to protect themselves: Goldman Sachs Chief Executive Office Lloyd Blankfein – only too well known now for saying that Goldman is doing “God’s work” – got a permit “to install a security gate at his house two months before Bear Stearns Cos. collapsed.”

All of this contributes to the view that Goldman Sachs is, indeed, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I’m certain that Rolling Stone and Bloomberg have taken action to protect their right to be critical of Goldman. I’ve spent plenty of time on the phone with their fact checkers to know they put a lot of effort into being able to support every word they print. Blogger Mike Morgan, who founded www.GoldmanSachs666.com, had to defend his right to be critical of Government Sachs by going to court last April when Goldman lawyers Chadbourne & Parke threatened him with trademark infringement.

But it isn’t just Goldman and it isn’t just our 401k retirement plans that have been damaged. There are fundamental problems in the way our capital markets are being run. The people running the system have known about these problems since at least the Crash of 1987 – I warned the U.S. central depository for all securities (Depository Trust Company) about it in 1993. Brooksley Born warned a presidential working group about it at a Treasury Department meeting in 1998 – and it contributed to the crash of 2008. As you read this today, nothing has been done to stop it from happening again. The real question is: which group will be the first to turn to action? Those with a sense of humor, those with a sense of security provided by a handgunor those with the sense to make changes?

Part III in the video series on East St. Louis explores ideas put forward for (re)development of the city, including cultural tourism based on the city's African American heritage and use of vacant land for farming to create a local food source for the St. Louis metropolitan area.

Part II gives views of downtown today, shows how its history can be seen in the city, and explains why the city could still be a good place for new development.

Part I discusses the origins and development of East St. Louis as an industrial city.

Michael R. Allen is an architectural historian currently serving as director of the Preservation Research Office, a technical assistance and preservation consulting firm. Allen also serves on the boards of the St. Louis Building Arts Foundation and Preservation Action.

Alex Lotz is a graduate of the Film Production program of Chapman University's Dodge College of Film and Media Arts.