May 20, 2008

Victims of the Housing Scam

Calculated Risk finds that some of the victims of the Mortgage fraud bubble were the employees of companies exploiting the bubble. In Bend, Oregon, one particularly ambitious builder found a way to get his employees to invest into his lucrative investments. It was his version of the employee 401K. Invest in his properties, and get rich quick. This seemed to be a great idea until the property values dropped, and the construction loans for the properties started to come due. Now, instead of a retirement nest-egg, some of the employees are left holding a personal debt anvil likely to keep them working for the man until they drop.

Desert Sun had no retirement plan, but it did offer the employee homeownership program, which its Web site likened to a 401(k).

The plan seemed straightforward enough: Desert Sun would build a home for employees, taking care of design, materials and construction. Employees could buy the completed home from Desert Sun at cost and assume monthly mortgage payments, or sell it and split proceeds 50-50 with the company.

...snip...The Desert Sun plan was not without risk for participants. The company pledged to cover all costs, but to fund the building, employees had to take out construction loans in their own names.

That meant employees were ultimately responsible for repaying the loans, which generally ranged between $300,000 and $500,000. But the banks handed the money directly to Desert Sun and employees had little if any involvement in how it was spent.

Still, it sounded like a great idea to Krystal Chamberlin, an accounts receivable clerk at the company. Chamberlin worried that her limited income -- the single mother earned about $27,000 a year -- would disqualify her. She said Fitzsimons urged her to participate, saying the financial benefits would be crucial for her and her 2-year-old daughter.

Chamberlin was delighted to hear in November 2006 that National City Mortgage had approved a $477,000 construction loan. She agreed to have her house built in the Roaring Springs subdivision of Sisters.

...snip...Chamberlin owes $284,000 on her property in Sisters, though not even the foundation is complete. At least 20 others now own vacant lots in Sisters, where they were promised finished homes. About 10 others own partly finished homes in Sisters and Bend.

...snip...The employee program was more lucrative for Desert Sun.

Deschutes County property records indicate that the company enjoyed six-figure profits on the sales of some of the lots.

On July 5, 2007, for example, Desert Sun Holdings bought lot 24 in the Village Meadows subdivision in Sisters from Redmond-based Allen-Rose Homes for $155,000. That same day, the company flipped the lot to employee Roger Howell for $269,900.

Desert Sun sold eight lots in Village Meadows for nearly $1 million more than it paid for them, Deschutes County records show.

...snip...On April 25, National City Mortgage notified Chamberlin that because of the lack of construction progress, it was declaring her loan in default. It asked for immediate payment of the $284.159.63 outstanding.

So, Krystal Chamberlin, at that time earning $27,000 per year, is now liable for almost 300K because she was lucky enough to work for a 29-year old scam artist who is still able to get funded for his new ventures. What a wonderful story about how well the free market works.

Coda: don't miss Tanta's excellent rant: Pity the poor fellow who bought into Bush's Ownership Society.

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the "fundamental" psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that ďa manís Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.Ē

Now, that's breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the "Self" (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn't find some psychological insight about the emotional relationship of people to their homes that doesn't speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

Funny how the hidden hand of the market seems well designed to hurt the little guy the most while protecting the interests of the well-connected fat-cats and boffo risk-takers. It seems time to ask once more, Who is our economy for, anyway?

Posted by Mary at May 20, 2008 01:42 AM | Corruption & Graft | Technorati links |

Well said. I've seen the invisible hand of the market. It was giving me the finger.

Posted by: TheHolyFatman at May 21, 2008 01:03 PM

LOL! Too Funny!
Maybe it's the invisible penis of the market, trickling down on us.

Posted by: watercat at May 21, 2008 01:49 PM

Not at that funny when it's your hometown, friends and neighbors, that has been trashed.

Posted by: Ten Bears at May 21, 2008 07:38 PM