Fresh Ground News™

Letter from the Governor

To the Members of the California State Senate:

Not only did we bailout the bank robbers, we pardoned them.

I am returning Senate Bill 1178 without my signature.
This bill, by extending anti-deficiency protection to refinancing, would fundamentally alter and impair the nature of pre-existing, previously negotiated mortgage loan contracts. In addition, the bill would encourage borrowers to strategically default on loans they have the capacity to repay simply because the mortgaged properties have lost value.
This bill’s anti-deficiency protection would apply to pre-existing, previously negotiated mortgage loan contracts that are the subject of actions filed on or after June 1, 2011. As a result, this bill fundamentally alters the nature and impairs the value of previously negotiated contracts, leading to negative consequences for the value of those loans held in a lender’s portfolio and a deleterious impact on the secondary market. Fundamentally altering the nature of a contract after its consummation is a bad precedent and will provide uncertainty for future lending transactions.
Sincerely,
Arnold Schwarzenegger

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News – Background – Analysis

Secure Values

Because someone says something has value doesn’t make it so for others. Real values should have a reasonable analysis, appraisal and terms attached to them. These processes have standards, rules and laws associated with them. Whenever these standards and laws are weakened the values derived are placed in question.
The security of financing is the probable repayment by a borrower, on agreed terms (un-secured), coupled with the collateral reliance on the appraised value of the real property (secured). Should the Borrower dis-continue repayment, the beneficiary can demand repayment and/or take the real property through judgment of the court and/or foreclosure of the property.
In California there is a distinction between ‘Purchase Money’ and ‘Hard Money’ financing, the former when you acquire the property the latter when you refinance it. With the former, if there is a deficiency sale, the securing property is the only remedy for repayment. With the hard money loan, the borrower can also be required to repay the deficiency through judgment.
Either form of financing is not necessarily unreasonable, They are designed by California law to facilitate economy, liquidity and security. That does not make them fair. The security and terms of both ‘Purchase Money’ and ‘Hard Money’ loans are based on value judgments made by the institutions making the loans.
With the banking deregulation of the 80’s the standards were weakened and loan products unregulated. The financial markets took advantage of loan products designed and intended for the disadvantaged to increase home ownership, but the lenders distributed them to the masses. No stated income, no income and no documentation loans became the standard. The market flooded with paper lacking rational and realistic repayment schemes all hedged by derivatives and derivatives of derivatives. Without restrictions this enormous amount of ‘free’ money chased a finite supply of properties skewing the valuation systems and bloating the real values to mathematically certain disaster. Buyers of bonds disappeared and and lenders stopped loaning. It couldn’t go on and the banks new it. The resulting blizzard of worthless paper left drifts of defaulting loans and flood of defaulted properties. The economic slide continues today because of the lake of capitalization. Until the inventory of housing and comercial properties deminishes we will drag across the bottom.
Laissez-faire would say, ‘If someone agrees to borrow at any terms and a lender loans, it should be left alone for the parties to settle.’ If that were the case, those ‘with’ would shortly have ‘all’ and it seems that might just be happening. Only reasonable terms make loans right and fair. We have rules and systems for the fact that ‘Loan Sharking’ exists. California has a ‘Purchase Money’ rule for this very reason. Over the last three decades the financial world has been granted a Laissez-faire concession writing paper however it pleases. This wild horse ride needs a bridal, bit and saddle. If a lender relayed on the value of the real property as the major security of the loan and reasonable repayment terms were required, realistic valuations would rule the day. There was a false market before the crash and a false market now. Another factor is that we have a fiat money system, which has an un-natural erosion and alluvium as the banking system moves the stream; taking away from one and depositing to another. What was easy money worth pennies on the dollar, and then sucked up by the crash, now restricted financing makes every existing dollar worth three, collecting assets on the cheap.

Therefore, the dependence on accurate data, income quality and realistic appraised values is all important. At will financing only creates bloated values and is fantasy; the result of the ‘Greater Fool’s Theory‘ of valuation. How did those licensed to appraise allow these values to spin out of control?

The banks created this mess and should suffer the greatest part of the penalty. By vetoing this legislation loans that were actual or constructive fraud on there face will be validated. Not only did we bailout the bank robbers, we pardoned them.

Inform to Change ™
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