“No man is an island,” John Donne wrote a long time ago. Years back, I learned that a particularly harmful weather pattern that freeze-dried my hometown in Idaho and buried Buffalo, N.Y., was caused by a half-degree Celsius change in the sea temperature off the coast of Chile. That miniscule change rippled to a giant change, thousands of miles away.
It is no less true in the economy. As we are discovering here and now in the housing market, with an uptick in the interest rate and a downtick in housing values, we are all affected one way or another. This ripple effect is evident in two California cases this spring, one involving a homeowner and the other involving a mortgage broker, both of whom are rocking in the waves.
Homeowner Ruth Michiel owned two homes in San Bernardino County. When she could no longer afford the payments, friends referred her to Paul Martinez, who offered to help her avoid foreclosure by filing bankruptcy. She signed a stack of papers and, without realizing it, signed away her rights to one of the properties. Martinez was later convicted of fraud in procuring one deed and forgery after he recorded a deed to himself on the second property.
Reading the April decision out of the Court of Appeal, it is difficult to determine whether there is an innocent bystander. Martinez claims Michiel was deeply involved in an attempt to defraud the bankruptcy court or a prospective homebuyer, and since the court was deciding only a narrow issue of penalizing forgeries, it didn’t discuss whether that allegation had merit.Nevertheless, financial stresses from the real property market downturn are having an effect throughout the economic environment, much as El Niño did to my landlocked hometown: A man is in jail, a homeowner is out of two homes, and a good-faith lender is out $25,000.
The mortgage broker problem is even more convoluted, but it also ran into trouble attempting to help homeowners facing financial stresses.
In this case, the mortgage broker, Family Home and Finance Center, arranged loans and funding that usually came from National City Mortgage Co. National City, in turn, sold the loans to Freddie Mac, otherwise known as Federal Home Loan Mortgage Corp., a government-sponsored private corporation that purchases mortgages from banks and bundles them into investment packages that it sells to investors.
When homeowners refinance, the early payoff ripples through the mortgage stream and changes the deal up the line, often shortchanging the expectation of the final investors. While some refinancing is expected, a large amount of refinancing upsets the investors. Freddie Mac notified National City Mortgage that some investors were unhappy at the large number of refinancing deals coming from National City mortgages. After an investigation, the bulk of the refinancing was traced to Family Home.
Family Home apparently encouraged borrowers to enter into high-interest loans and refinance quickly. This resulted in the unhappy investors, so Freddie Mac dropped Family Home as an approved broker.
There was nothing illegal in what Family Home offered, but Freddie Mac deemed the quick turnover rate of Family Home loans a poor investment asset, so the broker was, in effect, blacklisted by a major player in the mortgage market. Family Home sued Freddie Mac for defamation, for interference with contracts and for unfair competition, all without success. The court held that Freddie Mac had the right to refuse to deal with the broker.
Years ago, California went through the dot-com boom and bust. Bankruptcies skyrocketed, companies died, tax revenue fell precipitously and government programs went unfunded.
Today, we are going through the real estate boom and bust. Bankruptcies are climbing again. Houses sit empty. Home improvement projects languish. Builders, contractors, landscape designers, interior designers, roofers, pool builders and more are hurting. Investors are complaining. Brokers are being blacklisted. Refinancing options are drying up.
The ripple effects will continue. But, eventually, the market will correct itself, and we will return to a semblance of stability before the next boom-bust cycle.
Donne’s truism is just as valid today. Our actions, whether wise or foolish, short-sighted or far-sighted, affect many, many others for better or for worse. We need to consider that the next time we take a chance on an unrealistically hot market.
• Pamela Case, a local freelance paralegal, is among a select group of local residents with columns in the Tracy Press.