Pointing out failures has more benefits than placing blame. Understanding the failures may not provide solutions immediately, but at least plans can be made to reverse those failures.
Any solution to the financial crisis today is going to be viewed as radical. Those who want to throw money -- money that no one has -- at the problem in an attempt to jump start the economy are living in a fantasy world.
Solutions exist that can benefit the economy. One partial solution is provided courtesy of Cook County, Chicago Illinois Sheriff, Tom Dart.
The Chicago Sheriff, by his actions alone, demonstrates that he is a Democrat. Has compassion. As a single example of Sheriff Dart’s compassion, he has instructed his deputies in the Cook County Sheriff’s Department to cease evicting people from foreclosed properties. The reason is quite simple and elementary: It is estimated that about one-third of those who are being evicted are renters who did nothing wrong. People who have been faithfully, and with great trust in their landlord, paying their rent.
In a situation like this there is one clear villain -- the landlord who has defaulted in his payments to the bank or mortgage company. Foreclosures don’t happen because payments are a bit short each month. Foreclosures happen because absolutely no payments are being made. This means that, in plain and basic terms, the landlord is stealing from not only the financial institution that holds the mortgage, but also from the renter. A foreclosure automatically voids a lease, which can irreparably harm a tenant.
The financial institution is also a villain, due to pure, complete and utter stupidity. In theory, a landlord will set the rent at a rate that is sufficient to pay at minimum, the monthly payments. Hence, the bank has a potential stream of revenue when the property being foreclosed on is an investment property with a proven renter occupying.
Rather than evict the tenant, who has done no wrong, the bank should spend an hour or two renegotiating a lease with that tenant. That insures payments being made on the note and that the property remains occupied. Occupied properties have a higher market value than unoccupied properties. It makes simple sense.
If banks wanted to pull themselves out of these disastrous loans that they have made, they have options that make better sense than just letting a property sit empty, and hoping that the taxpayer will pay for the property. The banks need to be held accountable.
Human nature is such, combined with business practices, that when a full payment cannot be made, partial payments are not acceptable. Someone facing foreclosure of their home knows that they are going to be evicted, so they simply stop making payments in order to have ready cash to move and rent someplace else. That is called survival.
One of the tenets of free-wheeling capitalism is to cut your losses rather than minimizing your losses. A bank that forecloses on a property has larger tax breaks, which equate to higher profits, than if they accept lower payments on a property. Rather than evicting an occupant -- be it the former owner or a tenant -- banks should instead become the landlord and start collecting monthly rent. It very well might not equal the required note payments, but the bank is at least receiving money and, in the process, gaining equity in the property for when the economy improves.
A 100% write-off garners the bank a higher tax deduction than, say a 20% loss that would occur if the bank became the landlord. A total write-off, now with the possibility of the taxpayer paying for the property increases the profitability of the bank. That profit is paid out, in varying degrees, to executives in the form of higher salaries and bonuses.
With the $750 billion bail-out, banks have absolutely no incentive to resolve the problems that they helped to create. On the surface, banks will all claim a significant loss at the end of the fiscal year, but underneath that, there will be plenty of money to pay the high salaries and bonuses. Every year tens of thousands of companies report “net operating losses” while at the same time remaining highly profitable. The “net operating losses” typically come from changing accounting practices to maximize tax deductions which in turn keeps more profit earned within the company.
Banks of course will object to being forced or required to rent out foreclosed properties. They will throw up a laundry list of magnificent proportions showing why it is not feasible. In corporate and capitalistic jargon, “not feasible” means “not profitable.”
Cook County Sheriff Tom Dane is doing the responsible thing by not evicting people from foreclosed properties. The ball is now in the bank’s court. They need to go in and minimize their losses and start collecting rent. That would be the logical thing to do, and would also start the process of recovery for the banks, the economy, and Joe Sixpack.
Instead, the banks would rather spend money taking Sheriff Dane to court to force him to evict people. So far, Sheriff Dane has prevailed. His rationale for prevailing is simple: “My job as sheriff is to follow court orders, absolutely,” he said. “But I’m also in charge of making sure justice is being done here and it is clear that justice is not being done here.”