In May, a Californian contractor named C.C. Myers won national fame when he orchestrated the phenomenally quick rebuilding of a collapsed freeway overpass in that crazy quilt of convoluted highways known as "the Maze" in the San Francisco Bay Area. Myers may have lost money on the effort, after significantly outbidding every other contender for the contract, but the public relations bonanza more than made up for the price tag, or so we were told at the time.
The notoriety earned by such a feat can backfire, however, because it means that a mere eight months later, the news that Myers' fancy country club development in Auburn, Calif., is in serious financial trouble readily catches the eye, jumping out from a sea of other housing-related woes. The Sacramento Bee reported on Saturday that Wachovia Bank is claiming that Myers is in default on over $61 million in loans.
According to court documents, Myers' Winchester Properties LLC entered into a $65.8 million loan agreement in 2005 to develop and refinance the club's unsold homesites, build the golf course and a clubhouse, with the caveat that if Myers' group defaulted, the entire unpaid balance would come due.
Court records show that troubles began for Myers' development in January as defaults on principal and interest began to pile up.
So even as Myers' bridge-and-highway construction firm, C.C. Myers Inc., was sparing no expense rebuilding a highway in the Bay Area, his beloved country club development was already on the rocks, a victim of the housing bust that is hammering California.
How the World Works isn't inclined to shed too many tears over a country club in disarray, although one does wonder just how many housing-related catastrophes are required before California's economy completely tanks. In any case, Myers is likely to be on his own in coming to an accommodation with Wachovia -- he doesn't quite fit the profile of those who will be helped by the much-ballyhooed subprime rescue plan flogged all weekend by Treasury Secretary Hank Paulson and company.
Then again, as more details emerge about the plan, one wonders how many people are going to get helped at all. On Saturday, just before interviewing Paulson about the plan CNN's Gerri Willis, anchor of the weekend real estate television show "Open House," provided a nice summary of who will, and will not, qualify for a five-year mortgage freeze.
Up to 1.2 million struggling homeowners are eligible to be considered for a five-year freeze on their interest rates. But, and it's a big but, it only applies for people who are in danger of defaulting on their mortgage who have made their mortgage payments on time and who can prove that they would not be able to afford the reset rate. Also, it only applies to mortgages that were originated between January 1, 2005 and July 31, 2007 with the adjustable interest rates due to reset between January 1, 2008 and July 31 of 2010...
So, here are the people that are left out: if you don't have an income, if you've missed more than one payment in the last year, if you can afford a mortgage rate increase, or if the value of your mortgage exceeds the value of your home, you'll want to figure out a way to deal with the rate hike.
That doesn't sound like much of a rescue plan. Over a million homeowners have gone into foreclosure already this year. But maybe, just maybe, the scheme is only pretending to be a rescue plan! Maybe it's really a Machiavellian attempt by the banking industry to fend off competing legislation.
Elizabeth Warren, a Harvard law professor who specializes in bankruptcy issues, argues in the blog Credit Slips that the plan's true purpose is to "kill off" a bankruptcy plan proposed by Democrats that would give significant power to homeowners facing unaffordable mortgages. "The administration's subprime mortgage plan is the bank lobby's dream," writes Warren.
In a piece entitled, "Bankers Hope Bush Subprime Plan Will Scuttle House Bill," CongressDaily reports that "the mortgage industry hopes a White House plan designed to aid subprime borrowers at risk of losing their houses will help scuttle congressional efforts to refashion mortgages through the bankruptcy code... The announcement comes as Congress moves ahead with plans to make it easier for bankruptcy judges to refashion home mortgages that are on the verge of foreclosure -- legislation bitterly opposed by the housing industry. Bankers said they hope to use the White House approach as a prime example of why the bankruptcy legislation should not move forward, emphasizing that a voluntary effort can cover many of the estimated 2 million subprime loans that are scheduled to reset to higher rates over the next two years."
Bankers evidently dislike the bankruptcy proposals because they give borrowers some real power: they can write down the mortgage to the value of the property, and they can rewrite the mortgage into a fixed instrument. "Voluntary," according to the banks, is much better...
Of course, if the bankruptcy laws changed, the negotiations outside bankruptcy would change too. If families had the option to declare bankruptcy and cut the mortgage down to the size of the property, some mortgage servicers might start returning homeowner's phone calls and talking over other options.
Whether or not Warren is correct about the motivation for the mortgage freeze plan, her point about the alacrity with which mortgage servicers respond to homeowner needs is well taken. Because you can bet Wachovia will take C.C. Myers' call. If you owe $61 million, you're likely to get a deal. But if you owe just a few hundred thousand and you miss a couple of mortgage payments, you are out of luck.