Tarifa

Long ago I decided to go to the southernmost point of Europe. It was marked on the map, miles from anywhere, a tiny walled town called Tarifa.

I starting walking one spring morning. The road going west from Algeciras wound its way up a mountainside into the clouds. It was a narrow, broken road, wide enough to take a cart.

I walked, and walked. Nothing passed me for two hours. I reached a point where I could see across the straits, almost to Tangier. Behind me was the green mountain, clouds, and silence.

To the east was the rock of Gibraltar, looking for all the world like a massive galleon about to set sail for Africa. Somewhere beneath me was Algeciras, but I couldn’t see it. I sat there looking out to sea. I couldn’t see Tarifa. All I could see was miles and miles of heavily wooded valleys. In the end I walked back to Algeciras. So I didn’t get to see Tarifa until several decades later just when the vandals had moved in to build a group of hideous concrete boxes on the outskirts of the town.

Last week I was back. The hideous boxes were dwarfed by high rise. The old town walls were almost hidden by the encroaches of the new town. The harbour had doubled in size, and there were hydrofoil trips available to Tangier and Asilah.

We stayed the night in a rambling hotel built not far from where I turned back all those years ago. It was pleasant and reasonably cheap, but I had this strange meal called Cuban Rice. It consisted of a couple of upturned pots of rice, like white sandcastles, which were tasteless and boring. Beside them was a baked banana. At the back of the plate were two fried eggs. I looked at the dish in disbelief. The eggs were fine, so was the banana, but the three ingredients didn’t exactly gel into a meal.

Next time I’ll take the ferry to see what has happened to Morocco since I was last there. I have a sneaking suspicion it might look a little like southern Spain, filled with rows and rows of empty villas and drooping apartments.

Algeciras

Back in the early sixties when Spain was still a largely medieval country I hitched and walked my way down from Granada, through the mountains that Lorca calls The Passes of Cabra. We were warned to beware the brigands, but no-one bothered me. But then I was just a teenage bum.

South of Ronda the mountains fall away, and back then you were on the edge of Africa. There were scattered villages until you reached the charming little town of Algeciras.

I walked into the town on several occasions. The road was narrow, just enough for two small cars to pass, but there were hardly any cars. The first house right on the edge of town was on a small bank, and there was a tumble of red and yellow bougainvillea spilling off the covered patio, that rambled in a vivid splash of welcoming colour right down to the road.

That house on the bank and the bright gash of bougainvillea was somehow a symbol that the traveller had reached the end of the road. Rounding the corner and coming upon the scene was like meeting an old friend.

A short walk took you to the end of the railway line, which consisted of a few sets of rails down the side of a street. Across the road was the quay, and across the water was Africa, just five or six miles away.

There were old women, round as barrels, waddling through the streets on bow legs. There were blind men selling lottery tickets. There were urchins everywhere, and wizened men standing on street corners staring at the passers by.

Algeciras was a lonely market town on the edge of the continent, with a ferry to Ceuta, and a few lousy restaurants.

Last week we drove for several miles to get from one side to the other, past a massive new shopping mall on the northern hills, which is obviously aimed at the more wealthy Moroccans, who hop on the ferry for a taste of Europe.

To the east there is a massive oil depot, and there are ranks of high rise apartments in all directions. The road north is now a dual carriageway, which becomes a motorway as it slices through San Roque. At rush hour it is a parking lot. To the north-west is a whole new town. Everywhere is urban sprawl. The little house with its welcome bougainvillea was probably bulldozed years ago.

This isn’t Algeciras, it is just another modern concrete town.

US Mortgage Farce

First an apology. I wrote this article on October 14, and seem to have overlooked it. Still, better late than never.

I have been warning people to stay away from the US property market since 2005, and I suggested getting out of it during 2006. My views have not changed. In fact, the US market is shaping up for one heck of a mess.

We all know that a few years ago a few bright sparks decided they had discovered a great way to spread risk in the real estate and insurance markets. It all revolved around the highly dubious practice of selling mortgages in bundles of investment packages to pension funds. It was considered to be such a great wheeze that the lunatics who thought up the idea were given Nobel prizes.

The banks were going to sell on the mortgages so they weren’t really interested in whether the houses were worth what they sold for. They weren’t interested in whether the buyers could pay. All they were interested in was the commission fee for selling on the investment bundle.

Houses were built, buyers came along, mortgages were granted, the mortgages were bundled up and sold on to pension funds. Then came the housing crash.

Now the fun begins. Houses are now worth considerably less than the buyers paid for them. This means the investment bundle isn’t worth what it was sold for. That means the pension fund is sitting on a duff asset which is still depreciating. That means that people who have invested part of their income into that pension fund are looking at a lower return, and therefore a smaller pension. So much for risk being spread. That’s how it was spread. All over the planet. It was spread away from the issuing bank, which ought to have shouldered any risk, and onto ordinary people’s pension provisions, and those folks are now having to pay for the banks’ recklessness.

The banks did not do due diligence. The rating agencies gave the investments AAA credit ratings, and there was a whole lot of mis-selling.

As the houses are now worth less than the money owing on them there is no incentive for the buyers to carry on paying the mortgage. It is estimated that about 25% of all these under-water mortgages are in default, very often a strategic default. That means that although the buyer could pay the mortgage he sees no point in doing so, and just stops paying, thus living rent free in his nice new home.

This means not only is the underlying value of the investment asset going down, but the return on that investment has ceased, and the likelihood of the money ever being paid back has just taken a dive.

Generally, this should mean the bank forecloses on the non-performing loan. But hold on. The bank sold on the mortgage as part of an investment package. Which package was that particular mortgage a part of? Can it be untangled from the investment unit that was sold on? Very often the answer is ‘no’ or ‘dont know’.

So, now what? The bank may not be the right entity to foreclose as it has sold on its rights with that investment package. So who is going to foreclose?

A buyer who wants to stop paying his mortgage and stay in the house now looks to be in a very strong position.

That’s bad news for the banks, because the banks lent out the money and now they have another non-performing loan on their books. It’s bad news for the pension funds who bought the investment package. They now have only a remote chance of getting their money back. And it’s also bad news for rather a lot of pensioners who thought their pensions were safe.

This also means that we now have two more problems with US real estate. The first is, we have a locked-up market. These non-performing mortgages have put the sale of these properties out of the question for some time until someone can sort out who is entitled to do what. They have also put in doubt the legality of the sale of previously foreclosed homes. Did you buy one? If so I hope you took out title insurance. Even if you did, I seriously wonder when all the dust has settled whether the insurers will still be standing.

Apparently the banks hired people who knew nothing about the business to deal with the massive backlog of foreclosures. Many of these people were barely literate and now admit they didn’t know what a mortgage was, or what an affidavit was, and so on. This means the depositions that were the basis of the foreclosures are fraudulent.

In any case, how do you foreclose on a home when you can’t figure out who owns it because the original mortgage is part of a derivatives package that has been sliced and diced so many ways and then sold on that its legal ownership is often unrecognizable? Apparently no less than 65 million homes in question are tied to a computerized program called the national Mortgage Electronic Registration Systems (MERS), and that is often identified in foreclosure proceedings as the owner.

Wait a minute….. the computer program owns the house? I beg your pardon? Heck, I couldn’t make this up, could I?

Adam Levitin, a Georgetown University Law professor who specializes in mortgage finance and financial regulatory issues was recently quoted on CNBC as saying….

The mortgage is still owed, but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money. You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and you’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

Attorney Richard Kessler recently conducted a study in which he found “serious errors” in approximately 75 percent of the court filings related to home repossessions that he examined.

“Defective documentation has created millions of blighted titles that will plague the nation for the next decade.”

See what I mean about buying real estate in foreclosure in the US? See what I mean about having title insurance? See what I mean about the US property market probably being in a total mess for at least the next decade?

This situation leads to one more massive problem. Let me quote John Carney of CNBC:

“The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.”

This all came from a wonderful theory about how to spread risk for which the inventors got nobel prizes. Spreading risk is one thing, but it sounds more like muck spreading to me.

As I have said before: welcome to the upside-down world of the new normal. You’d better learn to live with it. It is going to be here for some time.

Do yourself a favour: dont buy real estate in the US. And dont look at a chart of the US$. The currency is dropping like a brick. It’ll give you nightmares. Short term it’s down about 18%, long term it is down so much it is embarrassing. And god knows how far it will fall after QE2.

Villas for £50,000

Okay, the scheme is now up and running. You can now buy a detached villa a couple of miles from fabulous beaches in the Algarve for only £50,000.

For the record, I am writing this at 7.15 on a saturday morning. The sun is lighting up the row of trees at the end of my garden, there is not a cloud in the sky, I have been watering my broad beans, and despite the early morning chill I only had on a light jumper and slacks. In a couple of hours I’ll be in shorts. Next month the daffodils will be out. You could be here as well.

Check out the write-ups. There is a holding page at:
http://www.property.org.uk/unique/cheap-villas/algarve-for-sale.html
At the bottom of this page are links to a proper write-up, and a website with full specification. If you like what you see, get back to me, and we can start to design your new home.

john