September 2008 will be remembered as an extraordinary month in the history of financial markets:
- It started with the federal government’s decision to take over Fannie Mae and Freddie Mac (September 5).
- Then, Bank of America agreed to buy out Merrill Lynch, while Lehman Brothers filed for bankruptcy (September 15).
- The federal government acquired a 79.9 percent stake in AIG to rescue the nation’s largest insurance company (September 16), which was followed by Goldman Sachs and Morgan Stanley electing to become bank holding companies (September 22).
- Washington Mutual filed for bankruptcy (September 25).
- And September is presently winding down with Congress considering a historic $700 billion plan to bail out the collapsing U.S. financial system, largely through the purchase of troubled mortgage backed securities from financial institutions.
Anyone following these remarkable events (and who hasn’t been following them?) knows that the primary cause is often summarized as rampant over-speculation by financial institutions in the market for mortgage backed securities. But that “cause” is really the product of many complex and intermingled “sub-causes.” To name a few:
- the U.S. housing market crash;
- questionable lending practices;
- systemic mortgage fraud;
- the failure of credit rating agencies;
- and poor governmental policymaking and oversight.
My readers know that for approximately the past year, I have been charting a critical aspect of one of these “sub-causes”: that is, the precipitous decline of the Florida condominium and real estate market as measured through the explosion in litigation between contract holders and developers (of course, the Florida real estate market crash officially pre-dates the start of my blog by at least several months.)
Now that Congress is deliberating upon — and will likely pass into law — a bailout package of monumental proportions, this is a question I expect to hear repeatedly from those holding contracts to purchase properties: what, if any, effect should the bailout have on a buyer’s decision between closing on the property, or pursuing any claims for rescission and refund of the deposits through litigation?
Here, for example, is a recent Miami Herald article trumpeting that a “Wall Street bailout could boost South Florida housing market.” In my view, the headline is far too optimistic, given the degree to which the South Florida housing market was and remains speculative. If successful, the short-term effect of any bailout plan which Congress approves would be to stem the failure of more banks and financial institutions and thereby promote a return to normalcy in the financial markets. A bailout will almost surely not revive the risky lending and financing practices that undisputedly helped bring about the crisis in the first place.
At the end of the day, the South Florida housing market is only going to rebound once the fundamentals re-adjust so that the demand side catches up to an enormous and ongoing over-supply of inventory that was fueled by speculation and unsound lending practices. This article suggests that the long-awaited entry of “vulture” or “bulk” buyers into the Miami condo market is starting to occur, although I have not seen the evidence that this is yet happening to the extent necessary to really prop up demand for South Florida real estate. It is more likely, in my opinion, that a steady flow of individual foreign buyers motivated by the weak dollar will levitate demand. But determining the degree of foreign interest in buying South Florida properties in the present market is a difficult task given the incentives that brokers and developers have to hype or exaggerate how interested foreign buyers are, as a means of enticing them to buy. And it is important to bear in mind that many foreign buyers were among those already burned in the bubble burst.
The final analysis here is that notwithstanding a Congressional bailout, the South Florida housing market will remain depressed and mired in litigation for the foreseeable future. That general prediction deserves modification only in the circumstance that the bailout plan includes relief targeted specifically at distressed mortgagors, i.e., homeowners. For example, legal scholar Howell Jackson has wisely proposed having the government purchase bad home loans — as opposed to the mortgage backed securities which financed such loans — thus enabling the government to offer relief to the homeowners whose mortgages it would now hold, much as the Home Owners Loan Corporation did during the Great Depression. Such a plan would give the housing market a shot in the arm by curtailing the number of foreclosed homes entering the supply of inventory.
This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.
Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or firstname.lastname@example.org