The funny thing about capitalism is that it rarely mirrors its stated goals. I am often reminded of how misleading the commercial statements of business are when cross-referenced against their practices. I was first made aware of this fact at the age of 16, growing up in Minnesota enduring the annual tornado season. One year, tornado’s swept through central Minnesota wreaking havoc and devastation in their wake. Having lived in Minnesota all of my life, I was privy to the many wonderful public service accomplishments of The American Family Insurance Company of Wisconsin. Up to that point, I had always thought of insurance companies as large, conservative, social giants! I thought they did well because they invested money smarter than the rest of society. Sure, invested well; didn’t take risk, etc. But that summer I was awakened to a powerful truth as American Family Insurance opted to refuse compensation due to longstanding policy holders in central Minnesota. Because the cost of paying claims superseded the penalty of refusing to pay, American Family gave their central Minnesota policy holders the single finger salute and said sayonara to Minnesota. And what was their cost? Apparently, an insurance company in Minnesota is banned from selling the particular line of business (in this case homeowners insurance) for one year for failing to pay legitimate claims. Insanity!
This week I experienced a parallel reality in my internship. Fairplay Realty-Elite has a very rigid model for foreclosure properties that we’ll go after prior to the trustees sale. You take a market analysis that estimate resale value at 70 cents on the dollar; subtract six months of taxes, insurance, and interest at current hard money rates; subtract repair cost that would position the property as an equal in its surrounding market; pay the tile and closing fees that are obtained from a matrix: And if the bank is owed a figure that is 110% or less – than we’re allowed to pursue the deal. Any other computation a homeowner is “S-O-L” (I never realized there is an “O” missing from that moniker!). This past week was extremely frustrating as I learned that the banks are less willing to bend on a transaction now than they were before they screwed everything up with the mortgage fiasco! Apparently they aren’t willing to expose themselves to the possibility that the market will tank anymore than it already has, so they only “deal” in cases where the backside exposure (after they resale the foreclosure) is limited. Essentially, the government gave them the incentive to holdout by buying out AIG, the mortgage insurance subsidiary that pays off the shortfall the banks are due if there is a shortfall on the resale of foreclosure properties. If the bank negotiates a short sale, no foreclosure has taken place, hence – no insurance payment from AIG. So for all intentions, the banks would have to be fools to give massive discounts when the current set-up assures they will get 100% of the principal they loaned returned – whether it is through the trustees sale, or via the insurance payment to close the gap on the difference. I am quickly starting to see why I had the little pow-wow with the owner, et al. Talk about power differences! How do you mediate a dispute when one party stands to loose only by coming to the table? This is going to be tough.