Running out of money

Black Swan, commenter at Mish Shedlock’s weblog, offers another anecdote from the mid-level business circle he runs in:

We did Christmas Eve at at a McMansion that looked like a replica of an Antebellum Mansion. I got to talking with the owner, and he told me he only owed $180,000 on the house, which was decked out like a Martha Stewart Christmas spread. His big lawn is exquisitely manicured, and keeping it that way is a huge expense (my lawn is so bad that neighbors burn crosses on it just to get me to mow it). He has a beautiful trophy wife and two very young kids in private school.

He told me he was running out of money

He has a trucking business in Newport News, Va., which is located at least 4.5 hours from his home in NC. He just let his manager go because he can no longer afford him. He will now be spending 5 days a week, away from his kids, his beautiful wife, his manicured lawn and his mansion, having to totally run the business himself from the port. He’s worried that even that won’t be enough to save him. Many of his customers are now more than 180 days behind in their payments to him. If he pushes them, he loses their business. If he doesn’t push them, he doesn’t get paid. [Emphasis added]

The last bit there is something I’ve wondered about for some time: to what extent is a deeper crisis being delayed by creditors being slow to collect on debts? Like the fellow mentioned above, such a creditor may be solvent on the books, but he ends up raiding his own savings to get the cash needed to keep the operation afloat. Once the savings are gone, all he has left is debts which may never be paid and in any case can’t be used to fund a business.

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One thought on “Running out of money

  1. While we’re talking about anecdotes, I have one. Since we are going down to FL, I looked into foreclosures as a possibility for living in, working on, and then turning over (knowing full well that is very risky).

    Here is the scoop on just one little house on the Florida coast after lots of phone calls and digging.

    Original purchase price was $700,000 in December of 2004. No record of a mortgage was recorded.

    In June of 2006 they secured a first mortgage on the property for $760,000 – so essentially no money down (in fact, received $60,000 back from the equity growth of the property, or 8.6% over a year and a half).

    The terms of the first mortgage:
    – 2% prepayment fee ($15,200) if full repayment received within first 2 years
    – 1% interest for the first 15 days – establishes the monthly payment at $2,444.66
    – Rate changes to 7.232% on day 16 and adjustable every month thereafter – making the new payment $5,166.51, but since the payment is capped at $2,444.66 for the first year, the difference of $2,722.25 is added to the principal (negative amortization)
    – Every year the payment is re-calculated based on the adjustable rate provision – but can only change 7.5% max each year. So for example, after the first year, the payment would go up only $183.33 even though the repayment in 29 years would require $5403.40

    And so it goes – and so the “owners” owed $882,992.56 (including late fees and such) in the judgment against them entered on 4/22/09 on a loan of $760,000, on a house that is now worth at best $250,000+, not to mention the $30,000 in back taxes due.

    But, the thing is that now Citibank owns the house. They purchased the mortgage in October 2008 (for an undisclosed sum) and folded it into a home mortgage asset trust where its true value can be hidden on the banks books. They will never sell the house (which is now falling into disrepair) because when they do they will immediately realize a huge loss in their assets, which affects the amount of depositors’ money they are supposed to have on hand to cover their obligations. But it is all a fraud, they are leveraged way beyond any means to ever recover, and a nice piece of property rots away…

    I tried to buy the house from Citibank, but they wouldn’t hear of it. Would not listen to me when I said, “OK. I’m trying to give you guys money. You won’t sell? You won’t even HEAR my offer?” No. Absolutely not. The reason?Because they’d have recognize the loss on their books, and on a grand scale, that makes them insolvent.

    After an hour of getting the run around, I told the Citibank employee on the phone, “No wonder you guys are in trouble.” She hung up on me.

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