RISKS OF VOLUNTARY FORECLOSURES

We have been reading with dismay about people walking from their mortgages even though they have the income to make their mortgage payments; these are known as “voluntary foreclosures”. The motivation is to avoid paying for a house where they owe more than the current price of the house, forcing the bank to take the loss when the house is foreclosed upon.

According to Experian, a credit rating service, over half a million borrowers walked from mortgages that they could afford in 2008, double the number from 2007. These home owners are not unemployed or out of savings, they are just choosing to not pay their mortgages anymore because they see it as an easy way to make some quick cash with no long term downside. According to Citigroup one in five foreclosures are now voluntary, people with jobs and savings and able to pay the mortgage. They are using the fact that the banks are slow in foreclosing to get a free place to live for months and sometimes years before having to move out for non payment. Surprisingly, Experian found that people with high credit scores are 50% more likely than people with average or low credit scores to walk from an underwater mortgage believing that a foreclosure will be only a minor ding to their credit score.

It may seem as though they are right. After all, there has been no public outrage at this practice and there have been no stories of anyone being arrested for financial fraud for refusing to pay the money they owe the banks while still having the same financial conditions as when they were given the loan.

The US government has electronically created almost a trillion dollars to shore up the global banking system from the problems caused by borrowers defaulting on “sub prime” loans. The loss of income to the banks from voluntary foreclosures may have even greater implications to the global economy than the defaults of high risk borrowers. Deutsche Bank predicts that the number of homeowners underwater will grow from 14 million, or 27% of all homeowners with mortgages, in 2009 to 25 million homeowners, or 48% of all those with a mortgage, before home prices stabilize. Assuming that the practice of voluntary foreclosure continues unabated and 25 million Americans voluntarily walk from their mortgages the US tax payers will be left to cover the trillions in bank losses or let the global banking infrastructure collapse in bankruptcy.

In 1985 we bought 5 acres outside of Dallas, Texas during the oil boom and when the oil boom went bust, the property became worthless. When we needed to move from the area for a job, we were stuck with a mortgage for an amount that was huge to us at the time. We continued to pay the taxes and mortgage for the property until it was paid off. After 10 years the Dallas economy recovered enough for us to sell the property for what we originally paid for it. Though we lost the use of that money and the interest on that money for 10 years, we considered it our tuition in the school of hard knocks. It taught us a lot about the real value of real estate and that knowledge has been worth far more than the money we lost on that underwater property. We currently have a Hawaii property that is underwater by over 50% and dropping. Our mortgage, maintenance and tax payments are our current tuition payments in the new economic school of hard knocks. We make those payments because we promised in writing we would when we took on the mortgage and we think keeping our promises is very important. But we also believe that walking away from our property, as the voluntary mortgage walkers are doing, would be incredibly shortsighted.

Here are the reasons we believe the voluntary foreclosure walkers are making a big mistake:
1. RENTS WILL SKYROCKET: The majority of the mortgage walkers will have to live in rentals along with the massive number of Y gens (now bigger in size then boomers) and others not able to qualify for a house loan. The increased demand for rentals will cause a sharp increase in rents. As we experienced in the 1980’s, rental costs can greatly exceed the cost owning a house. The mortgage walker may find that they are never again able to buy a house on credit making them a renter for life and exposed to the ever increasing rental rates.

2. US DOLLAR BECOMES FORMALLY DEVALUED: The massive amount of US currency being created to keep the banks afloat is causing the dollar to lose value against other currencies like the Japanese Yen and Euro. In the last 3 years, the dollar has lost 30% of its value compared with the Yen. Many large currencies have fixed exchange rates with the dollar such as the Chinese Yuan and Saudi Arabian Riyal and there is growing international pressure for these countries to formally devalue the US dollar. This devaluation could happen without notice and easily be 30% or more causing raw materials that we compete for internationally to skyrocket in price. The building materials that we were able to buy cheaply in the past may make buying a new house in the future unaffordable.

3. PERSONAL CREDIT CONSEQUENCES: So far the only consequence of walking away from a mortgage that we have heard about is losing 100 points on one’s credit score. But what if Congress decides to collect the losses being incurred by the FDIC and bad mortgages being purchased to keep the banks afloat from widespread foreclosures? They have access to everyone’s IRS statements, bank statements, and IRA/401K arming them with the information they need to uncover who is really broke. What if stronger consequences are implemented by banks and mortgage walkers lose their right to credit of any kind. They may be relegated to paying for cars, college, and clothes the way it used to be done, through layaway plans, savings and cash.

The people with good credit and income that are walking away from their mortgages may be creating another economic backlash by requiring the federal government to put even more trillions of dollars in the banking system to cover their debt. This will further erode the value of the US dollar with other international currencies making the money saved by walking away from their mortgages seem insignificant. Owning real estate and a house where living costs are relatively fixed are the primary ways to financially survive the dropping value of the dollar.

WHY THE ECONOMIC DOWNTURN IS DIFFERENT IN HAWAII

As the surge in foreclosures in Hawaii and the State furloughs and layoffs begin to hit home here in Hilo, we wonder how tough this downturn will get in the Aloha State. We realize that Hawaii has a long way to go before there is a turnaround and there will likely be more painful pay cuts and layoffs here in Hilo over the next year or two. But we are convinced this downturn will be different and shorter in Hawaii then on the mainland and here are our reasons:


1. Many of the jobs created by the tourist and real estate industry over the past ten years were filled by people from the mainland and Europe. We have noticed that as the jobs have evaporated over the past year, the mainlanders have already packed up and returned to the mainland. This helps the unemployment situation here because the large number of unemployed workers that would normally be competing for the few remaining jobs available in Hawaii are no longer in the State. So unlike the situation on the mainland, every new job that becomes available in Hawaii will have less people competing to get it.

2. The Hawaii tourist industry has a long history of being volatile with big increases in visitors after sharp downturns. Hawaii has traditionally had a low rate of unemployment, so the sudden high rate of lost jobs is likely to recover as quickly as it has in the past. In spite of this current downturn, visitors are likely to keep coming to Hawaii for the same reasons they have always have: Hawaii is an incredibly beautiful and fun place to visit.

3. Over 25% of Hawaii’s visitors are from foreign countries and that percentage has been growing as Asian countries have become richer. This makes Hawaii less dependent on the mainland US recovery for its recovery. The strong drop in the dollar as compared to the Euro and Yen since 2007 makes Hawaii a real travel bargain for foreign tourists. When the concern over the global pandemic flu lets up, we believe that the Asian, Japanese, and European tourists will return in even greater numbers.

4. Boomers have been a big factor in the surge in tourism in Hawaii over the last decade and as they start retiring they will have even more time to visit. One of the benefits of retirees moving to Hawaii is that they usually don’t take a job away and their retirement and savings income adds to the economy. As the 77 million Boomers in the US retire over the next 10 years there will be a huge increase in their visits and relocations to Hawaii creating more jobs and new sources for State tax income.

5. Though the furloughs and layoffs are really tough, people in Hawaii don’t have their identities defined by their job and they enjoy and value the extra time to talk story with their family and friends. Food is shared as a part of family and groups that socialize and people take the time to fish and grow food in their backyards, so most people living in Hawaii are not going to go hungry. The pain of lost income has the buffer of the Ohana factor in Hawaii where families move in together to share costs and help each other out. Those without a job have much to contribute to their family like fixing the roof, keeping up the garden, watching grandma and the kids, cooking or making clothes. When the jobs come back, people won’t be depressed or out of practice but happy to have work outside the house.

Hawaii is the best place in the US to be unemployed. People in Hawaii are not obsessed by world news or getting ahead and they don’t look down on you if you don’t have a job which makes it easier for us to focus on the warm beautiful days gained instead of career opportunities lost.

THE YEAR OF ASTRONOMY IN HAWAII COUNTY

2009 is the International Year of Astronomy for the world to commemorate the 400th anniversary of Galileo’s use of a telescope to study the sky (versus watching for returning ships or spying on neighbors). Astronomy enthusiasts across the world are using their telescopes this weekend in an effort to share Galileo’s experience of seeing Jupiter and its moons with as many people as possible

Hawaii County has had numerous activities surrounding the year long celebration. One of the highlights was a monthly lecture series featuring the Directors responsible for the telescopes on Mauna Kea mountain.

Today was another great event, an open house of every Observatory on Aohoku Place in Hilo above the University of Hawaii. Seven of the nine Observatory headquarters on the island of Hawaii are located on this street with the titanium cones of ‘Imiloa Astronomy Center located below them.

The Observatories located in Hilo are the Gemini Observatory, Joint Astronomy Centre, Japan’s Subaru Observatory, CalTech’s Submillimeter Array Observatory, the Smithsonian Submillimeter Observatory, NASA Infrared Telescope, and University of Hawaii’s Mauna Kea Observatory.

The Canada-France-Hawaii telescope and Keck Observatory offices are located in Waimea. Hilo will soon have a new Thirty Meter Telescope (TMT) which is planning to start construction of the largest telescope in the world on Mauna Kea in the next couple of years.

Subaru telescope is funded by Japan and they celebrated the day with music and tours.

We were delighted to get a tour of the Subaru facility.
They showed us the area where Astronomers can remotely control and view the telescope operation.

Subaru has a lab with a replica of the telescope mounting used on Mauna Kea so that they can test new devices and verify they will properly install before they haul them up to the almost 14,000 foot level.


Hilo has an active Astronomy community with regular lectures by visiting Astronomers sponsored by Astrotalk and a yearly AstroDay event supported by the Astronomers, museums and University of Hawaii. Most kids on the island have have been exposed to astronomy through ‘Imiloa Astronomy Center’s family events, camps, after-school programs, and school fields trips supported by the Moore foundation.

Hilo is a great place to be into Astronomy with many opportunities to learn and participate in observing the Universe and the dark skies program that limits light pollution and makes the Big Island one of the best places on Earth to view the skies at night.

IS GLOBAL VOLCANIC ACTIVITY INCREASING?

Living under the constantly erupting Kilauea Volcano in Hilo, Hawaii, we are especially attentive of news about other volcanoes around the world. It seems to us that a lot of volcanoes have been erupting during the past couple of years. Some scientists claim there are not more active volcanoes than usual but just more reports due to the increased population combined with better communications. They claim that 50 to 70 volcanoes erupt each year and 20 are always erupting.

But looking at volcanic reports, there seems to us to be a large number of active volcanoes, many of them having huge eruptions pushing emissions far up into the atmosphere. Since the beginning of 2009 thirty-seven volcanoes around world have started or continued eruptions, including Kilauea Volcano in Hawaii. Many of these erupting volcanoes are having major ash emissions reaching high altitudes which cover the earth.

In Indonesia at least seven volcanoes are currently erupting; Krakatau’s eruption has pushed ash to10,000 feet and Ibu’s eruption created a white-grey plume which rose over 1300 feet above its summit. Volcanoes are erupting in Papua New Guinea, the Philippines, the Mariana Islands, Tonga, Vanuatu, Barren Island, and Japan. In September, the Mayon Volcano in the Philippines exploded ash up to 2300 feet.



In Alaska, Redoubt’s eruption created an ash emission up to 50,000 feet in March and Cleveland Volcano created an ash cloud reaching an altitude of 20,000 feet in October. Sarychev Peak Volcano on the Kurile Islands pushed ash emissions to 34,000 feet and Russia’s Kamchatka Peninsula is having a record six volcanoes simultaneously erupting.

In August, Mexico’s Popocatepetl Volcano emitted ash to an altitude of 27,000 feet. Chaitén Volcano in Chile has had major eruptions this year with ash emissions reaching 100,000 feet. There are eruptions taking place in Mexico, Chile, Columbia and the Galapagos Islands. In Europe Montserrat Soufriere Hills, Mount Etna, and Stromboli Volcanoes are erupting.

Volcanoes are mostly tracked by satellites, so eruptions are not always seen due to the satellite’s position, darkness or clouds. This list does not include the numerous strong earthquakes under or near volcanoes this year, nor the consistently emitting volcanoes like Yellowstone or Long Valley in Mammoth Mountain which discharges 50-150 tons of carbon dioxide gas at the Horseshoe Lake Tree Kill Area range daily

The rate at which sulfur dioxide (SO2) has been released from Kilauea Volcano here in Hawaii has typically been between 150 and 200 tonnes/day, but in late December 2007, the emission rate increased to nearly 300 tonnes/day and it continued to rise until March 2008 when it reached 1,800 to 2,000 tonnes/day. The rate has slowly let up since then but is still up to 500 to700 tonnes/day, almost 4 times what is was before 2007. These emissions have crated haze and vog across Hawaii which sometimes reaches all the way to Guam.

Two thousand years ago Plutarch claimed that the eruption of Mount Etna in 44 B.C. dimmed the Sun and suggested that the resulting cooling caused crops to shrivel and produced famine in Rome and Egypt. Gasses from volcanoes result in numerous impacts on the climate and the USGS is currently studying gas emissions at 70 active volcanoes in the US alone. Sulfur dioxide is known to cause global cooling and ash injected at high altitudes can blot out the sun.

We notice here in Hilo that on days when heavy volcanic emissions (VOG) are overhead, it reduces the electrical production from our solar panel by 50%. We wonder if these global volcanic emissions will mean a colder winter this year or perhaps for several years to come?