I happened to catch that New York Times piece earlier this week, and the commentary on Debito about it. (Debito’s comment thread is moving more to an argument about building standards in Japan than what Martin Fackler had to say in his article, but it’s worth a visit just to see what Debito said.)
Fackler just wrote the same damn article that has been written about Japan for at least the last 15 years. Post-bubble, that Japan has simply been running in place. It usually has to do with big mortgages, the social contract breaking down, people having to make do with less, people scamming to get by. With a lot of the same topics being prominent in America right now, you can see how dusting off the same article would get you a pass.
The portion that caught my attention, similar to Debito, was how somebody is getting around a huge underwater position in their mortgage by selling their house to a relative, and then renting the house back from them. It implied that there is no such thing as a mortgage lien in property here. That surprised me, because it doesn’t make any sense.
The person featured in the story had a condo, which they had purchased for $500,000 in 1995. They sold it to a relative for $185,000, but still owe $110,000 on the original loan. It sounds like the relative owns the house free and clear, without a lien from the bank. The person is contemplating whether to do a bankruptcy on the $110k.
This is what the foreclosure lawyers in America are trying to do—get people who are underwater out from under the lien, so that the worst they have is an unsecured debt in place of whatever they owe the lender. Apparently, lawyers in Japan have perfected the technique.
Eido Inoue points out at Debito, though, that the conclusions the article makes from one man’s story of price deflation are a bit of a stretch. He links to Eamonn Fingleton at Unsustainable.org, who can usually be counted on to give a more level-headed analysis of major trends in this part of the world. Fingleton says the whole “lost decades” thesis is bogus, and that Japan has been chugging along just fine since 1990, helping China to hollow out American manufacturing and monopolizing key producer products industries like semiconductors.
I’ve read Fingleton before, and he’s been on the mark about several things, so I’m more inclined to agree that one area where the Japanese are not in decline is in making high-end stuff. Also, that people in this part of the Pacific region realize that there is no “financial economy”, only a real economy. While America spent the last 30 years (40 years?) downsizing, hollowing, financially-engineering and praising guys in suits whose contributions to society were mostly just these money tricks, the people in far East Asia have focused on building solid economies.
The problem with Japan is that in recent times nobody running it has bothered to take care of the rest of the people who aren’t involved in the cutting edge of the world economy. Like in America, the top guys have been busy taking care of themselves, and so the rot is starting to set in in the places that the power people have conveniently forgotten.
Too much of it is, “well, that’s just your problem,” which is then what gets reported back in the States. In the foreigner community, the same theme gets played, and this is what you read as it reverberates around the tiny expat blog community. Sure, it’s of course anti-foreigner sentiment, (technically, it’s a failure of Japan to guarantee equal protection of the laws), but it’s masked in the larger woes of the various ma-ke inus of post-Bubble Japan.
I don’t enjoy reading the same stupid articles about the demise of Japan, usually built on one or two extreme anecdotes. (They did the same thing when Japan was on the way up in the ’60’s and ’70’s.) But I’m not sure Fingleton’s got it right that Japan is firmly in control of its destiny. I think the rot is setting in, but it’s slow rot, so it’s not going to hit Japan in the face one fine day. It’s going to be of the nature where problems were identified, but nobody did anything about them. People going back to proposals that were fleshed out at least ten, twenty years before. Ignored the first time, people will later say, “well, we should have done that.” (Basically, it will happen when this country is a giant retirement village in the mid-century.)
When it’s things like the news, moseying along isn’t news. “Hey, we’re just doing our own thing at our own pace” isn’t really a headline grabber. There’s either got to be the downward spiral, or the secret scheming for world domination in the shadows. Now that’s news!
Japan goes to the next day, then the next week, then the next month. Like that. I think the people try to grab opportunities where they can, and some people are actually very creative in getting by or doing well. But a lot of Japanese thinking is simply trying to get other people to give you your way in constant negotiating about who-is-who, who-stands-where, and who-should-get-what. Most people find this unseemly, so they just (or inevitably) cave. It’s easier that way.
I see that a lot more (and what fits history here), than I do the other stuff that’s being printed, purporting to explain Japan.
“It implied that there is no such thing as a mortgage lien in property here.”
I am pretty sure that is not correct.
There are several types of personal bankruptcies in Japan (and elsewhere.)
In the first, you go to court to say you can’t pay off your debts and then go through the process of having your assets listed up and sold off to pay back your debts as much as possible. You might get some lenience on any debt you have left over but for the most part, you still have a home loan left over.
It seems that if you are in dire straights, you want to declare bankruptcy BEFORE you start defaulting on your loans. If the bank moves towards foreclosure, you are pretty much in a world of hurt. They auction off the house at a fraction of the value and you still have a sizable loan left.
One way to avoid some of that pain is to sell off the house of your own free will to pay back some of the loan (called 任意売却) which allows you to get a more fair market value for your house. It also shows a willingness to “try” to pay back your debts and is looked on more favourably when you are applying for bankruptcy.
The relative wouldn’t be owning the house free and clear. Masato took the money he got from the relative (most likely via a bank loan) and used it to pay off a chunk of the huge debt he still had. The relative, being a nice person, lets him continue to live there and pay rent but unless they are extremely wealthy, they have a loan of their own to pay, some of which will be covered by the rent Masato is supposed to be paying. Masato still has $11k left on his loan that he has to pay off and is contemplating bankruptcy to expunge part of it. He might get called for shenanigans, though.
That sounds right, doesn’t it? Lending on property all over the world, for the past couple centuries, has had with it this idea that the lender gets an interest in the thing they are lending on. What in modern days is called a “secured interest”, but long ago adopted various names like mortgage lien.
I don’t hear a lot about refinancing in Japan, and I have a feeling it’s because so many people are underwater. But if they can’t refinance for other reason (like there isn’t a housing authority writing regulations saying they must have the right), then one way to get a lower rate is do what Masato did. But it sounds like Masato’s relative would be on the hook if the first bank got the property, then whoever the creditor of the relative is (or if it’s Masato’s relative’s own funds) is out the money.
I can see the point that Fackler is making—that this kind of slow dance has been going on here for 15 years, where in America it’s been maybe four maximum. NYT had almost the exact same article, about a guy in Kashiwa, a few years ago; and I wonder if the editors don’t realize that people remember what they read.
In situations like these, I really think the government needs to step in with programs. I don’t think it’s so smart to have this giant cloud surrounding your housing market. Even though it’s a nation of renters, mostly.
“I don’t hear a lot about refinancing in Japan, and I have a feeling it’s because so many people are underwater.”
Lots of banks offer refinancing loan or 借り換え but as you say, unless there is about a 100 basis point difference in the interest between what you had and what you could get, it really isn’t recommended.
“But it sounds like Masato’s relative would be on the hook if the first bank got the property, then whoever the creditor of the relative is (or if it’s Masato’s relative’s own funds) is out the money.”
I am not sure I follow how you got there. Masato apparently went through 任意売却 to unload his house and pay off a chunk of his mortgage. One would think that the remainder of the principal would have been renegotiated as an unsecured loan because he sold off his collateral. The first bank wouldn’t have a claim on the property anymore. The first bank has apparently agreed to take as much as they can of the original loan and risk the uncollateralised remaining part (about JPY 9 Mill) from Masato. Masato’s relatives would only be on the hook if they were his guarantors for his loan.
“NYT had almost the exact same article, about a guy in Kashiwa, a few years ago;”
This one?: http://www.nytimes.com/2005/12/25/business/yourmoney/25japan.html?pagewanted=print
That was 5 years ago and, if anything, I’d say Japan is a bit worse off now than it was then. 2005, the Nikkei was slowly making a 2nd rebound, Yen was at about 125 to the US$ or so. Land prices were pretty crap but it “looked” like they were bottomed out. Fast forward 5 years: the Nikkei is about half what it was, the Yen is at 80 to the US$ and the “bottomed out” land prices found a new lower bottom.
Chuckers says:
I am not sure I follow how you got there. Masato apparently went through 任意売却 to unload his house and pay off a chunk of his mortgage. One would think that the remainder of the principal would have been renegotiated as an unsecured loan because he sold off his collateral. The first bank wouldn’t have a claim on the property anymore. The first bank has apparently agreed to take as much as they can of the original loan and risk the uncollateralised remaining part (about JPY 9 Mill) from Masato. Masato’s relatives would only be on the hook if they were his guarantors for his loan.
I am thinking he bought the house for $500,000 with 20% down ($100,000). So he had a $400,000 mortgage at 1995 interest rates. Sometime recently, he sold the house for $185,000 to a relative. That was all the house was worth, and that was all the security the bank really had. He still owes the $110,000. (This means he owed $295,000 out of the original $400,000.)
The bank got its $185,000 but gave up its security (and of course the right to boot Masato out of the house). Does his relative (or his relative’s lender) have the right to boot him out? If it’s as you put it, that the bank took the $185,000 to have what it could get, then, fine, they don’t have any leverage over Masato. That makes sense to me. Then, as unsecured borrower, nothing stops him from getting the $110,000 extinguished in BCY, especially if it’s carrying an unsecured rate.
The bottom line is that when real estate carries a value that is only a fraction of the remaining balance of a loan, it’s quite a situation. I’m glad I never bought.
“Does his relative (or his relative’s lender) have the right to boot him out? If it’s as you put it, that the bank took the $185,000 to have what it could get, then, fine, they don’t have any leverage over Masato.”
His relative would have the right to boot Masato out if he didn’t pay his rent (as well as any landlord in Japan can, I suppose.) The relative’s lender would have the right to boot Masato out if the relative has the place foreclosed on them.
Here is the website for Yoshinori Kaiami mentioned in the NYT article (he has a blog somewhere as well with the NYT excerpted.) This bit covers the explanation of what 任意売却 is:
http://www.a-mics.com/sale_explanation/
I haven’t read it over in great detail but it basically says that, for the most part, when you do this, it with the agreement of your bank which makes sense. They aren’t going to want you to sell off your collateral because, effectively, they (the bank) actually own the place (says so on the deed with the amount borrowed and rate of interest.) The bank can ask you to sell it off as well in this fashion as well. They would do this if they figured they could recoup more of their losses that way rather than go through the pain of foreclosure proceedings.
I also think it says that for the most part, in order for this to work, you already have to have a buyer lined up. In Masato’s case, this fortunately happened to be a relative but that is a bit of a red herring. It can be anybody. And that makes sense, too. You wouldn’t want someone to be able to go to the bank and say, look I am going to put my house on the market and try to get what I can so don’t foreclose on me when I get in arrears. The bank is only going to agree to let you restructure your debt with this if they are assured someone is going to come up with the dosh ahead of time.