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Saturday, March 28, 2009

Toxic Assets

Investors really need to start taking the term "toxic assets" literally in terms of properties affected by the mortgage implosion. The first case in point publicized earlier this week involves -- literally -- the toxic drywall found to be destroying many homes built between 2004 and 2007 from the inside out. Due to back-to-back-to-back hurricanes earlier in the 2000s, tremendous shortages in the supply of drywall led many builders and wholesalers to buy drywall from China. It seems the manufacturing process or just any lack of concern about the raw materials used resulted in extremely high levels of sulphur to be baked into the drywall. As it ages, the sulphur seeps out of the drywall as a gas. If the house is closed up for any period of time, you get the classic "rotten eggs" smell. That's not the real problem, bad as that may seem.

The real problem is the sulphur being emitted attacks ANYTHING in the home made of copper -- like PLUMBING and WIRING. There isn't really a fix -- you can't "seal" the drywall with paint to avoid the problem cuz it's still seeping on the cavity side of the wall where the real damage is being done. Of course, the vast majority of insurance companies are refusing any claims for this problem. The only solution is to completely gut ALL drywall, copper plumbing and copper wiring in the house and start over, at which point you might as well tear the house down and start over from a cost standpoint. Where is this problem most prevalent? Florida -- one of the leaders in foreclosed properties.

The other problem with toxic home assets is the problem with vagrancy and "squatting". A story earlier this week on the NewsHour illustrated the problem in one relatively nice looking neighborhood in California. A real estate agent working for a credit agency visited several properties on the agency's foreclosed list and tried to shoo away squatters attempting to live in the homes or quiz neighbors about anyone that might be currently away from the house but squatting at night. The story described how poor people and illegal immigrants are getting scammed by people running ads in the paper advertising below-market rents who meet them at the property to collect the first month's rent, let them in (presumably replacing the locks so they can give them keys that match) then disappear. The "renter" thinks they're living in the home legally but find out otherwise when the sherrif shows up to evict them. In other cases, people are just breaking in themselves and living there.

Of course, since most of the houses have the utilities shut off, people just stack trash up in the rooms, no dishes get washed, it isn't clear sinks and toilets work so....

You can imagine what these houses look (and smell) like. In the piece aired on television, many look like crack houses or meth labs on the inside with major appliances and fixtures stripped, gang tags spraypainted on the walls, *#)@ on the walls and floors, you name it.

These are the "assets" being unloaded by banks on well-meaning but unsuspecting regulators and government agencies.