Get the Pitchforks...The Evil Homeowners are ...

Let me set the stage for this classic B-Movie scene.  Its Grapevine, Texas, a quiet little village populated with poor bankers from around the world.  Up on the hill is an ominous castle with a mad scientist that has figured out that the by combining a bad economy, depressed housing prices, and delinquent mortgage payments; and then exposing it to lightning, that an ominous beast, capable of enormous destruction can be unleashed on the village below: the Strategic Defaulter!  Da, Da, Dum!!!!!!

The Horror!  The Depravity!  The...stupidity.

Like all B-movies, the villain is nothing more than a man in a suit painted by another man.  Well, the suit we are looking at was painted by the Banking industry and not just anyone in the banking industry but a Panel hosted by the Mortgage Bankers Association (MBA) at their annual servicing conference in Texas.  The panel was discussing whether banks should pursue a deficiency judgment against strategic defaulters.

One panelist, Jim Davis, Executive VP of American Home Mortgage,  was caught ranting about the beastly strategic defaulters, "Servicers should push back and hold those borrowers accountable.  I think it is time for us to do that.  There seems to be this entitlement by borrowers [to default because of a bad economy]."  Mr. Davis was paraphrased as disagreeing with the right to default because the homeowner made the decision to buy the property and the lender shouldn't be expected to bear the brunt of the loss.


I want to switch gears a little bit and have you watch the following video:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
www.thedailyshow.com
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You will note in this satirical news reporting that a vast truth was just unleashed, the MBA, which is hosting the panel on the beastly Strategic Defaulter, defaulted on a $79 million dollar loan.  I juxtapose these two stories for a couple of reasons: One, its funny; two, the banking industry is filled with hypocrites; and three, the banks don't really know who a strategic defaulter is over someone who simply can't pay.

In 2004, only 4% of defaults were strategic, a professor from the University of Chicago, using both survey and data based methods estimates the number of defaults in the current year between 25% and 35%.  I hope that I in some small part have helped increase that number this year.

The MBA would like nothing less than to be able to attach a deficiency to every loan that goes bad when the borrower had the wherewithal to pay for the note.  The problem that I have with that, is that the rules, i.e. the Deed of Trust Act in Washington, were written by bankers for bankers and now that the rules don't fit their reality the banks are out to make the homeowners into Frankenstein's monster. 

You will note in some previous posts that I believe in the existence of the heavy influence of the banking lobby.  It has impacted good legislation that would help out homeowners for the worse.  We have to be better educated about the process and realize that the bankers are speaking out of both sides of their face.  Now if something that can grab a pitchfork, influence legislation, and speak out of two sides of its head isn't a B-Movie monster,  then I don't know what is.

Strategy and Speed - Default and Bankrupcty - Will you be left behind?

Last week I wrote a post on why strategically defaulting on your home loan may be an economically sound choice, not just for the homeowner but for the overall economy.  Homeowners can deleverage underwater properties through a strategic default and nonjudicial foreclosure and in some cases erase second mortgage debt through a bankruptcy.  Sometimes, the default is enough to create hardship so that an otherwise errant short sale can be pushed through which may also eliminate debt from the second mortgage.

In today's Seattle Times, and really, it was kyped from the AP, a story discussed Borders filing chapter 11 bankruptcy because it couldn't keep up with its market.  One of the quotes really caught my eye, "Less nimble than rival Barnes & Noble, Borders now begins what analysts expect will be a quickly resolved struggle for the survival of its remaining stores."

The lead up to that quote came in the form of Borders missing the fact that its customer base was moving on to other providers for its goods.  Internet retailers, downloads, other big box stores that have driven down prices, and the such.  Really, customers that had evaluated the opportunity costs of staying with a financially bad model or moving onto a better model.   It made me think about some of my clients and really, my potential clients.  Are you going to let the wave of foreclosures wash over you, drive your house value farther into the floor, and leave you struggling to float for the survival of your remaining financial stores?

Many of us don't want to have this conversation, we bury our heads in the sand, hope Obama will wave a magic wand and our housing problems will go away.  If you are among those that are thinking that way I want to shatter that pair of rosy glasses on the bridge of your nose.  Obama can't fix it, it wasn't his fault, and it is unlikely that we will see the necessary tools provided by congress in the near term.  So, as a pragmatist, I suggest we look at the tools we have and strategically plan for the deleveraging of these toxic assets.

Strategic Default gives you as an individual leverage.  Bet you never thought that a deadbeat would have leverage, but many times we don't see the relationship between the layman and the bank in the context of the bank being without money.  The truth is, that if everyone would go to the bank tomorrow, withdraw every penny they have, and then not pay a cent on their loans, the banking industry would be gone in a month.  The banks would all file bankruptcy and disappear.  I am not advocating that, but from one of my favorite childhood movies, remember "It's A Wonderful Life" with Jimmy Stewart, that it was set against the backdrop of Jimmy running a bank in which the customers made a run on the bank and if it weren't for his honeymoon savings, the bank would have been sunk.  The moral of the cautionary tale of the runs on the banks from times past is that the customers have the power because they actually have the money.

The more people that go into default, the more likely that congress is going to finally come together and make decisions that will help stem the tide.  The problem is that many times the corporate donations mean that the legislators fall on the side of favors rather than the consumer and the rules are not likely to fall in the defaulter's favor.  So in the vein of our Borders example above, failure to adapt early to the changing economy is to risk the possibility that the market will pass you by and leave you struggling to float for the survival of your remaining financial stores.

The moral of this is not so profound as the common man holding power over the mighty banks.  It is simply don't procrastinate.  You need to make all speed in understanding this changing housing market and deleverage that toxic, underwater asset before it sinks you in the wave.

Deleveraging the Housing Teeter-Totter

When I was in school, I hated teeter-totters.  Mainly because I was really small and the big kids would stick me up in the air and not let me down.  Any of you homeowners feeling the same way?  Well, a number of years later while I was studying in college, the teeter-totter came back in the form of leverage, how the use of debt could multiply the financial decisions of companies, for good or bad.  If a deal was good, it was better with leverage, if it was bad, it was worse.  How much better or worse, depended largely on where the fulcrum was placed and the fulcrum was governed by time, interest rates, and percentages of debt.

Last week or maybe two, I took a hiatus from the unpleasant to enjoy the holidays, but now we must all face the facts of the new year, there was an article on how the US economy was going to deleverage, or get rid of leveraging devices, such as loans that have proven to be magnifying the downside.

The article speculated that households would deleverage about $1 Trillion, mostly through foreclosure.  The government and media love to throw out that trillion figure, and they have to because of the size of our economy, but it is nearly impossible to put into perspective.  Most of us have never seen a million dollars in one place but a friend of mine put together a slide show of a man standing next to a pallet of brief cases as tall as the man, each case holding a million dollars.  The final slide, the man isn't even visible, and pallets fill more than a football field of space.  That is a trillion dollars.

My curiosity, in reading the article asked, how many households would have to foreclose to make that number?  Census statistics showed the following amounts for housing prices the last six years before and including the recession:

Average Housing Prices
Period Ending	Median	Average
Dec-03	$196,000	$253,900
Dec-04	$229,600	$284,300
Dec-05	$238,600	$290,200
Dec-06	$244,700	$301,900
Dec-07	$227,700	$284,400
Dec-08	$229,600	$263,100
Running Average	$227,700	$279,633

 If we take the running average of those years as the amount of debt each household took on to purchase the home, assuming 100% financing, then it would take on the low end average, 3,576,112 houses going into foreclosure, and on the high median side, 4,391,744 houses going into foreclosure.

Those number would likely be meaningless to you as well, but if we take the Pacific Northwest consisting of Washington, Oregon, and Idaho and the 2009 housing units and ownership percentages, every homeowner in that tri-state footprint would have to foreclose their homes and we would still not make the trillion dollar mark.

	Housing units	Ownership	Owned
Washington	2,813,372	64.6%	1,817,438
Oregon	1,638,583	64.3%	1,053,609
Idaho	647,502	72.4%	468,791
			3,339,839

What this tells me is that we are not on an upswing as many of the trade publications would have us believe.  I believe that it was Mark Twain who said there are three kinds of lies, lies, damned lies, and statistics, and certainly we can manipulate the data or pick and choose which data we are going to look at.  However, if there is still to be over a trillion dollars of houing to be deleveraged and it would take more than every homeowner in three states to go into foreclosure, then we are looking at a lot of people up in the air on the wrong side of the teeter-totter while the bank laughs at us from below.