Miraculous Transfer of Wealth from Banks to Borrowers

Here is a well presented reason why the economics of foreclosure are beneficial to the overall economy.  Jim Cramer goes into some incredible comparisons between Bank of America and Capital One in regard to defaulters.  There is also interesting information on the economic buying power of defaulting homeowners.



My Law offices have been discussing the benefits of this strategy for a while and you can look back here on Why Strategic Default is Good for the Economy!

Cramer made the comment that strategic default creates a "miraculous transfer of wealth from banks to borrowers."  Credit card companies like Capital One and retailers like Costco are seeing the benefit of homeowners eliminating the largest single payment in their monthly budget and re-purposing that money to service other debts and make smart purchases.

The use of this freed up cash allows the homeowners to make economic choices that have more utility than being simply forced to feed the big banks.  This is why the banking sector as a whole is down 5% in trading but you see certain lenders like Capital One, which facilitates purchases with credit cards rather than mortgages has done well.  Homeowners want to be economic players, they like choice, the down turn seemed to take that choice away.  But now, the miraculous transfer is putting choice back in the homeowner's favor.

At the end of the piece, Cramer went on to put it simply, "You got to be nuts to pay your mortgage if its underwater, you got the government on your side."  I don't know that I agree the government is on your side, but we do see more politicians working on the homeowner's side as evidenced by the Foreclosure Fairness Act. The choice seems and if you clear away the emotional baggage, really is simple.  The transfer of that monthly mortgage payment, for whatever period of time you stay in your home is hard to overlook.

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.

Lawyer Goes to Jail Because he was not Strategic-Just Stupid

When I was at the University of Florida, one of the preeminent professors there was often heard to say, "If someone has to go to jail, make sure its the client."  I guess those sage words of advice never graced the ears of California lawyer, Michael J. Pines.  In a Housingwire article which details Mr. Pines contempt charges for helping his clients break back into a foreclosed home, the lawyer is made out to look like a bit of a Thoreau or Ghandi type figure for his civil disobedience.  My take, is that the lawyer in question is just stupid because he wasn't strategic.

I don't make that claim lightly, because I have great respect for anyone that can endure three brutal years of law school and then pass a bar, especially a difficult bar like California's.  The problem that I read in the article came from the following paragraph:"In January 2010, Canejo Capital Partners, an investment firm based in California, purchased the home through a foreclosure auction court documents show, but the Earls remained in the property and delayed eviction through bankruptcy filings."

To the average person, there doesn't seem to be any issue with this, but from my Washington perspective there are huge issues.  Mr. Pines was trying to create a forum where he could air his client's grievances with robo-signing, produce the note, and I am sure, a whole smattering of other claims that could discredit the bank's legal right to foreclose the home.  The huge issue that first comes to mind is that nonjudicial foreclosure is designed to ensure continuity of title, thus once the sale takes place, you have very little legal standing to challenge the sale.  Here in Washington, we saw the Albice case back at the end of the third quarter of last year where the Court of Appeals did overturn a sale, but that is incredibly rare. So strike one is that Mr. Pines didn't challenge the legality of foreclosure prior to the sale, he was too late to implement a valid strategy.

The second big issue that I saw was that Mr. Pines didn't strategically place his bankruptcy.  Bankruptcy is a tool, and in my opinion, shouldn't even be the mainstay of any attorney's practice.  Bankruptcy mills in my opinion are a disservice to the client because the attorney has a conflict of interest with his client.  He only gets paid for doing bankruptcy and if he lets his client walk out the door without a bankruptcy he doesn't get paid.  As my MBA professor would say, bankruptcy attorneys, when they open their tool box, have a big shiny hammer and the whole world looks like a nail.  The bankruptcy should have been placed prior to the sale, which would have had the same effect of keeping the client in the home for a longer period of time and then would have provided a proper venue to challenge the foreclosure.

See, the bank, upon receiving notice of the bankruptcy would be subjected to the automatic stay.  The automatic stay is the provision that is so powerful in bankruptcy because it stops all collection activities, including foreclosure.  The bank would have been forced to either wait for the bankruptcy proceedings to conclude or request relief from the stay.  In requesting relief, a well informed attorney would have the proper venue to challenge the legality of the foreclosure in the first place.  Mr. Pines instead waited too long and then had essentially no legal standing for the challenge.

The third issue is that the lawyer made the case about him, instead of about his client.  Self agrandizment during your client's proceedings is in bad taste.  Mr. Pines had spent too many nights reading Civil Disobedience and dreaming of changing the world through sit-ins instead of looking out for the best interests of his clients.  He helped his client's break into the house, after the foreclosure, and then spouted off to the court saying, "Well then I think you should hold a contempt hearing, and I welcome that..."  He was proud that he would bring attention to the plight of his client's case by getting sent to jail.  Idiot.

If you want to bring attention to the plight of your client, win the case.  Have a better argument!  Implement a strategy!  Don't get sent to the jail because you're too stupid to come up with a better plan.  The only thing that he can hope for now is that his complexion won't clash with his orange jumpsuit.

When strategically defaulting and forcing a foreclosure, sometimes it becomes obvious the bank is not following the rules, or maybe doesn't have legal rights to do what it claims to be doing.  At that point in time, you have to have a plan, a strategy, and if you are the attorney, it better not end with you going to jail...it really should be the client.  Wink, wink, nudge, nudge.

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.

Strategic Default...Why its good for the economy?

Our nation tends to be a conglomeration of misshapen lemmings.  We don't all look the same, some are white, some are black, some are tall some are short, skinny and fat, rich and poor, but when something is cool, we like to follow it, like a lemming.  California hit its declines in housing values and its sharp upswing in "negative equity" in 2009.  Well, like the waves I have talked about in previous posts, we see the wave washing over Seattle metro, following California like a great northwestern lemming (which is not as close to extinction as you might expect.)

In the Seattle Times today, the report discussed the rise in "negative equity" going from 23% of all households in teh Greater Seattle area to 34.3% at the end of 2010.  Now, my group and the companies that I have been working with for the last 8 months have been saying that this is the trend for ages now.  We have been talking about how homeowners have seen the greatest decrease in wealth in recent history and now our major news outlet decided to chime in, thank you.

The article quotes Zillow.com's chief economist Stan Humphries as saying, "[the increase in negative equity] increases the likelihood that owners will default - even if they still can manage the payment."  The article then goes on by quoting Glenn Crellin, the director of real estate research at WSU and  states that "strategic default" ..."damages owner's ability to obtain credit for other purchases, further curtailing economic activity."

This article states some generalities but misses the essence of the strategic default.  By definition, it is strategic, meaning there is a plan in place.  Crelin is only half right in his assessment, because what he fails to capture in his analysis or at least in the sound bite  provided by the Times is that by defaulting, the homeowner frees up cash flows of at least the mortgage payment.

Under the Deed of Trust Act for Washington, a defaulting homeowner can expect, at a minimum, seven months of mortgage payments being freed up for use in other economic pursuits.  The cash can be used to get rid of other debt, build bankruptcy proof asset pools, or even on a turn of whimsy pay for that amazing trip that the homeowner and spouse have been dreaming about but never had the cash to afford.

That cash flow is creating economic activity, just not for the banking establishment.  Homeowners are using that cash flow also to maintain lifestyles that have been severly hampered by the down turn in the economy.

The article did note that homeowners that decide to hold onto their mortgage, probably out of an uninformed sense of morality, harm the economy as well.  Those homeowners do not expend money on home improvements, basic maintenance, and are unwilling or unable to move even for better job opportunities.  That means that the utility of the cash being flowed from those homeowners to the banking institutions are actually less effective than that of the strategic defaulter.

Bottom line, it is better to default while you are in control of your financial self, than be forced to default when you have no other options.  Men were created to act, not to be acted upon.

Lovable Losers! Housing falls for 53 straight months

How many of you have that person in your family that can't win for trying?  I know that I have a few, in fact I seem to collect them as friends and relatives.  I guess I have a soft spot for the underdog.  When I was in my undergrad, I studied stocks and bonds, not a really exciting course of discussion for some, but when you are dealing with companies, there is a lot of personality to many of them, not unlike the lovable losers in our own lives. Think of Apple and its feud with Microsoft or Geico's Cavemen and the many other brands that live in Americana today that have taken on personas all their own.  Well, in investing, sometimes investors get attached to things because of the sexiness of the brand, or its perceived value regardless of its economic value.

I promise, this is going to tie in nicely with housing in a minute, but if you will allow me one story.  I grew up a fan of comic books and when I was studying stocks, one of our projects was to take an imaginary amount of $5M and invest it in a diversified portfolio and make daily transactions, the guy with the most money at the end of the semester wins.  One of my stock picks was Marvel.  The stock was going gangbusters for me, but then there was a falling out between Stan Lee and the rest of his board and there was a big suit over movie profits and the stock price tanked.  Guess who held on out of a misplaced sense of nostalgia?  That's right, me.  I did really well in that class, but that failure taught me a very important thing.   Emotional attachment to things, can cause you to lose in the endgame.

An interesting article was posted on CNBC today and it used the word "Depression."  Though our overall economy is not in a depression, if we look at housing prices overall for the US, we have lost value for 53 consecutive months.  That is over 4 and 1/2 years.  You may have children that started college and have never been able to study a single month of rising housing prices in a college career dedicated to finance without cracking open a historical chart.

The issue that I have with this, and this is partly the fault of media, partly the fault of nostalgia, partly the fault of fear, a myriad of factors that have lead us to hold on to a losing economic asset.  We love our homes, it is where we brought home our first child, raised the kids, had Christmas parties, proposed to spouses, and felt safe from a turbulent world.  There is so much emotional attachment to those four walls that many have or will lose the endgame because they cannot let go.

When we deal with foreclosure, strategic default, efficient breach, or whatever term you like to use, the simple fact is that in order to take action, rather than letting the economy dictate to us what is going to happen, we have to shed some of the emotional baggage. Yes it is your home, but as cliche as it may sound, home is where you heart is and that should be your family, not the four walls that are acting like an economic prison dragging us further into depression.

Look at the lovable losers in your life, give them a hug, because family and friends are the important parts of our life, and then look at the loser economic asset, take a picture and let it go.  Whether its a stock that is attached to a childhood memory or a house that you just can't afford to see drop in value one more month and let it go. Depression doesn't have to hold us, we can fight back and come out economic winners.