Counter Economics

(picture from http://boicemail.blogspot.com/2007/05/may-7-2007-newsletter.html)

While banks are begging for and getting money to cover their losses, what has been must less discussed is whether homeowners will be offered debt relief. Henry Paulson, the Secretary of the Treasury has stated that the number one thing the government can do for the average American is “stabilize the banking system.” This translates into giving trillions to the banks. However, there are hazy and hopeful ideas proposed, mostly by real estate professionals and banks that programs for borrowers are “just around the corner.” This link points out that every program recommended to congress is related to bailing out banks over house owners.

http://www.cepr.net/index.php/data-bytes/housing-market-monitor/plans-to-help-homeowners-send-checks-to-banks/

What Are Banks Doing To Help The Mortgage Situation?

Banks and the Fed and the Treasury (the Fed and the Treasury simply represent banking interests and don’t have to be lobbied) have lobbied congress for $3.4 trillion in various debt relief. The same debt relief banks deny their customers. The framing of  the crisis is clear, house owners must be “responsible” while banks get bailouts. Also banks are not interested in a careful examination of how this crisis was originated, but would rather move on. Furthermore, banks are not increasing lending with this money, as the collateral for loans has dried up. They are putting US taxpayer money into these areas:

1. Lavish executive compensation
2. Bank mergers
3. US Treasury Bonds
4. Preventing the honest auditing of their derivatives in order to cover up the how the mortgage backed security and credit swap business drove this crisis
5. Providing no accounting of where the bailout funds are being spent

Here is how the bailout to banks breaks down roughly. As you can see house owners are left out of the bonanza. This is the great plan brought to you by the Treasury Department

So the answer is that banks are doing nothing positive to help the mortgage crisis. In fact, the Fed and the Treasury (the banking industry quasi government representatives), are actually worsening the crisis with every action. This is unsurprising, as they caused it. Furthermore, the crisis is so deep, that the Treasury and the Fed want to get subsidies to their friends in the major banks, in the case of a more general default.

What Should Underwater House Owners Do?

Banks, mortgage lawyers, real estate agents, are all trying to have their voices heard on this topic. Their voices are almost always against the house owner’s interests. All of these experts contributed to the problem with creating the bubble and now they would like to be listened to again. The attempt here is to make a relatively simple decision complicated so that the advice of experts is necessary. This post will demonstrate that the options are not that complicated, and many of the options often given to home owners are not real options.

The different options break down into:

1. Having owners reduce their standards of living in order to pay their mortgage
2. Short sale
3. Short-refi
4. Foreclosure

Keep Paying the Mortgage on a Depreciated Asset

Of these options, the banks would prefer the first option. Countrywide told a man who was behind on his mortgage that spent $10 per day on groceries, that maybe “he could eat less.” Never concerned with ethics previously, or in the bubble build up, lenders get very preachy when discussing owners walking away from their upside down mortgages. The CEO of Countrywide Angelo Mozilo who in an email stated he though people who tried to refinance their underwater houses were “disgusting” pocketed $130 million in stock options he sold before the crash in Countrywide stock.

So the new line from banks and credit counseling outfits is “responsibility.” Gail Cunningham, the spokeswoman of the National Foundation for Credit Counseling states…

“We need a culture of responsible consumers and homeowners,”

The banks are trying to convince house owners to “fight to keep their home,” as if keeping a giant liability like an underwater mortgage is some scene from the movie Rocky. They are offering ways to worsen the house owners’ financial situation such as moving them to interest only or to a repayment loan. What the bank does not discuss is whether it is a good financial investment to keep paying the loan. They will never discuss this.

Another technique is trying to convince people that help is on the way. Programs like Bush’s foreclosure freeze for 30 days is basically a joke. No help is likely forthcoming because it would have to fight the banking lobby which as we have seen with the bailout is peerless. However, you can decide for yourself. So far the government has printed or spent (depending upon how you look at it) $3.4 trillion helping banks. We are aware of no programs of any fractional size to help house owners.

Ahhh……the promise of short sales and short refi’s

Short Sale and Short Refi

As for the other options, it is not clear that these are legitimate options. One way you can tell is by looking for short sales online (they are very difficult to find). When a friend contacted a major bank to inquire about their short sales, the bank declined to offer this information. This article discusses the issues with short sales…

http://tampabay.bizjournals.com/tampabay/stories/2008/03/03/story12.html?=120452040^1597931&surround=etf

…and offers the following quotation:

“”They are trying to execute a scenario that is absolutely impossible,”said Peter K. Murphy, CEO of Home Encounter LLC in Tampa, which is tracking short sales in the current housing market. “They want to throw a short sale on the market, hoping the bank will drop a price, and they’ll be able to sell. But that’s just not happening.”"

The overriding problem with short sales and short refis is that they are entirely at the bank’s discretion. Secondly, many real estate agents don’t actually know how to proceed with a short sale. Furthermore, there is evidence that it only makes sense to attempt a short sale with an agency that specializes in them as the number of agents with this knowledge is so thin. Many agents are so incompetent that they take their clients down the short sale path, obtain an offer, without ever checking with the bank as to whether they will actually accept a short sale. This is the first thing that should be done, but many agents don’t check first. Any agent can list a short sale, but few can bring it to closure.

Thus the statistics on short sales are as miserable, so house owners need to check the references of agents on how many short sales they have personally processed if the house owner attempts to go down this very difficult path.

“”Only 2 percent of all short sales attempted year-to-date have been successful,” Murphy said. “Short sales themselves are a great solution for certain types of problems homeowners are facing, but they have to be handled properly, or it will turn into nothing more than a giant mess.”"

Short refis are also extrodinarily uncommon. Websites like the following..

http://www.wizardlending.com/short_refi.htm

…and this YouTube Video…

..present short refi as very beneficial, and they are in theory. Winning the lottery is also very nice. However, these sites do not explain why short-refis are so uncommon. Instead they offer a lot of pie in the sky and jargon, along with come-ons to contact them for more details. The conventional wisdom is that banks would prefer anything over foreclosures, however, these sites neglect to mention that the short refi process is controlled by banks, and there is tremendous red tape involved in the process.

Because of these factors, it appears that the real purpose of the short sale and short-refi is to get the house owner to initiate a conversation with banks, who can then steer the house owner back into paying their mortgage using scare tactics. The problem is that listening to banks, real estate attorneys and real estate agents is what got the house owner in trouble in the first place. The short sale and short refi is a “free lunch,” and looking for free lunches is a problem. Con artists have an old saying…”You can’t cheat an honest man.” All cons, and the real estate business is no exception. Cons are based upon te idea that the mark is getting a “hidden deal.”

Real estate has an overage of overconfident and self dealing individuals who profess competence in matters which they do not possess. Incompetence and self-dealing is rampant among agents, attorneys, mortgage brokers and bank representatives. Part of this mortgage crisis fall on the shoulders of the individuals who were driven by fees over any ethical standards. Agents were instrumental in getting buyers to over leverage with the promise of appreciation. Being wrong in the past, does not seem to moderate the desire to provide advice as to the future. If these people were captains of a ship, it would long since have sunk. This personality type is precisely what gives Americans such a bad reputation in Europe. Furthermore, regulation and consumer protection is minimal. (Statements related to how unethical behavior is limited because individuals can lose their license is false, because this so rarely happens in these professions.) This does not seem likely to change, so self informing must supersede discussions with individuals connected to this industry.

Image from http://media.rd.com/rd/images/rdc/mag0711/when-foreclosure-hits-01-af.jpg

Foreclosure

Foreclosure is the normal pathway for underwater houses. The effect on credit is negative, however, there is a cost and benefit to any decision. In cases where the house owner can still afford the mortgage, but has lost all equity, the house owner is getting rid of a massive liability. This has a cost, in a reduced ability to borrow. In the case where the house buyer is having problems with meeting payments, there is actually evidence that not going into foreclosure can hurt the home owners’ credit more, as they often miss payments in other areas because they have left themselves no margin for error. Foreclosure puts the owner in control and allows them to use the leverage provided to them by state law (which we discuss below) other methods put the banks in control.

As far as timing, the fact is that credit ratings will mean less over the next 2 to 3 years because there will be no or a negative benefit to borrowing to buy property. Thus the value of the “right” to indebt oneself must be properly valued. So, this is one of the best times to have a foreclosure if one ever is to have one.

An interesting take was provided by a blogger

“Blogger Mike “Mish” Shedlock, of Mish’s Global Economic Trend Analysis, argues that people shouldn’t feel bad about backing out of the contract. He writes, “If banks can make ‘business decisions’ to ignore risks, to lend money with no down payment, and fire people at the first sign of trouble without any remorse, why shouldn’t consumers be able to do the same?”

Foreclosure Services

There are a number of services which are now focusing on “helping” people with their foreclosure. One should be suspicious as many people who turn to business that promise to help them with their finances end up even worse off and scammed twice. As discussed at SmartCreditInfo.com, debt consolidation services have serious conflicts of interest.

Here is a link on how the credit consolidation industry actually works.

http://www.smartcreditinfo.com/thetruth.html

Furthermore, walking away from a home is not particularly complicated. The real estate industry in general has a high propensity to make simple transactions appear very complex, mostly for reasons of fee generation on the part of people who work in real estate. The more new terms and complexity the industry can come up with, the more dependent home buyers and sellers will be on industry specialists.

Image from http://globalmoxie.com/blog/hackdaylondon-tags.shtml

This is how a lot of things in real estate are designed, lots of unnecessary complexity, for what is in fact very simple work.

Here are a few important points that make a big difference in whether the transaction is done in the house owner’s interests.

1. The fact that the house owner still inhabits the house is leverage against the bank. House owners should only move out of the property after they have received a signed document from the bank signing their rights away for a deficiency judgment. (this prevents them from attempting to recover the house sale price differential from the home owner after they resell the house). This document should be reviewed by a real estate attorney to make sure it is legitimate and comprehensive
2. House owners have rights to stay in the house under state law and this is their main leverage and it is not controllable by the bank
3. Under a foreclosure the bank’s interests are the opposite of the property owner’s interests. Statements about “win-win” scenarios need to be thrown out the window. Therefore no bank statement or discussion should be accepted at face value. That is a house owner can no longer trust statements make by bank representatives and everything must be independently verified

Before one enters into foreclosure, one is obligated to become educated. Before even speaking to a bank or real estate professional, one should read the published material, which is easy to find.

Low Cost Guides

Nolo has a guide on foreclosure here:

http://www.bankruptcyforeclosureblog.com/2008/09/how-to-walk-away-from-your-hom.html

Nolo Guides are typically very good, and for $13.00 as a PDF download this would be a very good purchase for a person considering walking away. There are also books on Amazon (although most focus on buying foreclosed properties). However the Nolo Guide above covers the bases, and it can be bought and read immediately as it is a download.

Foreclosure Yes offers a faster way to find information on the topic. 

One feedback we have heard from those reading Nolo guides is that they can be too time consuming to read. For those looking for a faster read see http://www.foreclosureyes.com

References

http://www.npr.org/templates/story/story.php?storyId=18958049

http://youwalkaway.com/

http://blogs.moneycentral.msn.com/smartspending/archive/2008/02/19/when-is-it-ok-to-walk-away-from-your-home.aspx

http://globaleconomicanalysis.blogspot.com/

http://adage.com/garfield/post?article_id=123355