Previously I discussed the psychology of walking away in 60 Minutes Legitimizes Walking Away, Changing Social Attitudes About Debt, and a Crash Course For Bernanke.
This post will address the business of walking away. Professor Depew was talking about Business Decisions in point 3 of Monday's Five Things.
Last night, CBS' "60 Minutes" took a look at the "subprime loan crisis." You can find the full transcript here, but the following exchange between "60 Minutes" correspondent Steve Kroft and homeowner Stephanie Valdez is a highlight worth examining a bit closer; it's significant both from an economic and, more importantly, a socionomic point of view.Banks vs. Consumers
STEPHANIE VALDEZ: Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense.
STEVE KROFT: That's what you agreed to do when you bought the house.
STEPHANIE VALDEZ: Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way.
STEVE KROFT: You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?
STEPHANIE VALDEZ: You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?
The issue Kroft is alluding to here is what one might call "the morality of contractual obligation." Without saying it explicitly, Kroft implies ("That's what you agreed to do when you bought the house,") that Valdez and her husband, by walking away from the house, are engaging in some vaguely immoral behavior. It's a promise. They are breaking their promise. Left dangling for the viewer to arrive at is the conclusion that people who break promises are immoral.
But Valdez is outlining a perfectly rational economic argument for exiting the mortgage contract and is willing to accept the full penalty - credit impairment - for her actions. Still, Kroft carries the vague morality objection a bit further in the segment.
"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'"
Kroft observes to real estate agent Kevin Moran. "There was a time, I think, when people felt really bad about not paying off a debt."
"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan," Moran replies. "They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it."
"Just a business decision," Kroft says.
Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."
Look for families to become more comfortable making "business decisions" of their own in 2008.
If banks can make "business decisions" to ignore risks, to lend money with no down payment, and fire people at at the first sign of trouble without any remorse, why shouldn't consumers be able to do the same?
Take a look at previous values on homes now being auctioned. Did not lenders make a business decision to ignore insane valuations placed on those homes?
Indeed they did, and one reason was they could securitize the garbage and sell it to pension plans and foreign investors as far away as Norway (see Citibank SIVs Hit Norway Townships). Is Citigroup about to refund Norway townships for the mess it created?
Another reason banks ignored insane valuations is they thought lucrative fees would more than make up for losses on foreclosed properties. They thought wrong.
As a result, lenders became home owners and are now in hock with the auction business.
You Walk Away
There is an interesting new business that just started up January 1, 2008. The business is called You Walk Away.
I spoke with John Maddux a "senior advocate" with You Walk Away (YWA) about the business. As one might expect it is booming. For $995 one receives a half hour of legal counsel where individual strategies are mapped out and all the laws pertaining to recourse vs. non-recourse loans as well as judicial procedures are explained to the customer. YWA also files the necessary legal papers to stop mortgage companies from calling and informs you immediately of how many days you will be able to stay in the house for free. Should the lender take longer to process the documents, YWA will keep you informed of any extra time.
Is Foreclosure Right For You?
Unshackle yourself today from a losing investment and use our proven method to Walk Away.
- Are you stressed out about your mortgage payments?
- Do you have little or no equity in your home?
- Have you had trouble trying to sell your house?
- Is your home sinking under the waves of the real estate crash?
- What if you could live payment free for up to 8 months or more and walk away without owing a penny?
With the amount of money at stake, the fee seems reasonable for the services provided.
Maddux informed me that YWA is currently operating in the state of California only, but Nevada and Florida will soon be coming online. Eventually they expect to be nationwide.
Walking Away In Ohio
One in ten homes in Cleveland, Ohio had been repossessed. Deutsche Bank Trust, acting on behalf of bondholders, is the largest property owner in the city. I discussed this situation in a Beautiful Model For Fraud.
Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay.Will Deutsche Bank and the other 20 lenders attempt to walk away from this mess as a business decision? You bet. The business of walking away is going to be booming for a long time to come. This is yet another reason why Things That "Can't" Happen are about to.
City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.
"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."
Mike "Mish" Shedlock
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