More Nuts and Dolts

Economist [e·con·o·mist; noun] – An expert in the production, distribution and consumption of goods and services, but is a complete idiot when it comes to making good business decisions for homeowners awash in negative equity. Unabridged Dictionary

The following July 26, 2012 article appearing on a default servicing website,[1] caught my attention the other day: “Economists in Survey Oppose Strategic Default, Principal Forgiveness.”  Herewith, are some of the gems:

  • In Zillow’s Home Price Expectation survey for June, 71 percent of economists said they would not choose strategic default, even if they owed at least 40 percent more on their mortgage compared to the home’s current value.
  • The survey, which was conducted by Pulsenomics, included 114 responses from economists, real estate experts, and investment and market strategists.
  • Coming close to the percentage of those who said they would not strategically default, 72 percent said they opposed a principal reduction program, while 28 percent were in favor of one.
  • “These survey results suggest that economic and financial considerations are not the dominant drivers of behavior for even deeply underwater borrowers,” said found (sic) of Pulsenomics, Terry Loebs. “This underscores the challenges in valuing underwater mortgages and in determining the costs and benefits of principal forgiveness initiatives.”
  • “We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations,” said Zillow Chief Economist Stan Humphries. “Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well.”

With all respect to Mr. Loebs, let me suggest that if you want to determine the “dominant drivers of behavior for even deeply underwater borrowers,” you should ask them – not a bunch of bean counters. In an effort to breathe some life into this wrongheaded survey, let me suggest some real questions for distressed homeowners that will get to the heart of the issue:

  • How long were you making payments on your mortgage, before you decided you could no longer afford to continue doing so?
  • What prevented you from stopping earlier?
  • Did you pursue any loan modification or refinance alternatives before stopping?
  • Was it successful, and if so, why did you ultimately decide to stop making the payments?
  • While making payments toward reducing the negative equity, have you been able to set aside any money for retirement, emergencies, children’s schooling, etc.?
  • Besides negative equity, was there any other significant issue in your life that caused you to make the decision to stop payments, such as, divorce, job change, unemployment, death of spouse, etc.?
  • Prior to the time you stopped making payments, did your lender tell you that doing so was the only way they could offer some other pre-foreclosure solution?

While not intended to be a complete set of artfully skilled survey questions, my point is that most people who stop making their mortgage payments do not do so lightly.  They are totally unaccustomed to defaulting on debt.  However, five or more years of this economic downturn is a significant amount of time to tread water, making no headway in one’s life.  At some point, one comes to the realization that continuing to make payments on a mortgage that will never result in meaningful equity, is simply irresponsible.  It is irresponsible to one’s self, their spouse, their children, and their retirement hopes.


MBA – “More Boneheaded Antics.” On the lighter side, in addition to [some] economists, let’s look at another bunch of Nuts and Dolts: The Mortgage Bankers Association, or “MBA.” In 2007, the leading industry group decided that since they’d been so successful in foisting off onto the American public subprime loans, no-doc loans, stated income loans, liar loans, negatively amortizing loans, and every other Easy Money gimmick they could dream up, they needed a monument to their own success – they needed a trophy building!  They had become far too successful and important to be [gasp] “mere renters.”

The MBA’s website touts their research and forecasting skills as follows:

“The highly regarded research and economics group provides the most current and comprehensive data and benchmarking tools that make a difference in short- and long-term strategic planning. They cover all real estate business areas – economic forecasting, residential, commercial and multifamily. *** MBA leads the industry with its dynamic research and economic tools. We serve as a one-stop location for gathering timely and accurate information for the real estate finance industry.”

Wow!  Pretty heady stuff!  With all the bandwidth of this austere group, they couldn’t possibly go wrong in deciding to buy and finish construction on a $79 million 10-story steel and glass edifice near the White House. Not only would they no longer have to be [gasp] “mere renters,” they would now enter the rarified atmosphere of the elite – they would become Landlords.  While their building would have more than 170,000 square feet of space, they would occupy something over a third, and rent out the rest to the Little People for retail and office use.  And undoubtedly relying on their crack research and economics group’s “short- and long-term strategic planning” skills, they inked the deal in January, 2007, with construction to be completed in 2008.  In the lofty words of then-President, Jonathon Kempner’s [who resigned in 2008] press release“We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association.”

Now the comeuppance.  In February, 2010, after discovering that their business plan had fallen over a cliff.  And so had real estate values.  They were officially underwater.  So, what did they do?  Did they decide to suck it up, make the best of a bad situation?  Keep making payment in order to send the right message?  No!  They stopped paying their mortgage; they sold their showplace.  It was [gasp] a Short Sale – something only the proletariat does when then find that they’ve bitten off more than they can chew.  How could this be?  According to the Wall Street Journal:

“On Friday, CoStar Group Inc., a provider of commercial real estate data, said it had agreed to buy the MBA’s 10-story headquarters building in Washington, D.C., for $41.3 million. That is well below the $79 million the trade group agreed to pay for the glass-walled building in 2007, near the top of the property bubble, while it was still under construction. The price also falls short of the $75 million of financing that the MBA got from a group of banks led by PNC Financial Services Group Inc.”

I wonder if the MBA paid PNC Financial Services Group the deficiency, which was something north of $33 million?  According to the Journal article, John Courson, the association’s new chief executive officer, “declined in an interview Saturday to say whether the MBA would pay off the full loan amount. ‘We’re not going to discuss the financing,’ he said.”

Hmmm. Courson, Courson… That name sounds familiar.  I wonder if he is the same John Courson who famously said in a 2009 interview that he believed under-water mortgage borrowers should not “strategically default” but should keep paying their loans even if it was not in their economic interest to do so. ‘What about the message they will send to their family and their kids and their friends?’ he asked.

Yup! The one and only.  Wonder what the MBA is saying today about walking away from a mortgage that makes no economic sense?[2] On March 15, 2011, prophetically, the Ides of March, the MBA announced that Mr. Courson was thrown under a DC transit bus stepping down.

[1] This blog post is not intended to malign the website, which is a very useful source of reliable information about what is going on in the industry.

[2] For a must-see, watch Jon Stewart’s comedy piece on the MBA’s classic screw-up here.