Thursday, May 13, 2010

Freddie Mac Executive Lectures Underwater Homeowners About Morality. Really.

Is your mortgage underwater? Are you wondering if you should stop throwing money away in a hopeless cause? Is your mortgage putting you in dire financial straits? Well, don't worry-one of the jackasses who just destroyed our economy is here to lecture you about morality and social responsibility.

Here's a letter that Freddie Mac Executive Vice-President Don Bisenius recently posted on the Freddie Mac web site. It is an insulting and pathetic attempt to convince people with underwater mortgages to keep paying them, even when it's not in their best interests. I felt as though he was talking to me, so I figured I'd respond.

(Freddie Mac, of course, is the secondary mortgage buyer that was rescued by taxpayers after it essentially failed in 2008. It has already taken $52 billion, and the cash drain on taxpayers seems to have no end in sight.)

A Perspective on Strategic Defaults 
Don Bisenius
May 3, 2010 – As the mortgage industry works through a large volume of loan delinquencies, a new and growing concern has emerged: strategic defaults. In other words, borrowers who have the financial means to make monthly mortgage payments, but choose not to do so and, instead, purposely default on their loan.

Yes, this is a huge problem. Foreclosures, whether intentional or not, are often personally traumatic, and not only on affect the borrower, but society in general as they have the effect of lowering home prices for everyone around as well.

Now, Mr. Bisenius, since you are a longtime executive at Freddie Mac, which paid its executives millions to buy shitty mortgages from anyone that would sell them, you are among the people most responsible for this tragic wave of foreclosures which has crushed the housing market and destroyed the finances of millions of households. You must be planning to write about how bad this situation is, and how sorry you are for your role in it. No doubt this will be accompanied by a letter of resignation, and an offer to return your ill-gotten salary to the taxpayers for helping to preside over such an utter failure. Please continue.
Strategic defaults come from a variety of homebuyers: from real estate investors who sought to profit from rising house prices during the housing boom, to individual families who simply sought shelter. But these homebuyers have certain things in common: their properties reside in regions where house prices have declined considerably, and the amount still owed on the mortgage is far greater than the present value of the house.
Yes, it's terrible. Get on to the resignation, please.
Some in this situation believe they will be forever chained to a large debt owed when they sell the house. And so, even though they have the ability to keep paying the monthly bill, they have decided to walk away from the property without paying off the loan. An intentional foreclosure, if you will.
Makes perfect sense to me. I mean really, Don, did you raise a stink when your buddies at Morgan Stanley walked away from a $2.5 billion loan and handed the keys to its office buildings back to its lender, even though they could have kept paying? I didn't think so.
In essence, these borrowers are weighing the costs and benefits of a strategic default, and coming to a conclusion. 
And in many cases, that very obvious conclusion is that it would be insane to continue to pay their mortgages.
Now, the costs can be considerable. Once a mortgage goes into default, a borrower's credit rating is severely tarnished, making it more expensive, if not impossible, to qualify for any new form of credit. 
Of course, if they continue to pay said mortgage, they will be so broke that they will also find it impossible to qualify for any new form of credit.
In certain states, a borrower's personal assets can be subject to a deficiency judgment. 
Well, that's what Chapter 7 is for. And in most states, that's not the case anyway. And so what? Do you think people don't take this into consideration when they make a rational decision to walk away?
And anything that involves a credit review, such as obtaining auto insurance or getting a new job, can be complicated. These detriments can be in effect for several years. 
That sounds like a threat. 
The benefit: the borrower avoids paying for the lost equity in the house.
So let's recap your cost/benefit analysis, shall we, Don?

The costs of defaulting on your mortgage:

  1.  Your credit score will go down, which will make it harder for you to get new loans that you obviously can't afford in the first place, and which you won't get anyway because you're broke and no one is lending.
  2.  In certain states, you may have to file Chapter 7 in order to protect your other assets, which will also affect your credit score as already discussed.
  3.  Your credit score may affect your ability to get certain jobs- jobs that aren't available anymore anyway ever since institutions like Freddie Mac destroyed the economy.
  4.  It might be a hassle to get car insurance.

These costs are real, but they aren't catastrophic, and for many people will hardly affect them at all.

The benefits:

You could immediately get rid of tens of thousands of dollars of debt. This money could be used for sending your kids to college, or going back to school yourself, or buying groceries or health insurance. 

So is it worth it? I don't know, because every situation is different. What I do know is that you, Don Bisenius, have absolutely no fucking clue either. So sit down, and shut the hell up.

And you seem to realize that too, don't you, Don? Because that's not really your point. And it's also becoming pretty obvious that you have no intention of resigning or refunding your salary to taxpayers.

 I'm deeply disappointed.
Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn't make it good social policy. 
What the fuck, Don? Did you seriously just start talking about good social policy? When did it become the responsibility of borrowers to worry about social policy? Borrowers have enough on their hands trying to keep your bankster buddies from raping them. Where in the hell do you get off talking about social responsibility? Where were you in the last 10 years-hell, the last 30 years- when the entire financial industry took a giant crap on social responsibility, and destroyed the American economy so that executives like yourself could get obscenely rich at the expense of average Americans, who have lost their jobs and seen their life savings go up in smoke as a result of the free-market bullshit spouted by people exactly like you?
That's because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower's calculations.
Yeah, externalities. I don't suppose anyone on Wall Street factored in the externalities of destroying the financial system either, did they? Did they worry about the millions of jobs that would be lost? Did they worry about the trillions of taxpayer dollars that would get transferred from the poor and middle class to executives like yourself? Did anyone at Freddie Mac give two shits about the fact that the banks they dealt with were pushing fraudulent loans on people who didn't know any better or who couldn't afford them, and paying themselves billions in bonuses as fast as they could, knowing that taxpayers would bail them out when the shit inevitably hit the fan? 

You've  been at Freddie Mac since 1992, Don. What were you doing-napping? Maybe you should have woken the hell up and delivered this speech about social responsibility and externalities to your colleagues and golfing buddies at Goldman and Citigroup and the rest. Maybe you should give it right now to your boss, one Ed Haldeman, who will make $6 million this year presiding over a company that has attached itself to the American economy like a bloodsucking leech.
Let's start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected. Indeed, , the analytic firm, recently said that more strategic defaults could tip a fragile housing market back into one of further price declines. Even more families harmed.
Yeah, and that's all the fault of the borrower. The borrower who was told by everyone in the financial industry that prices would rise forever. The borrower who bought a home cautiously and conservatively, only to watch the banks and Freddie Mac team up to flood the market they live in with thousands of homes which were destined for foreclosure the minute the deal was done. 

Don, if you were the CEO of a company that intentionally spread a fatal and infectious disease among the population, you would blame the contagion on people who didn't just shoot themselves as soon as they found out they were infected in order to keep themselves from passing it on. And then lecture them in a letter not unlike this one.
But that's not all. Should strategic defaults become more common, mortgage guarantors and investors, including Freddie Mac, would need to factor this risk more prominently into their credit policies and prices. 
Now that is a threat.
The likely impact on future homebuyers: the cost of a mortgage will go up and credit terms will be less flexible. Thus, the impact of strategic defaulters on still more families might be more expensive mortgages and loans that are more difficult to obtain. The strategic defaulter does not usually consider these costs.
You think? 

You're telling us we have a moral responsibility to keep throwing our money away on a hopeless and disastrous loan so…other people can get these loans?
Do borrowers considering strategic defaults have other options? They do. For those who have not suffered any disruption in income and have a longer time horizon, simply continuing to pay the bills might be best.
Sure, it might be best for them. Or it might not.  And if it is, I'm sure they'll do it.
Over time, recovering house prices and declining mortgage balances likely will close some, if not all, of the equity gap. 
And you know this….how? Because you have some super power that lets you predict where housing prices will go? Why didn't you use that five years ago? It might have helped save the global economy.
The reality is that you have absolutely no idea where housing prices will be in one year, much less 20. But for a lot of people, everything will have to go just right to break even in 20 years. And if it doesn't, their kids won't be going to college, or they'll find themselves greeting people at Wal-Mart well past retirement age so they can buy groceries and Geritol. 

But don't worry about that; listen to Don Bisenius, an executive at a corporation that was so good at predicting the future, they've been taken over by the government and have already had to beg taxpayers for $52 billion, even before their recent $10.6 payoff.
According to the Federal Reserve, while the housing bust wiped out $8 trillion in home equity, $1 trillion came back in 2009. The point here: time might be your best ally.
Guess what? The $1 trillion that already came back was the stuff that shouldn't have been devalued. That other $7 trillion was the bubble; and it's gone and will take years to come back at historical housing appreciation rates. There is a reason people can't pay back all these loans. The homes just aren't worth that much.
Another alternative: if Freddie Mac owns the loan, a family might be able to refinance up to 125 percent of the current property value. In other words, if a family's home equity has been completely wiped out and the mortgage balance is as much as 25 percent more than the home is worth, we can help.
Well, if you're so worried about the social effect, then get out there and start modifying the principal on these loans. But Freddie Mac isn't doing that. They have great programs for the few people that can actually qualify for them. But the Making Home Affordable Program has been a colossal failure, because no one wants to do the only thing that will help, which is to reduce the principal. The banks won't do that because it would force them to start telling the truth about how much these mortgages are really worth, and that would put a damper on the bonus parties. How's that for social responsibility?
What about families who need to move? We can help here, too. Freddie Mac has an array of solutions that help certain borrowers avoid the cost and stigma of foreclosure, such as short sales and deeds in lieu of foreclosure. And we continue to work on additional solutions that address would-be strategic defaulters while minimizing the impact on neighbors.
"An array of solutions that help certain borrowers…" Just not the ones who really need the help.

"Avoid the…stigma of foreclosure." You want to help people avoid the stigma? Stop writing asinine letters accusing them of ruining society. Like this one.
In the end, borrowers considering a strategic default should recognize the damaging impact their actions can have on others. While a personal financial strategy might argue for a strategic default, entire communities and future homebuyers can be harmed as a result. And that is why our broader social and policy interests will be best served by discouraging strategic defaults.
So borrowers should sacrifice their own financial interests in order to make sure that you continue to get paid, while you and the people like yourself who are responsible for the mess collect billions of dollars of taxpayer funded bonuses and lecture struggling families about wasting money on college funds and groceries when they could be paying their mortgages.

Are there some borrowers who are at fault? Sure, but most people just didn't know any better. And how could they? They aren't financial experts like you are, Don. They're teachers and waitresses and mechanics and soldiers who didn't know any better than to listen when you and your friends in the business told them to buy now or they'd miss out on the chance to buy a home forever. And even the worst of the speculators and house flippers weren't doing anything worse than your banking buddies still are today. The only difference is that they lost their investment, while Freddie Mac got bailed out and you and your friends got to keep your jobs and fancy cars.


There are two important points that I want to make. 

First, there is no moral requirement to pay off a mortgage. It makes my blood boil when I hear bankers lecturing people about living up to their responsibility, especially when those same bankers wouldn't think twice about defaulting on commercial loans they no longer view as profitable. It is not a moral issue.

What do you think happens when you get a mortgage? Do you think the bank is relying on your good word that you will pay them back? If they are, then I guess you have a moral responsibility to pay keep paying. But that's not how it works. You don't promise to pay them back. You promise to either a) pay them back or else b) let them take the house. You have the option. If it makes more sense to pay it, then pay it. If it makes more sense to walk away, then walk away. That's it. 

The second point is that there is no such thing as a strategic default. It's just a default. No one ever makes every payment that they possibly could. Have you ever heard of a borrower who stopping eating and sold all of his possessions in order to make payments as long as he possibly could?

Of course not. People make payments until it no longer makes sense for them to make them anymore. For some people, that moment comes when they have to choose between food and the mortgage. For others, it's the car. For the more prescient among us, it's the ones who make the decision right around the time they realize the choice is between paying the mortgage or giving up what little hope for future financial freedom they still have.

But I guess you won't get the coveted Don Bisenius Social Responsibility Medal Of Honor unless you starve the family and live without electricity.

Thanks for the morality lesson, jackass.

1 comment:

  1. Great post! Its nice to read something written by someone who understands this whole disaster and doesnt buy into the bankers b.s. Im 200k underwater on a 350k house myself (no second taken out either), and US Bank tells me I need to wait unil "fall" until the new "hamp enhancments" go into effect to see if there will be any principal reductions. My guess is there wont be. If not then were walking away. Also how come wall st can go to congress on the weekend and get a bailout done, but the tax payers have to wait 2 year, then in march get a hint of principal redutions from obama, but still have to wait until the fall for any details!? Total bullshit! Also for your strategic default examples dont forget out the Mortgage Bankers Assosication, who just recently decided that paying on thier, new, underwater building wouldnt be "financialy prudent"..Ironic!