New - "Extreme Orange Mozillo Jerky!"

Who left the Orange in the microwave?

The Danger Must Be Growing
‘cause the Orange keeps on glowing
Mozilow shows no sign of slowing
In his robbing and his gloating…

This absolutely frightening picture accompanies the LA Times article, “House committee questions high compensation for CEOs involved in mortgage crisis” (AP – March07, 2008). If you don’t think it’s right to walk away from your mortgage, this might piss you off enough to change your mind:

"It seems that CEOs hit the lottery when their companies collapse," House Oversight and Government Reform Committee Chairman Henry Waxman, D-Calif., said at the opening of the hearing. "Any reasonable relation between their compensation and the interests of their shareholders appears to have broken down."

Appearing before the panel were Angelo Mozilo of Countrywide Financial Corp., the nation's largest mortgage lender; Stanley O'Neal, formerly of Merrill Lynch & Co.; and Charles Prince, formerly of Citigroup Inc. All three companies have been major losers in the mortgage crisis.

Waxman noted that Mozilo received more than $120 million in compensation and sales of Countrywide stock last year while that company recorded losses of $1.6 billion. Merrill Lynch lost $10 billion in 2007, but O'Neal got a $161 million retirement package.

…

Republicans on the committee questioned the need for the hearing……

This takes us back to why these things (exploding bubbles destroying companies) happen. Shouldn’t company insiders know that a company is taking way too many stupid risks? This is what they do for a living after all. The answer is OF COURSE THEY KNOW. They know that when the company blows up, investors will lose a fortune. They also know that since the company is making tons of money off of the super risky gambles they’re taking, they will get paid a fortune until all hell breaks loose. So they don’t care. This is called The Agency Problem (which states that the interests of management might not be the same as those of the investors). And when all hell breaks loose, their punishment is to have a mountain of money dropped on them. Poor bastards.

There is no corporate governance or oversight in the US. Stockholders have no say because of the way management chooses the board which chooses the compensation committee which pays the CEO who sits on other boards which choose the compensation committees for other CEOs who sit on the first board,…ad nauseum. But since nobody cares, and these phony hearing will be forgotten by Monday, that is how it will always be. Enjoy.

For the one or two who do care, scream at you congressmen via email or other means. Tell these weasels what you think. The only thing they care about is their jobs, and if they think somebody is watching, they might ape doing the right thing for long enough to accidentaly improve something.

Write your Representative:

https://forms.house.gov/wyr/welcome.shtml

Write your Senator:

http://senate.gov/general/contact_information/senators_cfm.cfm

Tell them what you think of them. Be colorful. Send me your letters and I'll post as many as I can.

Short The Banks

The Let It Sink way is going to become The Way. It doesn’t take a lot of examination or thought to realize that walking away from an upside down house is going to become the norm. After decades of having pro-business economics and Darwinian capitalism shoved down their throats, Americans have finally figured out that it can finally benefit them somehow. In this case, if they look at their mortgages in the same way that the banks do, which is as amoral business agreements, then rather than beating themselves up about obligations and failure, they will do a little bit of math and dump the houses right in the bank’s lap. This is absolutely going to destroy many banks in the US and around the world. They have always depended on people acting out of moral obligation, while the banks themselves acted out of pure self interest. Now that the playing field is being equalized, many banks will die. Good riddance.

Today’s New York Times has an entertaining article about how the ridiculous loans that banks originated to boost their profits in the short term have made walking away all the more attractive to home owners.

“Facing Default, Some Walk Out on New Homes,” (NYTimes - John Leland – Feb 29, 2008)

The Morals of Walking Away from Your Mortgage and House

"You signed a contract Mr. Potter!"

To summarize all of the arguments I’m about to make, let me say THERE ARE NO MORAL ISSUES IN WALKING AWAY FROM YOUR MORTGAGE AND HOME.

But Mr. Blogger, these people made a promise. Doesn’t that count for anything anymore?

Excellent question. Business is the dominant life form in America. Business lays off 30 year employees because it is legal and economically good for the company. Business pollutes because it is legal and economically good for the company. Business lobbies congress for fewer regulations and less oversight because it is legal and economically good for the company. Business gives you a 0% credit card, and then raises the rate to 30% once you have a huge balance because it is legal and economically good for the company. Business had the US bankruptcy laws changed to make it harder for people to walk away from their credit card debt because it is legal and economically good for the company. In other words Business has no morals, and Business will do absolutely anything to anyone as long as it is legal and economically good for the company.

Well a funny thing happened recently. The housing market self destructed. And now tens of millions of people owe the banks more than their houses are worth, sometimes 100s of thousands of dollars more. The lenders and the borrowers agreed to the terms of their mortgage contracts. These contracts can come in a hundred different flavors, but basically they all say that the borrower has the duty to pay his mortgage, or he has to give his house to the bank. That is what the contracts say. They do not say that the borrower will go to Hell if he does not pay. They do not say that the borrower will go to jail. They say that the penalty for not paying the mortgage is the house. And therefore, if is legal and economically good for YOU, feel free to walk away from your house and let the bank have it.

I am not saying you should try to live in the house without making payments until you are evicted. That’s not nice. But if you and your lawyer (you need a lawyer to look at all of your loan documents) agree that it is in your best interest to walk away, then do it. And don’t feel bad. The bank doesn’t feel bad when it hits you with a giant bounced check fee, or with a credit card late fee. And it doesn’t feel bad about evicting people who can’t pay their mortgages. Why doesn’t it feel bad? Because what it is doing is legal according to the contracts that everybody signed. And so is dumping your sinking house back on that very same bank.

The Votes Are In

Check out L.A. Land's reader opinion poll: Is walking away irresponsible or wise? The question is whether it is OK to walk away from a loan if you are upside-down (you owe more on your mortgage than your home is worth). About 60% of readers consider it to be OK, versus 40% who think it is not. Here are some of the comments:

jb said:

I agree with Keith and others - the contract is being fulfilled by walking (I will either pay the mortgage OR the bank will take the house).

Our government is pulling out all stops, trashing the dollar, simply to save banks. Let the banks fail, they used the full power of highly paid risk management professionals who then bought these mortgages like crack addicts. Someone please start a new bank called Post Housing Bubble Bank (PHBB) - I will send you all of my cd's even for a lower rate than others. You can replace WaMu and the like when they fail - as they should.

Dr. JwB comments:

I've been pondering and not commenting on this issue because I'm trying to decide if what I would do (walk away) makes me a terrible person.

Now the questions are: Given that the transaction cannot be undone, what does the least damage to this family? Does avoiding that damage justify the damage this does to other people (and what is that damage)?

The bank gets the house, which was agreed by both parties as fair value for the loan. The market gets a foreclosure sale at what would in theory be a more reasonable price (sooner rather than later). The family gets a ding in their credit, and maybe loses a little sleep because of guilt.

So what am I missing?

and goodfaith points out:

Strikes me that for homeowners who are underwater, this is a classic "efficient breach" of a contract... very basic contract law. It happens sometimes that it makes more sense to not follow contractual obligations because economic circumstances have changed. This is why in contract law there aren't punitive damages even for intentional breach of contract. So walking away, and incurring the known consequences of breach--foreclosure and reduced credit rating--is the rational way to do things, and I don't have a problem with it.

I think people do have a problem with people who "buy" homes with no intention of ever making a payment, and have basically entered into the mortgage contract in bad faith, expecting to game the system by taking advantage of mortgage law by living in a place for 12 months before it gets foreclosed. Should there be some extra liability for that kind of behavior? Maybe. But previous commenters who said that banks entered into these extremely high LTV deals knowingly is correct--they were sophisticated enough to know better.

The votes are in. If you're willing to take your lumps, i.e. you give back your house and get a very bad credit rating for a while, then do what you have to within the bounds of the law and the contract. Take care of yourself. The banks and hedge funds are certainly looking after themselves.