All is Well… (A Tin Foil Hat Production)

Quick check on the current status:

• The CBO came out with a non-partisan report showing that Health Care Reform, as it stands now, will not only fail in its main purpose of lowering health care costs – but will actually raise costs by over $1 trillion! Senators from both sides of the aisle are urging a slower pace to take a better look at the tremendous costs. In related news, President Obama is urging Congress to get health care legislation out next month!

• The Chairman of the Joint Chiefs of Staff, the Secretary of the Navy, the Secretary of the Air Force, the current and former Defense Secretaries as well as the President of the United States have all agreed there is no need for more F22 fighter planes beyond those currently contracted. Senators from states where the F22 is built, however, have taken $369 million from an environmental clean-up fund and tacked it onto a defense bill in order to keep building military planes nobody wants during a recession no one can afford, thus creating pork no one will eat. In related news, the budget deficit reaches a record $1 trillion and a little noticed study established that Congress can’t even spell the word “irony”.

• Goldman-Sachs reports RECORD earnings during the worst recession this nation has seen since the Great Depression. Shortly after repaying $10 billion in tax-payer bailouts, Goldman trounced analysts’ estimates and continues to reap billions in profits trading in derivative markets. (Actually, they trade in unregulated tertiary derivatives – that’s a derivative of a derivative of a derivative of something that actually exists, for those of you keeping score at home). In the mean time, CIT – a company specializing in loans to small businesses and entrepreneurs – apparently serves no national interest to the Fed and has been told: “Enough is enough. No more bailouts” (No soup for you!) and is desperately searching for funding while on life support. In related news, keys members of the Treasury, the Fed, the administration’s key economic advisers and the principles of Goldman-Sachs have all agreed on a new secret handshake and expect their membership-only lapel pins to arrive shortly.

After reading these items you might find yourself a little confused… apprehensive even. You might wonder why the press does not present these bits of news together, in a way that reflects the absolute absurdity of the body politic today. You might even find yourself becoming a bit fearful: wondering how we got to such a criminally illogical place (through the looking glass, as it were). But not to worry. Congress is going to help us understand what happened to the economy and how we got here. They’ve announced a commission, chaired by a Democratic: the former Treasurer of California and a Republican: a former representative from California, to “examine the causes of the financial crisis” our nation currently faces. It seems their related contributions to bankrupting the 8th largest economy in the world (the once proud State of California) were of little concern. In related news, it has been announced that registered sex offenders will be heading up a commission to explore marital fidelity and Governors.

Read individually, many of these news items are innocuous. But taken as a whole, it becomes less and less difficult to suspect a conspiracy permeates politics. Maybe this is all coincidence. Maybe a Tin Foil Hat Production can be made to look quite stylish:

But in the end, a proper response to our government was perfected over 30 years ago by John Landis in the movie Animal House. He foresaw those in power telling us “All is Well” and – prophetically – he foresaw the results. Who am I to improve on perfection:

Filed under: "TIN FOIL HAT" Productions, Goldman Sachs, Health Care

On Mortgages and Moral Compunction

What would it take for you to walk away from your mortgage?

Kenneth Harney, in his column Nation’s Housing, reports on an interesting study recently done by the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.  This study took a look at homeowner’s attitudes toward mortgage defaults, specifically what’s come to be called “strategic” walkaways or decisions to bail on a mortgage due to purely economic reasons.  The study found that “26% of the record number of home mortgage defaults across the country” were strategic – the homeowner had the ability to pay the mortgage but chose not to because the debt was greater than the asset.  In other words, one in four of the current foreclosures is not due to hardship, but rather a lack of compunction.

My partner and mortgage rate expert, Brian Brady, has for some time now railed against the disappearance of moral compunction with regard to mortgages.  His contention, as I understand it, is that moral compunction was  priced into the model by lenders.  There has historically been a stigma attached to not paying one’s debts, especially one’s home mortgage debt.  This may or may not be true; I am no expert on the history of mortgage defaults in our nation, but it is certainly compelling.  If accurate, the obvious question then becomes: to what degree did moral compunction affect rates and if it is indeed gone, how much higher will rates go?

There is no real mystery to how mortgage rates are priced.  Mathematicians create models of mortgage “behavior” based on the 4 C’s: Capacity, Capital, Collateral and Credit.  Of these four, Credit is really what we’re talking about here.  Your income, your assets and the property’s value are theoretically objective but your credit… well, it’s not really credit that’s being measured here is it?  It’s your Character; your likelihood to honor your debts, although lenders don’t like to say that because it has a snooty, superiority quality.  Make no mistake though, character is most definitely being evaluated during the loan process.   So the question seems to be: How do these mathematicians change the models to reflect a decrease (or abandonment) of moral compunction?

That sounds like a difficult question to answer but I think we can make it a little easier.  If we read further into the study by co-authors Paola Sapienza, Luigi Zingales and Luigi Guiso we realize there is in fact a sliding scale of moral compunction practiced by American homeowners.  (That last statement should be read with tongue in cheek; sliding scale and moral compunction are oxymoronic… you cannot be a little bit pregnant.)  When asked, “81% of household heads said they believe intentional defaults on mortgages to be ‘morally wrong’.”  Yet that number dwindles down as negative equity grows; by the time we get to negative equity of $200,000 fully one in three of these same homeowners would strategically default.  Turns out the act they found “morally wrong” was actually just mis-priced.  In other words, a great many homeowners find morality to be a good thing… taken in moderation.

Besides negative equity, the authors discovered a number of other factors that might influence a homeowner’s decision to strategically default, including age (younger were less likely to have a moral issue) and political affiliation (self-described political independents were also less likely to have a moral issue).  But the other significant factor was familiarity.  Not only did having a greater number of foreclosures within the local community increase the likelihood of a strategic foreclosure, but “owners who (knew) someone who defaulted strategically (were) 82% more likely to default themselves, compared with owners who (did) not know anyone in that situation.”  As the old saying goes: “Familiarity breeds contempt.”

Earlier I wondered how mathematicians could change mortgage pricing models to reflect the empirical observation that making one’s mortgage payment has lost moral compunction.  Based on this study, there is no moral component and probably never was.  The first step then, is to remove the variable of morality altogether.  The model should instead add two more C’s: Community and Contact.

• Community would account for the percentage of foreclosures within a borrower’s local area, probably using the same distance radius now used for comps in appraisals.  Deriving a statistically significant factor for the likelihood of foreclosure based on the percentage of foreclosures within a Community should not be too difficult
• Contact would ascertain whether or not the borrower is acquainted with someone who has walked away from their mortgage.  Again, if a borrower is 82% more likely to walk away from their mortgage based on knowing someone else who has done so, that’s a pretty important variable.

Does that last one sound a little intrusive to you?  We ask similar questions of potential jurors in order to seat an impartial jury.  Is accurately pricing mortgages for the housing industry somehow above such questions?  Have you looked at a mortgage application lately?  It is easily the most intrusive document ever created for general public use.  Have a job?  We want to talk to your employer.  Got divorced?  We want to look at the entire decree.  Own your own business?  You better just send me a copy of every schedule of your tax returns for the past two years.  There is a list of over a dozen declarations you must attest to regarding law suits, bad debts, citizenship and so on.  Another question regarding your familiarity with strategic foreclosures would hardly encumber the process.

Like it or not, this issue has to be resolved.  Without a substantive discussion and response to strategic foreclosures, mortgage pricing models will have no choice but to account for foreclosures – both hardship and strategic – with across the board increases in rates.  That is the easiest hedge against increased risk.  But such indiscriminate rate hikes will only serve to diminish the housing industry and punish the vast majority who have acted responsibly.  Does that sound moral to you?

Filed under: LENDERS, LIFE THAT POPs, POLITICAL & ECONOMIC FOLLY, SELLERS, foreclosures, Moral Compunction

Finding Your Perfection

Earlier this week I was watching some old reruns of M*A*S*H.  What a well done series that was; funnier the first few years than it was later, in my opinion, because they got more political.  But the later years did give us a terrific character: Major Charles Emerson Winchester III.  Do you remember this guy?  What a pompous ass he was.  Speaking of pompous asses, why am I spending your valuable time reminiscing about a sitcom?  Good question, but I’ve got an even better answer.

I’m a big believer in being present.  If you’ve read any of my stuff or heard me speak, then you already know this.  As a matter of fact, if you’re anything like the agents I meet out here, you might even be tired of hearing it.  You might find the whole topic a little touchy-feely.  “There goes Sean again.  He might be a debonair, handsome, witty, intelligent, entertaining, man-of-action; but I’m tired of the Zen-happiness thing.  (I took a little license imagining what your thought about me might be;  you might not actually find me debonair…)  So today I’m going to sneak a little happiness in on you using pop culture: M*A*S*H to be specific.

Back to Major Charles Emerson Winchester III; as much of a buffoon as he was, the writers also gave him some of the most interesting lines.  I’m thinking of two in particular.  During one of his character’s early episodes, by way of explaining himself to the other doctors, he says, “I do one thing at a time, I do it very well, then I move on.”  That’s a great line isn’t it?  “I do one thing at a time…” sounds like someone who is present.  Someone who is focused on what he’s doing right then and there.  So far, so good.  “I do it very well…”  Hmmm, a little ego coming in here;  not so much about being present as it is being recognized by others for his accomplishments.  “Then I move on.”  OK, so now we see that he’s not really present at all.  He’s thinking about the next thing, but before he goes to it he expects your accolades for whatever he has just finished.  I’ll come back to this quote in a moment.

The other line I remember comes from an episode in which a soldier arrives badly hurt and Dr. Winchester, using those superior skills he constantly talks about, saves the man’s leg.  The Doc is very proud of this:  “Thanks to me,” he says, “when this boy goes home he’ll walk off the plane.”  You can imagine the good Doctor’s surprise then, when he lets  the soldier know just how great a job he did on the leg and the patient instead asks why his hand is in a sling.  Winchester explains that there was some minor trauma and there will be some permanent loss of dexterity… but the leg!  “I’ve saved your leg!”  “I don’t care about my leg!” the young man cries out.   “I’m a concert pianist!  My hands are my world.”  Dr. Winchester, a discerning patron of the arts himself, is crushed by this news and decides to help the soldier adjust.

To make a short story very long:  Winchester ends up showing the erstwhile pianist some pieces written specifically for the one-handed musician.  “What are you suggesting?” he asks,  “that I spend the rest of life touring and putting on concerts as some type of freak?”  Winchester tries to explain to the soldier that his gift is not located in his hands; it is located in his heart… and his soul.  Then he goes on to say:  “I’m a surgeon.  With these hands I can make a scalpel sing.  But all of my life, what I really wanted to be, was a concert pianist.  I took all the lessons.  I put in all the hours.”  (Here’s the big quote I promised two paragraphs ago)  “I can play the notes, but I cannot make music.”  Think about that:  I can play the notes, but I cannot make music.  Let’s go back for a moment to his first quote: “I do one thing at a time.  I do it very well.  Then I move on.”  Sounds an awful lot like someone practicing the notes, doesn’t it?  But to make music, as Dr. Winchester learned much too late in life, requires more than playing notes.  It takes a certain letting go of ego and analysis and judgment.  It comes from the perfection found in being completely and absolutely:  present.

This applies to a lot more than playing the piano.  What about when you’re talking to a client or doing that report or exercising in the morning?  How about when you spend time with your family, your children?  Every single day you can experience the pleasure – the joy, really – of living in perfection.  Not the perfection of flawlessly playing the notes (that’s not even physically possible), but rather the perfection of making your own music.  Be present today, be perfect… and enjoy the music.

Filed under: LIFE THAT POPs, M*A*S*H, Success