April 17, 2012
By George Ure and Gaye Levy
Time to take on one of the ugliest questions an American worker can ask: “Do I have to work until death?”
Sadly, for an increasing number of Americans, the idea of retirement at age 62 to a life rich with adventures and the once-held American dream of “Golden Years” has turned into cardboard, or worse.
We’ve identified a large number of factors which are in play and a discussion of each helps to put “Working to Death” into perspective.
Mass consumption Home Improvement Loans and HELOCs.
The soaring divorce rates of recent years.
Inter-government “investment” of Social Security.
Long-term inflation by the Federal Reserve.
Soaring healthcare costs.
Serial market declines.
Pension fund bankruptcies and shortages.
Let’s address these in turn, starting with home improvement loans and HELOCs – the once darlings of the financial “services” industry standing for Home Equity Lines of Credit.
At their peak, during the go-go years of the 1990s and into beginning of the end of the housing bubble in 2007, the number of people “borrowing home equity” for current expenses, such as education, a new SUV, or to meet unexpected cash flow demands, skyrocketed.
A Huge Problem with the Payback
The problem was that most people never really paid the money back, so when the housing collapse began in earnest in 2008 (and arguably by the Case Shiller/S&P Housing Index report, it continues even now with housing prices stuck at 2003 levels) hundreds of thousands faced bankruptcy.
If you thought the housing collapse was done, wake up and think again. The US Attorney Legal Services web site reports an estimated 4-million delinquent mortgages are heading into foreclosure this year.
Another factor not often addressed is the impact of a raging national divorce rate in the period. Depending on which source you want to consider, the divorce rate in the US jumped by between 25 and 50% between the 1950s and 1970s through 1980s levels.
Thanks to court-sanctioned divorce settlements, many times a woman (especially in the 1980s) would have to refinance a family home in order to “cash out” the soon-to-be ex’s equity position.
This means some increased pressure in home lending at the time, but in the follow-on period which we’re in now, plenty of single women from their late 50s to low 70s find that because of financial emergencies, low wages, and the pressures of parenting, they just haven’t been able to get the home paid off.
With Social Security not keeping up with real inflation, this means thousands of aging women will have to stay in the workforce, or face the specter of losing their homes and having to move into either a very small condo, or worse: lose a lifetime of working for a paid-off home entirely by going into the rental market.
January 17, 2012
By Matt Taibbi
If there was ever a news story that crystalized the moral dementia of modern Wall Street in one little vignette, this is it.
Newspapers in Colorado today are reporting that the elegant Hotel Jerome in Aspen, Colorado, will be closed to the public from today through Monday at noon.
Why? Because a local squire has apparently decided to rent out all 94 rooms of the hotel for three-plus days for his daughter’s Bat Mitzvah.
The hotel’s general manager, Tony DiLucia, would say only that the party was being thrown by a “nice family,” but newspapers are now reporting that the Daddy of the lucky little gal is one Jeffrey Verschleiser, currently an executive with Goldman, Sachs.
At first, I couldn’t remember how I knew that name. But then I looked it up and saw an explosive Atlantic magazine story, published last year, called, “E-mails Suggest Bear Stearns Cheated Clients Out Of Millions.” And then I remembered that piece, and it hit me: Jeffrey Verschleiser is one of the biggest assholes in the entire world!
The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.
Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.
But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.
So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.
From the Atlantic story by reporter Teri Buhl:
January 11, 2012
By Cindy Galli
Montana farmers have filed a class action suit against former New Jersey governor Jon Corzine, charging that the failed financial firm run by Corzine stole millions from their accounts to pay off its spiraling debts, and that Corzine’s “single-minded obsession” with making MF Global a big player on Wall Street led to the firm’s collapse.
MF Global’s clients included 38,000 wheat farmers, cattle ranchers and others who “hedged” their crop prices by placing millions in MF Global accounts. Those accounts were supposed to be “segregated and secure,” according to the federal suit, meaning MF Global could not draw on those funds.
The lawsuit, filed on behalf of all 38,000 customers, alleges that when MF Global made a series of bad investments — notably in European debt — it began “siphoning funds withdrawn from segregated client accounts” to cover its debts.
“This is a suit by the real victims of MF Global,” said plaintiff’s attorney Mark Baker of the law firm Anderson, Baker & Swanson. “The missing funds were not investments in MF Global, or loans to MF Global, but rather the customer’s own money as collateral to guaranty their contracts. They were not to be used by others – let alone their own broker – to speculate on risky and exotic securities.”
January 6, 2012
By ALAN FARNHAM
“So the banks can raise your credit card rates as high as they want – yet they borrow money from the fed with super low interest rates AND get bailed out. Makes sense.” –KTRN
Credit card rates have risen to a four-year high—this, at a time when the Fed is practically begging banks to lug away free money. Does that mean that card companies are making out like bandits? And where can card customers expect card rates go in 2012?
“Rates currently are the highest since we’ve been tracking them,” says Ben Woolsey, director of marketing for CreditCards.com, which has tracked card rates every week for the past four years. The average rate nationally right now, based on new card offers by 100 of the most popular issuers in the U.S., stands at 15.14 percent, up from 14.75 percent six months ago.
The average includes several different kinds of cards (airline, cash-back, low-interest, student, and business, for example) but excludes ones with introductory “teaser” rates. For cards with variable rates, only the lowest is considered for the average. Thus, some consumers are paying far more than the average suggests. The current rate for card holders with bad credit, for example, is 25 percent.
While credit card rates remain high, most other interest rates have reached 50-year lows. The prime rate, which banks charge their best customers, stands at just 3.25 percent. The federal discount rate — that’s what it costs banks to borrow from the Federal Reserve — is just .75 percent.
October 28, 2011
On the defensive over a half-billion-dollar loan to a now-bankrupt solar company, the White House on Friday ordered an independent review of similar loans made by the Energy Department, its latest response to rising criticism over Solyndra Inc.
The announcement came as House Republicans prepared for a possible vote next week to subpoena White House documents related to the defunct California company.
White House officials said the review would assess the health of more than two dozen other loans and loan guarantees made by the Energy Department program that supported Solyndra. Congressional Republicans have been investigating the company’s bankruptcy amid embarrassing revelations that federal officials were warned it had problems but nonetheless continued to support it, and sent President Barack Obama to visit the company and praise it publicly.
“Today we are directing that an independent analysis be conducted of the current state of the Department of Energy loan portfolio, focusing on future loan monitoring and management,” White House chief of staff Bill Daley said. “While we continue to take steps to make sure the United States remains competitive in the 21st century energy economy, we must also ensure that we are strong stewards of taxpayer dollars.”
Daley said the review would be conducted by former Treasury official Herb Allison, who oversaw the Troubled Asset Relief Program, part of the 2008 Wall Street bailout. The review would not look at the Solyndra case but would evaluate other loans worth tens of billions of dollars and recommend steps to stabilize them if they appear to have problems like the loan to Solyndra.
The White House has already refused a request by the Republican-controlled House Energy and Commerce Committee for all its internal communications about Solyndra, which closed its doors and filed for bankruptcy protection earlier this year, costing 1,100 jobs.
GOP Reps. Fred Upton of Michigan and Cliff Stearns of Florida said the subpoena was necessary because the White House has denied its requests for documents. Upton chairs the Energy and Commerce panel, while Stearns leads a subcommittee on investigations. Recently released emails and other documents show that White House officials participated in decisions regarding the Solyndra loan.
“What is the White House trying to hide from the American public?” Stearns and Upton asked in a joint statement. “It is alarming for the Obama White House to cast aside its vows of transparency and block Congress from learning more about the roles that those in the White House and other members of the administration played in the Solyndra mess.”
The panel is seeking documents that might shed light on actions by White House officials in connection with the original 2009 loan to Solyndra as well as a restructuring of the deal that took place earlier this year.
Solyndra, of Fremont, Calif., was the first renewable-energy company to receive a loan guarantee under a stimulus-law program to encourage green energy and was frequently touted by the Obama administration as a model. Obama visited the company’s headquarters last year, and Vice President Joe Biden spoke by satellite at a groundbreaking ceremony.
The Obama administration has released thousands of emails — but withheld thousands more — concerning the $528 million loan. To date, the administration says it has produced 70,000 pages, participated in nine briefings for congressional committee staff and provided testimony at four House committee hearings.
October 27, 2011
By Linda Stern
“Yes, a degree is a good thing to have. But we all know college is really just a huge scam. It should only take two years to get a degree – they make you take so many bogus glasses just to keep you around for five years to get more of your money.” –Chris KTRN
The cost of college in the United States rose sharply for the 2011-2012 school year, continuing a multiyear pattern in which public school increases outpaced private school hikes and both eclipsed the average rate of inflation by significant amounts, the College Board reported on Wednesday.
At public 4-year schools, average tuition and fees rose 8.3 percent to $8,244 for in-state students and 5.7 percent to $20,770 for out-of-state students, not including room, board, or extra expenses like travel, laptops and midnight pizzas.
Private nonprofit four-year schools raised their tuition and fees by 4.5 percent, to an average of $28,500, according to the study, Trends in College Pricing 2011, released by the College Board Advocacy & Policy Center. The Consumer Price Index increased 3.6 percent between July 2010 and July 2011, the study noted.
In-state tuition and fees for public two-year colleges averaged $2,963, an 8.7 percent increase from the previous year.
So-called net prices — the amount that families pay after receiving grant aid and taking advantage of tax credits — have increased by an average of about 1.4 percent a year for the last 5 years at public four-year schools, the College Board said. Those increases made college less affordable, as average family inflation-adjusted incomes have fallen in the decade between 2000 and 2010, the College Board said.
“While the importance of a college degree has never been greater, its rapidly rising price is an overwhelming obstacle to many students and families,” said College Board President Gaston Caperton.
Financial aid rose as well, the College Board said in a companion report, but not enough to cover increases in tuition and fees at four-year public schools. In the 2010-2011 year, undergraduate students received an average of $12,455 per full-time equivalent student in financial aid, including $6,539 in grant aid, $4,907 in federal loans, and $1,009 in a combination of tax credits and deductions and federal work-study jobs.
Many students supplement that with private loans, a figure that the College Board estimated at about $6 billion in total volume. In a separate development, President Obama unveiled a program on Tuesday that he said would help some 1.6 million student borrowers lower their student loan payments.
“College costs are still outpacing family incomes and available aid,” said Lauren Asher, president of the Institute for College Access & Success, an advocacy group.
“The maximum Pell Grant covers barely a third of the full cost of four years of college and we have more people with student loans than ever before, and they are borrowing more than ever.”
Asher has emphasized the bottom line cost of college, including all of those extra expenses such as travel and supplies, and noted that they make college even less affordable than the tuition, room, board and fees figures upon which the College Board focuses.
Beginning on October 29, U.S. colleges are required to post net price calculators on their web sites. These calculators are supposed to go beyond sticker prices to include estimates of total cost of attendance, including the extras, as well as estimates of typical aid paid to students at the school.
October 24, 2011
King World News
By Eric King
With large fluctuations in the gold and silver markets, today King World News interviewed four decade veteran, John Hathaway, the prolific manager of the Tocqueville Gold Fund. When asked about tightness in the silver market in Asia and the Middle-East, Hathaway replied, “Well, that’s very bullish. If there is retail support at these levels, that kind of backstops whatever is going on at the COMEX or behind the scenes at the various exchanges. So that’s very positive.”
When asked if the physical demand will overwhelm the manipulation efforts, Hathaway stated, “Yeah, any sort of attempt to hold back the market sooner or later falls apart. I mean we saw that with the London Gold Pool in the late 1960’s. So you can keep the market off balance for a while, but you can’t do it forever and the longer the move is put off, the bigger the explosion on the upside.
To the extent that there has been intervention (in the gold market), you kind of have to wonder if the government in Europe or the European central bank didn’t want gold to be on the defensive because of all of these announcements about a lending facility….
“The last thing they want is for gold to be rocketing in the face of that. It’s circumstantial but it’s plausible. Right now we are testing those lows of roughly a month ago.
Whenever you have a decline of the magnitude that we had you are going to retest the lows at some point and that seems to be what’s going on right here. Only time will tell if those tests are successful, but we will take one day at a time and I thought today was pretty good.”
When asked about the 2 trillion euro bailout, Hathaway stated, “To me it’s just another papering over and buying time, but without getting to the heart of the issue. I have no idea how much time this will buy, but this is just postponing a reckoning of fundamental issues.”
October 24, 2011
By MATTHEW MOSK and BRIAN ROSS
With the approval of the Obama administration, an electric car company that received a $529 million federal government loan guarantee is assembling its first line of cars in Finland, saying it could not find a facility in the United States capable of doing the work.
Vice President Joseph Biden heralded the Energy Department’s $529 million loan to the start-up electric car company called Fisker as a bright new path to thousands of American manufacturing jobs. But two years after the loan was announced, the company’s manufacturing jobs are still limited to the assembly of the flashy electric Fisker Karma sports car in Finland.
“There was no contract manufacturer in the U.S. that could actually produce our vehicle,” the car company’s founder and namesake told ABC News. “They don’t exist here.”
Henrik Fisker said the U.S. money has been spent on engineering and design work that stayed in the U.S., not on the 500 manufacturing jobs that went to a rural Finnish firm, Valmet Automotive.
“We’re not in the business of failing; we’re in the business of winning. So we make the right decision for the business,” Fisker said. “That’s why we went to Finland.”
The loan to Fisker is part of a $1 billion bet the Energy Department has made in two politically connected California-based electric carmakers producing sporty — and pricey — cutting-edge autos. Fisker Automotive, backed by a powerhouse venture capital firm whose partners include former Vice President Al Gore, predicts it will eventually be churning out tens of thousands of electric sports sedans at the shuttered GM factory it bought in Delaware. And Tesla Motors, whose prime backers include PayPal mogul Elon Musk and Google co-founders Larry Page and Sergey Brin, says it will do the same in a massive facility tooling up in Silicon Valley.
An investigation by ABC News and the Center for Public Integrity’s iWatch News found that the DOE’s bet carries risks for taxpayers, has raised concern among industry observers and government auditors, and adds to questions about the way billions of dollars in loans for smart cars and green energy companies have been awarded. Fisker is more than a year behind rolling out its $97,000 luxury vehicle bankrolled in part with DOE money. While more are promised soon, just 40 of its Karma cars (below) have been manufactured and only two delivered to customers’ driveways, including one to movie star Leonardo DiCaprio. Tesla’s SEC filings reveal the start-up has lost money every quarter. And while its federal funding is intended to help it mass produce a new $57,400 Model S sedan, the company has no experience in a project so vast.
There is intense scrutiny of the decisions made by the Department of Energy as it invests billions of taxpayer dollars in alternative energy. The questions come in the wake of the administration’s failed $535 million investment in solar panel maker Solyndra. The company’s collapse, bankruptcy and raid by FBI agents generated a litany of questions about how the Energy Department doles out billions in highly sought after green energy seed money.
A key question, experts and investigators say, is whether another Solyndra is in the offing.
In interviews, executives with Tesla and Fisker said comparisons to Solyndra are unfounded. Each said the government’s investments will ultimately pay off by supporting a fleet of electric cars that will ease the nation’s dependence on fuel and benefit the environment.
“It’s absolutely a worthwhile risk,” said Diarmuid O’Connell, vice president of corporate and business development for Tesla Motors. “I absolutely believe it was a good bet for American taxpayers.” Tesla has said its mass production of the sedan will ultimately lead to profitability.
Henrik Fisker, the renowned auto designer who founded the car company that carries his name, said his company holds tremendous promise and has accumulated $600 million in private financing.
October 20, 2011
The Economic Collapse Blog
Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. The word “derivatives” sounds complicated and technical, but understanding them is really not that hard. A derivative is essentially a fancy way of saying that a bet has been made. Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before. Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion. The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”. For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down. When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
Most people don’t talk much about derivatives because they simply do not understand them.
Perhaps a couple of definitions would be helpful.
The following is how a recent Bloomberg article defined derivatives….
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
The key word there is “speculation”. Today the folks down on Wall Street are speculating on just about anything that you can imagine.
The following is how Investopedia defines derivatives….
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
A derivative has no underlying value of its own. A derivative is essentially a side bet. Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world. Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it. This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size. Everything is going to be fine as long as the system stays in balance. But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective….
If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1.4 QUADRILLION.
I realize that number sounds like something out of Looney tunes, so I’ll try to put it into perspective.
$1.4 Quadrillion is roughly:
-40 TIMES THE WORLD’S STOCK MARKET.
-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.
It is hard to fathom how much money a quadrillion is.
If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.
Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.
In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system….
Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.
Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.
They will almost certainly be at the center of the next financial crisis as well.
For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.
So what does that mean?
An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag….
This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.
So did you hear about this on the news?
Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.
JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.
It is hard to even conceive of such figures.
Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.
Morgan Stanley also has tremendous exposure to derivatives.
You may have noticed that these are some of the “too big to fail” banks.
The biggest U.S. banks continue to grow and they continue to get even more power.
Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets. Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.
These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.
You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the “too big to bail” banks to become bigger than ever.
And they pretty much do whatever they want.
A while back, the New York Times published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives”. That article exposed the steel-fisted control that the “too big to fail” banks exert over the trading of derivatives. Just consider the following excerpt from the article….
On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.
The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
So what institutions are represented at these meetings?
Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
Why do those same five names seem to keep popping up time after time?
Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.
Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.
But that is a faulty assumption. Just look at AIG back in 2008. When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone “bust” without gigantic bailouts from the federal government. If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.
It is inevitable that the same thing is going to happen again. Except next time it may be on a much grander scale.
When “the house” goes “bust”, everybody loses. The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won’t be any government on earth with enough money to put it back together again.
A horrible derivatives crisis is coming.
It is only a matter of time.
Stay alert for any mention of the word “derivatives” or the term “derivatives crisis” in the news. When the derivatives crisis arrives, things will start falling apart very rapidly.
September 23rd, 2011
By: Laura Rowley
Gene Kessler, 67, may be the new face of mortgage default. The tech industry retiree is in the process of walking away from the home he purchased for $166,000 in 2004 in a small town 75 miles southwest of Minneapolis.
Its value has plummeted to $111,000, wiping out Kessler’s $45,000 down payment and leaving him with a mortgage that’s more than the home is worth. He stopped paying the loan six months ago, and estimates he’ll have to vacate by March 2012.
But Kessler isn’t in financial trouble, and he could afford the monthly payments. He has no other debts and two pensions from former employers, as well as Social Security. He also has a woodworking hobby, and runs a small business selling the artisan lamps he makes in galleries. He’s single now, and his two children are grown and gone.
“I was looking for a way to get back to a larger city, and this was the only way I could get out of this house,” says Kessler, who paid $800 to YouWalkAway.com to help guide him through the process known as strategic default. He’s anticipating a move to a warmer climate and a more active art and dating scene in Santa Fe, N.M.
Banks Hit the Restart Button on Foreclosures
First notices of default jumped 33% in August, a nine-month high and the biggest month-over-month increase since August 2007, according to figures by RealtyTrac released Wednesday.
“There are 3 million to 4 million seriously delinquent mortgages that under normal circumstances would be in foreclosure but have been kept out by procedural delays and paperwork problems,” says Rick Sharga, RealtyTrac senior vice president. The recent spike in foreclosure starts suggests lenders are “hitting the restart button” on cases that were delayed by documentation problems such as robo-signing, he explains.
There’s no data on the demographics or financial histories of the people receiving recent default notices. But among them are some homeowners who have never defaulted on a loan before, at least according to one poll. YouWalkAway.com surveyed several hundred of its clients earlier this year, and just 23% said they had previously shirked a financial obligation.
“The people we are now seeing are nearing retirement age, who never missed a payment on anything in their lives,” says Jon Maddux, co-founder and CEO of the Carlsbad, Calif., firm. “They are trapped. They can’t sell or get a modification and they need to downsize or move for a job.”
Attitudes toward default have also shifted, Maddux says. “Back in 2008 people were very emotional, very scared, in disbelief or denial,” he says. “Now they are simply fed up. It’s a very calculated, black-and-white business decision. People feel very relieved.”
Putting a Crater in Your Credit Score
A more widespread understanding of the consequences of default may be a factor, says Brent White, a University of Arizona law professor and author of Underwater Home.
“The conventional wisdom is you are ruined and are not going to recover,” says White, who wrote a widely circulated discussion paper on the topic. But in so-called “non-recourse” states such as California, the bank can only foreclose on the property and resell it. If the price is less than the amount owed on the mortgage, the lender can’t sue the homeowner to recoup the shortfall, says White. Even in recourse states, the bank is unlikely to go after the homeowner following foreclosure, he argues.
“The vast majority of those who default end up doing a short sale and that discharges the deficiency,” he says. “If they are pursued, they can negotiate to pay less than the full amount. A savvy person who retains an attorney or other knowledgeable person to walk them through the process will likely get through default without having to pay a deficiency judgment. Most people will have a good credit score again within a couple years.”
But John Ulzheimer, president of consumer education for SmartCredit.com, disagrees, at least for consumers new to default. “If someone who has never missed a payment suddenly puts their home in foreclosure, their credit score is destroyed,” says Ulzheimer, who previously worked for a credit bureau.
“If you already have payment problems on the mortgage and defaulted on other accounts, [foreclosure] may not have a material downward impact, but it will lock in a lower score for a long time,” Ulzheimer says. People who stop paying the mortgage can minimize the credit score impact by using that free cash flow to pay down other debts, such as credit cards, he adds.
Refusing to Walk Away From a Bad Loan
But just because the bank doesn’t pursue homeowners today doesn’t mean it won’t tomorrow, argues Ulzheimer. The statute of limitations to sue on contract debt in recourse states ranges from three to 15 years. “Some people think that’s the next shoe to fall,” he notes.
That possibility is just one reason other underwater homeowners are stubbornly hanging on. Liana Friend, 67, bought a two-story, 2,300-square-foot home with a pool in a master community in Corona, Calif., in July 2005 as an investment for $540,000. It’s now worth $295,000.
Friend owes $389,000 on 30-year mortgage at 6.75% that can’t be refinanced. The difference between her costs and the rent she can collect on the property is about $1,300 a month. Even Friend’s property manager has suggested she default on the investment.
But she refuses. “It’s a big time moral issue,” says Friend. “If you make a contract, you agree to the terms. It bothers me that people get up and walk away. I don’t want that on my credit report.”
Moreover, Friend made a $160,000 down payment using money inherited from her grandparents. Her grandmother was a self-taught investor from a farming community who married her first husband (of five) at age 14 and eventually made a fortune in stocks. “She would grab all the granddaughters in her pink Cadillac and take us shopping,” Friend recalls. “We were not allowed to take things in shopping bags — she insisted we had to have them in boxes. We all adored her.”
“I love and believe in real estate,” adds Friend, who purchased two other homes in the 1980s that are still worth far more than she paid. She bought the properties for income in retirement, and plans to bequeath them to her three daughters.
Are You Better Off Renting?
Friend should ask her lender how far the mortgage needs to be paid down in order to refinance, advises Keith Gumbinger, vice president at HSH Associates, a mortgage information publisher. He estimates she would need $160,000, possibly more, to do a cash-in refinance on the property. But even if she could refinance, it still wouldn’t fully close the shortfall between the rent and her costs, and it may take decades for the house to recover its value.
White says underwater homeowners should figure out if they are paying substantially more to own a house on a monthly basis than they would pay to rent a similar property. “Even if you are thousands of dollars underwater, if you are paying the same as you would to rent, you don’t gain that much financially by defaulting,” he says. (The survey by YouWalkAway.com found a quarter of respondents saved 50% or more on housing expenses when they rented after their default.)
In addition, someone who will need a good credit score to run a small business or borrow to meet a goal, such as a child’s college education, should avoid strategic default. “If you have a particular need for easy credit in the future, then it doesn’t make financial sense,” White notes.
As for Kessler, he is looking forward to biking, tennis and skiing in the Southwest next year. “I don’t feel guilty at all about walking away from the place,” he says. “The banks really did it to themselves. They made a ton of money with me over the years. I owned four or five houses. But I don’t think I’ll ever buy another house. I’ll probably just rent until they put me in a nursing home.”