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Who Gets a Seat in the Lifeboat?

June 25, 2010

I was surprised when a fella down at the Southside Inn was going on today about a 60 Minutes piece he’d seen recently admonishing folks who have “walked away from” their moral responsibility to pay their debt obligations to the lender who lent them the money to buy their homes.

Really? I said I hadn’t seen the show but something bothered me about it so I decided to check it out.

As I said, I hadn’t seen the piece, but I have a modicum of respect for Morley Safer and CBS, so before I shot off my big mouth, I went home, fired up the computer, went to the CBS website and watched the segment (just shy of 15 minutes in an hour show) 4 times. I wanted to be sure. Then I discovered the text version and saved it for reference. OK, now I’m into this rant for a bit more than an hour.

I’ve been involved in real estate financing for thirty years. Believe me, I’ve seen it all. But this segment of what I consider to be an stand-up news program gave me some real problems. To begin with, every single example (of which there were three) were folks from Arizona who were faced with the decision of whether to stop making the monthly payments on their homes (which had fallen in value between 30 to 60 percent) or suck it up and ride out the storm. Two of the three interviewed had decided to abandon ship and try to save their financial lives. One stated that nearly half of the homes in his neighborhood here taken over by banks (17 out of 44).

Morley serving up statistics to show that one in seven foreclosures where occasioned by homeowners who had the ability to pay their contractual obligations but would rather not. The implication was not covert. He asked whether they didn’t feel ashamed or embarrassed by their actions. The two who and jumped ship politely said, “No.” I thought that was curious, so I engaged my brain and started a Quixotic search to understand that which made no sense to me.

While I have considerable experience in real estate financing, I’ve never done an Arizona deal and I know little about the statistical analysis of our current mortgage crisis. I am only sure of two things: 1) the situation sucks and, 2) I have never run into anyone who flippantly says, “Go ahead, take my home, I don’t care.” And so I did some research.

First, I learned that Arizona has one of the largest rates of mortgage foreclosures in the nation. Next, I discovered that Arizona is a “Title State” not a “Lien State.” You seen in New York (a Lien State), and many other places, when a lender makes a loan to a home buyer it gets a mortgage lien on the property as security whereas in Arizona (a Title State) and several other states, the lender gets a deed of trust. The difference? A lender in a “Lien State” must bring a court action to foreclose a mortgage and sell it at a court supervised judicial sale. The lender is limited at that sale to recover the amounts due under the mortgage plus it’s actual costs to pursue the action. Any overage (owner equity) goes to the foreclosed homeowner. Now, in a “Title State” that’s not true. If a borrower defaults, the lender is already holding the deed (in trust). If the homeowner hasn’t met the obligation to make payments under the trust agreement, title is already vested in the lender. Simple! No cumbersome court action, no concerns about equity. The lender keeps the property: lock stock and barrel.

Oh, but wait. Morley went on to suggest that the homeowners had a moral obligation to pay if they could, and his statistics showed that 1/7 of all foreclosure (1 million out of 7 million, currently) were “walk-away” homeowners. So, cynic that I am, I tried to find the basis for that assertion. The 7 million is easy. That’s roughly true according to statistics readily available from the Federal Reserve Bank. It was the “walk away” number that threw me. After 45 minutes or so, I stumbled upon an article in Bloomberg Business Week from last month where an apparently knowledgeable fellow had “estimated” that figure. His basis for his estimate was that if a borrower who had previously been making payments on time and had gone into default for three months yet maintained current payments on other credit obligations in excess of $10,000.00, then that borrow was a “walk-away.”

OK, let’s play this out: Half of the homes in my neighborhood are vacant. Nobody’s buying. If I’ve been struggling to meet all my obligations but finally can’t and have a choice between making my payments on a house that’s worth substantially less than what I owe or having my car repossessed, should I make the house payment? Well, perhaps, but if there’s no equity in that for me and I know the lender has agreed to look only to the house as collateral (i.e – they can’t come after my other assets under the deed of trust) then at least I can get to work, look for another job, or get out of Dodge while I can.

The story is told about the guy who was a passenger on the Titanic and dressed up in a woman’s gown to secure a position on a lifeboat being lowered as the “Unsinkable Ship” went under.

Moral indignation? That’s a different post. Bailouts? What’s good for the goose is … well you know.

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