On November 12th, 2010 we published our article “Tattoos, Pyramid Schemes and Social Justice” in which we advocated that homeowners consider suspending their mortgage payments. In the article we enumerated reasons why we felt this action is both ethical and prudent. On January 11th, 2011 we published our articles “Ibanez– Denying the Antecedent, Suppressing the Evidence and one big fat Red Herring” which outlined the legal realities of securitized mortgages, and the impact of the landmark Ibanez decision on homeowners, particularly in Massachusetts. We affirmed our conviction that Massachusetts homeowners with securitized mortgages might want to consider suspending their mortgage payment, and place instead their funds into an escrow account.
Both articles were widely published and read, and in both cases we received also some negative feedback, although strangely, only from foreclosure defence attorneys. Their sentiment was universal “we would never advise a client to stop paying their mortgage” - we marvelled. When challenged on this point, or presented with the evidence, none could provide any reasoning for this advice that they would so confidently given their clients, nor could they identify a fallacy in the arguments we had made, or a fact we had misrepresented.
Perhaps they recognized the intrinsic problem in responding simply “because that is what people do, and we should take it for granted that because people do it, it is correct.” Such inductive reasoning at the corporate level can not be defended as anything more than “group think".
In such a case, we suspect fear, shame and guilt are more powerful drivers than reason. Further, such thinking serves only to exaggerate the anxiety that stems from the perceived consequences of default. This is not a coincidence, or something which is “hard-wired” into the human person. These are emotional controls that have been cultivated over many decades that encourage borrowers and in particular homeowners (those in possession of real property), to follow unnatural social norms, even at the expense of critical thinking and reason. Thus the context in which such financial obligations exist go almost entirely unexamined.
Financial and ethical considerations in which default is not only feasable but perhaps even a moral imperative are ignored. In sharp contrast are the standards lenders within the same culture abide in their quest to maximize profits. Needless to say, this asymmetrical ethic, leads to the possibility of abuse, and widespread economic injustice. In our society, it is now the case that debtors, and in particular home owners are akin to indentured servants. The severity of the condition is directly and inversely proportionate to the misdeeds of the financial system which gave rise to it.
Ultimately we were forced to conclude, that those who possess too much fear and too little confidence are acting in fact on the basis of emotion, even though the prospective outcome is not what they would otherwise choose. A spirited response in reason is what is necessary to ensure that such emotions do not distort rational thought and overcome it.
We hope the above articles, along with the following serves as a practical, financial, and above all ethical framework for understanding the risks involved in continuing to make mortgage payments on securitized loans and their derivatives in light of what is known today about the serious defects in chain of title, and the abuses that took place by many in the securitization process.
We do not make such suggestions lightly.
A catastrophe of “epic proportions”
Despite our concern over the seriousness of the advice given, we never wavered in our conviction that we were “right”, even if unpopular.
On May 25th, 2011 a report was released based on a Massachusetts investigation that identified fraudulent documents clouding the titles to Massachusetts properties. The report cited the example of homeowners who were already in some stage of default for financial reasons, and discussed the issue of fraudulent conveyances as a result of perjury. It would be an error to present this information only as a means to stave off foreclosure for those who no longer have choices. Perjury is the fruit of a system built on many layers of fraud that diseased the entire securitization process. However, the important aspect of the report was not the examples of those who are financially distressed, but rather, (and correctly) the implications to those who are neither in foreclosure, nor financially distressed.
Although it took only 8 words to say what took us just about 6,000 in our last article to say, and although it came about 7 months after our initial article, the unmistakable words “…the ownership of your house is in question” finally had emerged in main stream media.
The problem is hardly unique to Massachusetts.
We also hope that the foreclosure defence attorney’s (or more importantly their clients) who so strongly criticized our thinking on the matter, will listen to the words of John O'Brien, Register, Southern Essex District Registry of Deeds – his proclamation does not leave much room for interpretation; “This is a catastrophe of epic proportions."
The report is limited in scope as it cites only one example of a name used (namely “Linda Green”) to commit perjury and cloud thousands of titles to Massachusetts homes. However, there exists far more names other than “Linda Green” which have been used to commit perjury - the math is not difficult.
Nonetheless, the report barely touches the tip of the proverbial Iceberg, for the issue of perjury pales in comparison to the fundamental and irreparable harm done in the securitization process, which universally affects securitized mortgages nationwide - a fact that will be increasingly revealed.
For example a review of what has been said on the Ibanez matter makes any investigation into mere perjury wholly unnecessary.
In the November 2010 article we wrote:
“Americans have a duty to ask critical questions about the operations of their financial institutions, and if evidence has been presented that a deal was made, but not everyone was playing by the rules, than those deals need to be looked at again. It is not good enough any longer to say, if it doesn't affect“me” than, I’m not getting involved. We have a duty to one another as Americans, and more importantly as human beings, to care about truth and justice. What’s more, apathy, so long as we are not affected, is a short lived consolation. Ultimately, this crisis will affect everyone …”
"They may not be able to sell their home, and they may not be able to refinance their home. And that is a major, major problem."
Here is another excerpt taken from the November article:
"It has been made to appear as if those who have fallen on hard times are a matter of "incidental" inequalities in an otherwise procedurally just system. However, it is precisely the opposite which is true. Our financial institutions have created deliberate inequalities, through the use of procedurally unjust systems."
Marie McDonnell, a Forensic Mortgage Analyst provided the following comments in the same May report (referring to the titles to Massachusetts properties):
"I'm speechless. The scope of the problem is unimaginable; the depth of the fraud is shocking."
People are not stupid and ought not to be treated as such. They make mistakes from time to time, but that is not the same thing as being stupid.
The value of your home may be going down, but this condition will not last forever – obvious though it may be, it’s still worth stating; nothing last forever, including rates of increase or decrease in asset prices. In the meantime, a few folks from your bank or the government (not clear if they are necessarily separate entities any longer) may try to convince you that there are some things you can do with your home to improve your lot, and help you transfer this “unwanted” asset to themselves (even if it does provide shelter - Investment qualities aside for a moment).
Here’s the recent Menu:
1. “The sucker trade” aka refinancing. It goes something like this: “Can I exchange your big unsecured “credit card-like” debt which was improperly secured for a properly secured mortgage on your home?” And what do you get for this trade? A fraction of a point off the interest rate on your note. Never mind one was unsecured and the other secured.
There is secured debt and there is unsecured debt. The two are not the same in value to the borrower, nor are they the same in value to the lender. We would challenge anyone to find a business in the world that would choose secured debt over unsecured debt (regardless of their financial condition), for a fraction of a point. Why should consumers be any different? There is one adage in business that is eternally true: “there is no free lunch”.
This is why so much mortgage loan activity in the last 1.5 years has been refinancing. Banks are not interested in taking on new risk, they are interested in mitigating old ones. These new notes and mortgages don’t find their way to MERS, and they do not follow the “old” securitization process. These original wet-ink notes find their way to actual bank vaults this time.
No need to worry about the 30+ pts. you've lost on what is probably your biggest investment - because of the asset bubble you did not see, understand, or create - after all, why worry about what may take more than 20 years to recover in value when you can save a fraction of a point on the cost of your debt – listen to the radio adds, and the brokers – there has “never been a better time” (sounds creepily like 2005).
2. “The Kumbaya”or the “we’ll get through this together” offer – aka the ‘short sale’ option. Think of it as making smores and singing Kumbaya with your servicer. Only when you go home from camp, you lose everything, and they gain everything thanks to PMI, GSE guarantees, credit default swaps and deficiency judgments. If this continues unabated, use the mortgage escrow account we suggested setting up to start buying stock in Wells Fargo or US Bank – the money will be better spent – at least you’ll be on the other side of the asset transfers.
3. “The Gandhi” – aka “just give me your house because I asked nicely, and you’re an honorable person and we know you want to do the ‘the right thing’ ” option or ‘Deed in Lieu of foreclosure’. By far the best choice for the peacemakers of our modern society. If you think you can take this high road, get ready to also walk around barefoot, spin cotton on a simple gin for hours at a time, live in a tent, and give up marital relations with your spouse – because that‘s what it means to be like Gandhi – pacifist through and through (never mind true pacifist are one in 10 million, or maybe less). A great many who are actually afraid, claim instead to be pacifists - this might be a good time to do a Myers Briggs personality test.
4. “The Pinocchio” or “free lunch” option (don’t worry, there is really no cost) - our personal favorite which is now being espoused by an anxious Wall Street government. Payments to homeowners who surrender their real estate, rather than raise legitimate legal challenges to the ownership of the home you and your family live in. You will only have to trade in “real” property, for a few pieces of paper (that will get you by for a few months), backed by nothing, that make cell phones look depreciation-resistant. For some reason the image of Pinocchio turning into a donkey keeps coming to mind.
Imagine all that work with no self-interest, bankers are a generous bunch, perhaps when they come, they will even ‘greet you with a kiss’. A great many mortgage brokers who represented predatory lenders were also willing to offer their advice during the golden years of the housing uber-bubble. These are the same people, with a different slant. At that time, the refrain was “prices will only keep rising, so you can do something like pay any price” because by this logic, if prices keep rising, no price is too high.
Now the financial industry which has helped us move from a country which makes things, to a country which makes things up, are chanting their inglorious antiphon – prices will only keep sinking, so let us take that house off your hands, after all, we’re in it together and both parties are taking a loss. Right? This way you can get rid of the discomfort of having to deal with this. By this logic, no value is enough to fight for your home, because prices will keep sinking and thus, the value will ultimately go to zero.
Both statements are logical fallacies and indeed two sides of the same coin – although they have distinct attendant emotions.
In every transaction there is a buyer and a seller – no matter what monetary instruments are used in the consummation of the transaction (debt, equity, currency, etc.) Your home is no different. It may help to not think of it as shelter for a moment or as “the American dream” (needless to say the dream needs to be elevated). Try for a moment instead to think of it first as just 2 x 4’s and drywall. If this is hard to do, consider thinking of your American dream as being fortunate enough to live in a still largely free country of plenty, to have had a mostly good life, reflect on your positive memories – and let your house just be an object (last time we checked there were no shortages for future reacquisition) – that is what it is after all, it’s just an object.
Once you arrive at this moment of honest detachment, then you might want to consider how those who are interested in your home, see the world. Humans are animals in a way, and they are also far more. Through our choices we move closer to the animal kingdom of primal instincts or closer to another kingdom that is very different than that of mere animals. Let’s just say that your bank, your servicer, the trusts, the depositors, the trust administrators, the investors, the engineers of derivative products, the CDO salesmen, the ratings agencies, the intermediaries entities, and certainly their lawyers, have made choices (not that it can’t be undone) to be a little closer to the animal kingdom – keeps this in mind when speaking to them – it’s important. To this group your house has nothing to do withdreams– it has to do with one thing only; little sheets of green paper. Now think of money for a moment as a redemption slip on society, and if you have many of these “redemption slips”, you in affect have much you can ask of society if you so choose.
These folks want to redeem a number of these “slips” on you as a member of society. Perhaps your claim to your home is weak, if it appears that the debt is greater than the equity (understandings of both debt and equity need to be examined carefully), or because you have struggled to make your mortgage payments, or because you are legitimately concerned about getting clear title to your home, or perhaps you just don’t want to participate in a pyramid scheme that causes others to suffer. That is ok, we understand, everyone will want you looking at yourself full time, and if it applies, your misfortunes in life. If you have a personal misfortune such as divorce, loss of a job, or heaven forbid a sick family member, expect it to be used against you. You might as well go look in the mirror and read yourself your Miranda rights before you get on the phone with your servicer and divulge every detail of your personal and financial life just because they asked nicely and said they would “help”.
Try to remember, you’re not calling Mother Teresa. That isn't to say you shouldn't empathize with those who would like to take your home. Wall Street bankers and their progeny are human too. They suffer just like you. They have personal short comings like you. Although their personal shortcomings less often involve layoffs and confusing financial burdens – their suffering is of a different variety altogether – nonetheless they suffer.
It is better to keep your suffering to yourself, they are not genuinely interested in hearing about it, and it is best to vet who you share with in the first place, including the details of your personal finances. There is nothing wrong with that information being entirely private, although if you were raised in America, you were not raised to understand this. By preserving yourself, you will also preserve your dignity – even if all else is lost, nobody can take this last item away from you, and it is worth more than all of the homes in America.
It is a harsh saying, and we wish we could find something more subtle, but we could think of no other saying that more accurately describes what we are speaking of here, that is to say “Do not give dogs what is sacred; do not throw your pearls to pigs.” If at some point this seems like a good idea after all, it may be worth reading the line which follows from the one cited – the consequences are fairly clear.
Self-pity rarely achieves much. Instead, if the urge to sadness at your portion in life can’t be overcome, then do it in private. Perhaps think of those who have less than you in life – perhaps orphans in Haiti or those in some other seriously underprivileged society, than you will feel rich. We have poor in America, but we don’t have too many who are starving just yet. Prepare yourself to fight a good fight. Even if you lose, you will have the swagger that you fought for what is right and just, which is easier to describe at parties than the procedure for rolling over and playing dead.
It is a curious thing to witness the endless talk of ”helping homeowners”, and of perpetual applications to “modifications” and “forbearance”. If a person draws you into a crime unwittingly and unknowingly, a context in which you expend great time, energy and resources, believing the circumstances to be quite other than they in fact are, is it anything other than insulting when the same person offers to “help” you with your “situation”? Does an “appeal to pity” seem like the most appropriate of responses?
Arbitrarily asserted, arbitrarily denied
These folks want you looking at yourself, because they don’t want you looking at them. This behavior is so deeply ingrained in our culture that even seasoned consumer and home owner advocates fall prey to the proclivity of discussing primarily the circumstances of the debtor rather than that of the creditor. However, the question isn’t how good is your claim to the security interest in the real property you call home. The real question is how good is the security interest of those who seek to take it from you? And how did something so simple and mundane as a mortgage become so irreparably harmed? Could it really have been mere incompetence?
Possession is an important part of the law. If there is a serious and legitimate dispute over ownership, which has now been well established for about 60 million properties and some 7 trillion in securitized mortgages, why would you give up your legitimate claims? Perhaps you would do this only if you did not realize just how legitimate your claims are (default or not), and how illegitimate theirs are, because after all it is not the topic of the many phone conversations with your servicer.
In fact, given the gravity of the question over clear title, the only seemingly prudent thing to do is to suspend mortgage payments, weather you can afford them or not, and to instead place those funds into a private escrow account, as we had previously advised. That is why they want you to be highly circumspect of your condition in life, because you will be too distracted to notice the thief in front of you. Remember if greed doesn't work, fear will, and vice versa. Think of them as the commensurate emotions associated with bubbles and collapses – they vacillate, one to the other, but the transfer of assets abides at a steady clip to those who feel no emotions.
These folks will try to help you undervalue yourself. Don’t. You were not designed or built to be a slave to another man through debt. It is, for lack of a better word, a sin. If you don’t have a Ph.D in finance from Harvard, you probably couldn't design this Ponzi scheme if you’re life depended on it. Are you accountable? You are. But they are more accountable. It is important to think for yourself when someone tells you something ridiculous like “prices will always go up”. Intellectual inertia with a streak of greed is wrong, but it is also minor on a relative basis, and very prevalent. However, using superior knowledge and power to prey on the ignorant in a calculated way is more serious. You have a stronger claim to the security interest in the property than they do, on many grounds, not the least of which is ethical. That isn’t to say you will win, but you have to try.
If they are to assert their claims arbitrarily, than you can arbitrarily deny them - should the burden of proof not be symmetrical?
It has been said that “time reveals truth and justice”. Do not worry about what others say about you today, or next week. Worry about what people will say about you in ten years or more. For it is only when we look back and remember, that we bring our experiences of life into complete focus, and others see us for the intentions which work inside us, and not merely the outward appearances which can be misleading. If somebody calls you a “deadbeat” or a “squatter” thank them, for is it not widely known that people judge others according to the way they feel about themselves inside? Or as the great prophet Bob Marley once said “Judge not, for you judge yourself”. Besides is there any more obvious way to poison the well, than to use such loaded language?
Your servicer wants updated details of your financial condition in order to decipher if it is cost affective to sue you for a deficiency judgment after your home is taken (if it is to be sold in the near term, they will want the fastest sale, not the highest sale), it is not primarily, as you may be told, to determine qualification for a modification. For example, they would like to know where your bank account is so that they can attach it, and they would like to know where you work, and see a recent pay stub, so they can eventually garnish your pay. Think through it – you live in the most litigious society in the world.
After all, you are going to pay the difference, either through a judgment, or such things as your involuntary ownership of the GSE’s (another form of indirect wealth transfer). It is a peculiar thing indeed when we believe it is ok to hand over the details of our financial and personal matters to perfect strangers on the phone, because they have “represented” that they are the counter-party in interest to a loan that was taken out as part of our (unknowing) participation in a global pyramid scheme.
We now know much about predatory lending. We know about liar loans that were wholly executed by highly compensated brokers. We know that the more CDO’s and synthetic CDO’s that were sold with AAA ratings (despite being jam-packed with sub-prime paper), the more billions investment banks made. We know that banks understand that their security interest to the real property used in the MBS trusts is not there, and that they are willing to use forgeries, and perjury as their means. Basically, the lesson of the last few years is that the engineers of this hyper-pyramid scheme will do anything to get what they want.
Have things changed? Is that what the evidence points to? Or is that what we want to believe about human nature? That these folks are not “that bad”? Because we want to believe something, does it make it reality? An objective review of the evidence does not indicate the players involved in your mortgage have your best interest in mind. It would be best to accept that upfront, so that a reasonable plan, that actually has a chance at success, can be made.
This is not about “sticking it to the bank”. This is about legitimate questions. Protecting yourself and your family’s financial future, and coming to a reasonable business solution to this very bad situation, that does not involve your subjugation and further humiliation. There may have been intellectual inertia, even greed, in your actions, but where is it written that you must live with that mistake forever? and who qualified the bank to do the judging? At some point there has to be an agreement, and a settlement, but you ought to meet the bank at the negotiating table at least as an equal, if not a superior, for your misdeeds are minor in light of theirs. Do you call their CEO, Board members, or shareholders and ask for the details of their personal and financial lives before you’ll “discuss” anything?
All that should be said by a homeowner is that the asset prices were wrong when you bought your home. You had no control over the setting of those prices – but the folks who did have responsibility for the setting of asset prices, knew something you didn't and stood to profit from that special knowledge. That’s why they owned credit default swaps and not real estate when the bubble popped.
When the bank is willing to discuss a settlement of your unsecured debt (as in they cannot legally foreclose on your securitized mortgage), then you can talk about a number that makes sense for both parties to avoid protracted and expensive litigation that might lead to a judgment, which at any rate will be collected over many years if at all. Is this not the same as a principle reduction today, particularly when future payment on a hypothetical judgment will be made in dollars which are sure to be worth less. At least in the event of a write down, your bank has the opportunity to re-invest the residual loan value in something that might actually appreciate, as opposed to fixed payment in devalued future dollars. But then again, perhaps they already know this, which is why their first preference is foreclosure. For one, the value of your home does not have to be impaired on their balance sheet, and secondly, although nobody is telling you this, your home will appreciate again, and has far superior prospects of beating the doubled edge sword of taxes and inflation, than the bank wants you to know.
There is a right way and a wrong way to plunder
Plunder? We confess it is a strong word, and probably seems like a) it only corresponds to a small fraction of the loans made that are now clearly understood as “predatory” in nature or b) is hyperbole. Neither is correct, it is rather the only way to describe the mortgage securitization industry in the last decade. There is one characteristic of greed which is constant – the addict always over stays their welcome (just ask casino operators or stock brokers about the psychology of some of their clients).
Here are a few points to consider:
1. Why would such products exist which have variable features as a function of time. For example, low front end interest rates with a later reset, or terms which allow for the annexation of more collateral at a later date (deficiency judgment). Not unlike an actuary for an insurance company, a banker makes a decision on risk based on a statistical profile of the barrower, since past-time can only be known at that moment, why would future characteristic of the loan be determined in present time, when the future cannot be known? Unless there is in fact some designs being made on the future.
Remember, these folks make their living from investments, and investors think far into the future. Most borrowers make their living from a paycheck, and their future projects about as far as the Friday after next.
The case of variable rate loans:
- If at a future date, the interest rate is static, the bank gains nothing by adding this feature.
- If at a future date, the interest rate is lower, the bank stands to lose, when the customer refinances inside or outside the bank.
- If at a future date, the interest rate is higher, than the customer may not be able to afford the loan, in which case, the bank stands to make a windfall through foreclosure.
Since our economists have long held that both inflation and housing price appreciation are steady, why would these loans ever exist? As a sort of actuary, the bank would determine the price for the risk based on historical patterns, set the terms, and a deal would either be done or not, and every one would move on. But that is not what happened with these “innovative” products. There was a “lead-in” and a carefully planned design made on future time.
2. However, it will quickly be pointed out that many borrowers agreed to misrepresent both their financial history and circumstances in order to obtain these loans. This is true. Here are some important points to remember:
a. There are both qualitative and quantitative differences in the behavior of borrowers who made misrepresentations and lenders who planned predatory loans. In quantitative terms it is the business of lenders to make loans, that is to say market debt. If there were no buyers for such loans, life would continue on, and we may well have a healthier society. However, the same cannot be said of the lender, for if they do not issue debt, they have no business so to speak of, and life does not “go on” for debt is the instrument by which their income is earned, and unlike the borrower, represents an “asset” to the bank under normal conditions. Therefore both motives and incentives for the making of new loans are far greater on the part of the lender.
b. In qualitative terms, the business of the lender is a) risk assessment and b) asset appraisal. In a consumer society it is critical that entire generations of consumers (including consumers of financial products) never learn how to do either competently. We have largely succeeded at this task in America. The result is that the intricacies of risk assessment are overwhelmingly within the circle of competence of lenders, and completely outside that of the borrowers. Again the balance of power is asymmetrical.
To suggest than that the conduct of the two groups is ethically symmetrical is incorrect, and masks the truth that the real risk of systemic predation is inherently on the side of banks.
The common refrain is that it was the lack of restraint on the part of borrowers which caused the crisis, but this is nothing more than to establish a false cause. That is to say it draws a highly questionable conclusion about the cause and effect relationship. The child of a false cause is naturally, a false dilemma. The bank bailouts were precisely that; a false dilemma sold to the American people, and a prototype of the much larger wealth transfer operation that was about to take place in the form of foreclosure.
In the construction of the bailout package, the US treasury reduced the options Americans had to consider to just two, which were sharply opposed and unfair to the American people to whom It was presented (i.e. bail out the banks, or else we will be facing “…the Collapse of the Global Financial System”). It is like being victimized twice. By accusing the American people (falsely) of being the cause, then forcing a false dilemma, those responsible have not played fair, and have caused a great many to overlook alternative explanations which are far more accurate.
Nonetheless, the fact remains that banks lent vast sums to Americans at interest rates that did not reflect prudent risk management. There are only two possible explanations:
a) Our financial institutions somehow suddenly lost (or perhaps never possessed) the acumen that is part of their circle of competence; that is to say risk assessment and asset pricing, and were revealed to in fact be imbeciles.
b) The loans made were predatory by design and served a purpose in their ultimate failure.
Despite many Ivy league degrees, bankers are involved in a business model which is no more sophisticated than borrowing pieces of paper (usually from their friends) for zero interest and loaning out the same at a rate of interest above zero. Given the simplicity of their business model, we are tempted to select option “A” (our various and sundry encounters with bankers has served only to affirm this preference). However, “B” is in the only option which excludes absurdity from the calculation.
This taken into consideration with the certainty of asset price manipulation, and other abuses in the origination, and reselling of these loans ought to be carefully considered.
In truth, greed paints you into a corner. The only way out this time has been excessive liquidity, to blanket over the fallout, like snow over an ugly landscape. Yet, with excessive money supply, comes excessive inflation, and with excessive inflation comes a preference for hard assets over fixed income; in short, your bank would rather have your home, than your mortgage payments, modified or not. Imagine, at the rate we are going now, what the value of your future mortgage payment denominated in dollars will be at the expiry of your loan term say 25 years from now. No interest rate is high enough now to outpace the real rate of inflation – and if a few rounds of golf with the folks at FASB allow you to keep your land grab on the books at unimpaired prices in the near term; well even better.
If we ascribe to a traditional definition of ethics, than we must concern ourselves with that which we do voluntarily, and not what we do because we are forced. In this sense, the question ought not to be “is it ethical to stop paying your mortgage”? The real question in light of everything that has been revealed, and the very real human suffering that has been caused is; “is it ethical to pay your mortgage?”