Pages Menu
TwitterRssFacebook
Categories Menu

Posted by on Sep 4, 2011 in At TMV, Business, Economy, Politics, Society | 21 comments

Stossel’s Indignation

I just watched a John Stossel Special show on Fox Business Network (FBN). Tonight he did a sort of redemption show for a previous one on the phenomena of “walking away”. I call it a redemption show because Stossel claimed the subject of the previous show felt he did a “hatchet job” the last time. The subject, Chad Ruyle a co-founder of YouWalkAway.com, agreed to go back on Stossel’s show to set the record straight. Why, I don’t know. YouWalkAway is a website and service which helps homeowners navigate the process of walking away from an underwater mortgage. I can’t say I know the definition of a hatchet job but, I bet the following said by Stossel in the first show would qualify:

You guys are disgusting, you are helping people freeload

I am sure some of Stossel’s viewers shared his contempt because the concept of “walking away” or a “strategic default” was a foreign one until a few years ago. That was before almost eleven million homeowners found themselves underwater or owing much more than their house was worth. It was before millions of mortgage backed securities investors were made whole. It was before thousands of mortgage brokers put a closed sign on their door and walked away rich. It was before the mega banks took billions in a bailout but, gave millions in bonuses the same year. It was before all those banks, investors and brokers decided higher interest rates and obscene profits trumped the risk of making loans which really never had a chance of being paid back.

Stossel poo-pooed Ruyle’s point that homeowners were making decisions just like the banks and the investment class do every day. For the investment class, a bad investment should be jettisoned. In the case of an underwater homeowner, their biggest investment, a home, may simply never bear fruit. Cutting down the tree, in this case, suddenly worries laissez-faire capitalists like Stossel. What is good for the goose is apparently not good for the gander. For the banks, their sudden attack of morality probably has more to do with the profits associated with servicing troubled mortgages instead of indignation. They seem to make their money by both making impossible loans and the slow process of kicking the mortgagee to the street.

This trend of walking away will probably continue. The trend of foreclosures won’t get better in the near future either. I believe it is finally time to do the MORAL thing. It seems to me everybody involved in the mortgage mess has a little skin in the morality game when it comes to blame. So, they should all pay. All the suffering should not be the homeowner’s alone. Banks, mortgage backed securities holders, originators (mortgage brokers), the loan service industry, credit default swappers and anyone else who had to buy a dump truck over the last decade to haul all the money they made should pay. The government, yes the government, should get them all around the table and tell them all to take the necessary financial loss to stop this foreclosure mess. Many economists tell us our economy cannot recover until this happens.

As far as indignation goes, the hypocrisy of Stossel’s hyperbole is clear to all but his most rabid disciples. He says he loves the free market until the masses take advantage of it. He says he loves morality but would stand by while normal homeowners take the fall for all their sins and the sins of the whole financial industry. By the way, the title of his series is called “Freeloaders”. He apparently wanders the world in search of freeloaders who need to be exposed. By taking advantage of the hardest decision a homeowner may ever make, isn’t Stossel a sort of freeloader in a way? Maybe next time Stossel should look a little closer to home for his freeloader.

Click here for reuse options!
Copyright 2011 The Moderate Voice
  • AlexandSmith

    Amen.

    As someone who gas worked in bankruptcy law for awhile I can tell you uber wealthy folks have been walking away from underwater mortgages for years. It’s a common practice at that level.

    Every single solution cannot be geared to the wealthy everytime. Something has to give or something is going to snap.

    Otherwise, don’t watch Stossel. He’s a twit.

  • mrmarket

    I guess I have a 50/50 thought on this. I know many people who purchased houses that were beyond their means. These were smart intelligent people making business decision. I believe these people should not be able to breach their contracts with the banks. They knew they were buying more than they could afford.

    There are a group of people that purchased based on what they could from the bank where the banks did not properly underwrite and research the loan. This was the “everyone” gets a house even if they can not afford it.. don’t worry Fannie and Freddie will take care of it.
    Many were guilty of this. I think they should be penalized by letting people walk away.

  • Walking away from an underwater mortgage is perfectly legal. You can’t vandalize the home or let it fall into disrepair before you do (I think), but there’s nothing to prevent you from walking away from it.

    Remember a home is a physical asset. It has value, it can be resold or repackaged. This is not like intangibles, actually it is just like repossession of cars or home electronics/furniture if you stop paying car loans or credit cards.

  • SteveinCH

    DR

    Interesting post and an interesting topic. Some thoughts.

    1. The notion that mortgage brokers and others were taking advantage of ignorant homeowners I think it pretty demonstrably false. If you read accounts at the time, the mortgage industry was fueled by a very bad assumption, that house prices always go up. This assumption was made by everyone in the industry and everyone in politics (maybe not everyone but easily 99% plus). Under that assumption, behaviors, yes even CDOs were logical approaches to the market. Of course, that assumption sucked and one can argue many in the industry “should have” known it. But the fact is they didn’t.

    2. The comparison between homeowners and businesses is a tired and poor one. Businesses rarely walk away from investments. They may write them down over time, even write them down to zero. What they do is take a loss. If they walk on a loan, they pay the penalty associated with the loan. I see no particular issue with that from either a business or a homeowner. However, if one arrives at the point of saying there should be no consequence for a homeowner, one has crossed the line in my view. A contract is a contract.

    3. I also think there’s a difference (at least in my own view) between a contract I enter into and one that my company does. In my view, I should do my best to fulfill any contract I enter into. In other words, if I can afford to pay my mortgage I should. In that sense, for me, a strategic default is immoral. A business, again in my view, is an amoral entity unlike an individual.

    4. The economic considerations are also very different. Because corporations are amoral entities, the risk of “strategic default” is already priced into business loans. It is not priced into consumer loans today because, until the present time, it has not been perceived as a significant risk. Were that to change, rates will go up for everyone.

    5. The notion that “those who profited” from making loans should compensate those who lost from taking them is a pretty ridiculous proposition. Are you suggesting that the loser on every contract is entitled to compensation from the winner. If I sell you a call option for the S&P and it ends in the money, should I not be able to claim the rewards because I won and you lost? Does that make any sense at all? And, again, were your proposed solution to prevail, credit would become even less available and at even higher cost. Maybe you think that’s a good thing but it would be unwise to ignore the cost.

    6. I’d suggest you distinguish strategic default from walking away. The website does a pretty good job of this. I haven’t watched the Stossel show but it sounds like he’s more outraged with strategic default than walking away. From a moral sense, I would be too. Failure to pay when you are able, is, in my view, something a person should not do (aka immoral). Walking away when you cannot pay is a very different thing.

    7. Lastly, I’d suggest you take a look at the pricing on the website. If one wanted to get outraged, one could easily take on the website owner for attempting to profit off of the misery of people under pressure. How accurate and fully disclosing do you find the website? Seems pretty hype-laden and not fully informative to me. But hey, he’s only charging a few hundred bucks and another 30 to 100 a month. I’m sure people at risk of losing their homes can afford it.

  • Quelcrist Falconer

    3. I also think there’s a difference (at least in my own view) between a contract I enter into and one that my company does. In my view, I should do my best to fulfill any contract I enter into. In other words, if I can afford to pay my mortgage I should. In that sense, for me, a strategic default is immoral. A business, again in my view, is an amoral entity unlike an individual.

    When dealing with an Amoral Entity, you better get amoral real fast, or else it will eat you & spit you out before breakfast.

  • SteveinCH

    Not at all QF, morality is an individual trait. When dealing with an immoral actor, you have no less responsibility to behave in a moral fashion. He did it first is never a morally acceptable excuse.

  • rudi

    BOA tried to foreclose on two properties in Tampa. In both cases. the borrower missed payments by days, one early one late. Due to bad press, BOA backed off on the bad PR. I could see a foreclosure on default of 6 months, but DAYS!!

  • zippee

    Of course Stossel is outraged; his libertarianism is a libertarianism of convenience.

  • DaGoat

    SteveinCH I have a couple of disagreements. There were many reasons for the housing bubble and subsequent crash, among those was predatory lending for lack of a better term. Loans were made that the loan officer had to know the homeowner had no chance of paying off unless the property itself appreciated. In a sense both homeowners and lenders were engaging in speculation. I know there are many people out there placing the lion’s share of blame on predatory lending. I’m not saying that, but I disagree with your statement 1 that it was not a factor.

    Secondly a mortgage is a contract and the morality/amorality aspect isn’t a factor. The lender accepts the house as collateral in the event of default and may be able to go after the homeowner in other ways depending on the contract. The consequence of the homeowner not fulfilling the contract is spelled out – he loses the house. The consequence to the bank is also spelled out – they take the collateral which theoretically covers the loan. In addition the homeowner has the additional consequence of a damaged credit rating. If the homeowner decides to walk away and accept the consequences that is fine. I know I’m saying things you already know, where I disagree with you is looking at it as anything but a legal contract.

    Where I don’t agree with many people is the expectation that people without means to stay in a given home should somehow be allowed to stay in that home anyway. Walking away from the mortgage is a much more honest approach.

  • Stray Mongrel

    But these homeowners are walking away specifically because the value of the home has dropped lower than the cost of the mortgage. The entire purpose of walking away is to place the market losses on the bank. The bank then receives less money back then they lent, which would be the same as the homeowner walking into the bank, taking thousands of dollars out of the vault, and then lighting it on fire.

    In all fairness the bank took that gamble to begin with, when they entered into the contract. They get the house, which is what they agreed upon, so they have little to complain about at that point.

    The system was set up for a market that assumed real estate always appreciates. I’m sure that before recent market problems, this type of “walk away” was alot more rare, and not much of an issue.

    Now it’s become a business model, and that’s the real problem. In a perfect world, “nobody should be screwing nobody”. I think that’s Stossel’s point.

  • dduck

    I’ll go with that 50/50 also. Come on, we all know a least one “free loader” and it could have been oneself at some point. OK, I’ll be the first to confess, I overstayed my unemployment, for one. How many people max out there credit cards with plasma TVs, multiple telephone/text bills, etc., then declare bankruptcy.

  • dduck

    “In all fairness the bank took that gamble to begin with, when they entered into the contract. They get the house, which is what they agreed upon, so they have little to complain about at that point.”
    NO, banks should not be gambling! That FU the whole system. Those doing it, enabling it and taking advantage of it, are all at fault. And, investing in a bank under those circumstances is bunk investing instead of bank investing. Take that to the bank.

  • casualobserver

    Dg…I too see this as less of a moral issue and more of a transaction. Nonetheless, I don’t see the homeowner ultimately benefitting by the so-called strategic option being peddled. In only a few states, can you escape a deficiency judgement. Therefore, you don’t escape the ultimate loss the bank takes. Whether you ultimately lose less than if you short sell is obviously a big fat guess. With a short you have a chance of keeping the judgement off your credit record too.

    One way or another, we will bring things back to where they need to be……people renting unless they really can afford the mortgage….and if we get rid of Fannie and Freddie in the process, so much the better.

  • Did anyone miss the bit about the bailouts? The basic argument is that, since the lenders were excused from suffering the consequences of bad decisions, then so should the borrowers. In a sense, he’s arguing equal immorality. I don’t like the argument, but it isn’t without merit. Of course, the root of the problem is with the bailouts.

    Amoral actions serve as justification for more amoral actions.

  • rudi

    Those bad Fannie Mae back homeowners. The Only cause of bad financial times. But what about shopping malls, strip malls and the CRE bubble? The posts link:
    http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

    Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

  • JSpencer

    I’ve watched Stossel’s shtick for years and have long since come to the conclusion his wiring is crossed. I take everything that particular axe grinder says with a lot of salt.

  • D.R. WELCH

    Steve,
    Thank you for reading my column. It is refreshing a conservative like yourself would differentiate between people and corporations. By calling them “amoral” in item 4 and saying corporations behave differently than people you seem to confirm what many of the libs say regarding the Supreme Court assertion that corps are people.
    All I can say on the subject is what I know. While being an owner of a corp, I can tell you businesses regularly default on all kinds of contracts unfavorable to the business. They pay a penalty and move on. I don’t think you made the case that corps do not on a regular basis walk away from all kinds of contracts. I understand I have set up a sort of strawman and proving a negative is very difficult but, you brought it up.
    Sadly however, you seem to defend Stossel and others who want their cake…It is either a financial transaction subject to good ole capitalism or not. In the pure capitalistic utopia I have seen you defend, the art of the deal is king. I write contracts with advantages and you either agree to my terms, renegotiate or say no. If I exercise my options within the contract, in this case walking away, I have that right. In the self-correcting capitalistic utopia, you write better terms next time or go out of business. Whether or not those possibilities were priced into the loans this time is irrelevant in utopia land. Darwinian market forces will kill off those who do not adapt.
    The real non-utopian truth is we pick winners and losers all the time. Even capitalism has its limits and rules. In this case we picked winners by making banks whole in the bailout. By doing this we also made CDO holders and others whole. I see two intellectually honest positions in this situation. One, those made whole (banks etc. ) should help the homeowner in this situation. Two, if you worship at the alter of the free market on Sunday, you can’t fault the business decision of the walk away homeowner on Monday.

  • SteveinCH

    DR,

    Thanks for your reply. I wish you had responded to what I had written as opposed to restating your pov but that’s fine.

    I think walking away when you can pay as a person is wrong. It is interesting that you want to equate corporate morality and individual morality in this case. Amoral is not immoral.

    Have a nice day : )

  • JSpencer

    Steve, DR did in fact address the heart of the issue. In the old parlay, what is good for the goose is good for the gander. You still don’t have your eyes open quite wide enough..

  • SteveinCH

    Hmmm JS

    Among the things he (and you) didn’t address would be…

    …the notion that the behavior was purposefully deceitful as opposed to based on a false premise

    …the difference between an individual (moral or immoral) and an enterprise (amoral)

    …the future loan pricing implications of widespread strategic defaul

    …the rationale for losers in a business transaction being able to extract compensation from winners (and the implications of allowing that broadly across a range of business transactions)

    …the distinction (both economically and morally) between walking away and strategic default

    …the questionable position of the organization represented by the person D.R quotes in his piece.

    But yes, other than that, he addressed my points. In fact JS, if you read point 3, I don’t have an issue with walking away. Strategic default is where my issue sits.

    But then again, I don’t actually believe you read my posts if they are lengthy.

  • slamfu

    Probably the best case of what is good for the goose is not good for the gander, and another example of the wealthy trying to hold the poor to a standard they not only don’t support, but get to be completely hypocritical about at the same time.

    http://news.firedoglake.com/2010/08/11/mortgage-bankers-association-strategically-defaults-on-office-space/

Twitter Auto Publish Powered By : XYZScripts.com