Mort Zuckerman

I saw an interview with Mort Zuckerman yesterday. I believe he is publisher of US News and World Report, and a guy I have a lot of respect for. Unfortunately, he scared me half to death. I have been worrying about a problem I have not heard well mentioned until he brought it up during the interview, and that is the problem of home owners owing more on their houses than their current value. According to Mort there are about 20,000,000 mortgages in the country where the owner owes at least 20% more on the house than its current value. In addition, he calculates that 15 trillion in wealth has evaporated with the downturn in stock values and home values. He doesn't even calculate the reduction in auto values and residual losses taken by lenders. These are probably minor in the big picture. He also states that even though the bailout package was sold based on freeing up the credit markets, that has not been the case. He says banks are moving to shore up their banking operations as their first priority and are still taking a strict approach to the granting of credit. He didn't mention anything about the funding being used for "exec comp", something I hope is closely monitored.

Another analyst pointed out that that U.S. auto makers are among the worst managed businesses on the planet. According to him they pay their rank and file workers too much, over pay their executives, marry their business to unrealistic expectations and then cannot respond to market changes. He thinks bailing them out sends the wrong signal to business, that you can run a crappy business and have the government bail you out if you fail. I don't see that the gov't has a choice, but they need to get off of this CAFE thing and tax gasoline like the other developed nations. We are currently back into a another period of cheap gas and this will tend to blunt investment in alternative ideas in energy, fuel, and transportation. This is exactly where gov't intervention IS required.

All of this evolves into the discussion of "corporate welfare" vs doing things to help the underprivileged and what can be afforded. Obama will have his hands full. In his spare time, he can heal the middle east, stop the war in Iraq, hang bin Laden, cure cancer and obesity, etc. etc. etc.

dr

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Comment by JJ Hornblass on November 9, 2008 at 10:42pm: Just because someone is underwater on their mortgage doesn't mean they'll abandon their home. Would you? I wouldn't, at least not unless I felt like I had to or it made financial sense to do so. When your underwater on your mortgage, you don't necessarily have the financial ability to act on a "better deal." That's because the decline in home value prevents you from making a downpayment on a comparable house, unless the consumer has saved much money -- which Americans, by and large, do not. I am not saying the economic situation is poor, but I think it is important to consider the situation fairly.

Comment by David Ruggles on November 9, 2008 at 11:12pm: You are most certainly correct that everyone who is underwater on their mortgage won't necessarily default. But it does represent a big "unknown". The reason I've been concerned about the topic is that as a Las Vegas resident, we see a lot of this "abandonment" actually taking place. Of course, Las Vegas is not the norm. Most of the people who are "bailing" on their mortgages have gone into rental situations or. But Zukerman is the first "expert" I heard mention the issue at all.

Comment by Tony Rand on November 10, 2008 at 4:52pm: It makes financial sense for people to abandon their home when they can acquire an equal replacement home, sometimes in the same neighborhood, saving tens (sometimes hundreds) of thousands due to price erosion. At least that is the trend that we're starting to see. Folks are current on their mortgage but unhappy with the negative equity. They find a replacement residence, purporting to rent or sell their existing residence (by supplying rental or listing agreements to the lender). Once their new purchase has closed, they stop paying the old mortgage; regardless if still actively listed for sale or now generating rental income. While in the midst of an economic crisis, with consumer confidence continuing to decline, walking away from a negative equity position will continue to grow - making the most financial sense for those trying to survive in the now while fearing the promise of future improvements. It is because of this trend that FNMA revised their guidelines in June making it even more difficult for consumers to obtain a new primary residence while converting their existing residence. Zukerman is correct - this will be an important issue. It will continue to lean on the confidence of banks and consumers alike and carries an unknown-known on the additional losses that will be written down over the next eight quarters.

Comment by Tim_Cleveland on November 10, 2008 at 8:55pm: I remember hearing a year or so ago about a guy who was actually hawking a seminar to teach people how to do what Tony describes. I think that in any event this possibility is becoming less likely as financing, even for good borowers is tougher to get just now. With a live person looking at most loan apps now, I would think that they would raise an eyebrow if someone just decides to change their current home into a rental and wants a conforming loan to buy a new one a few blocks away. I am with JJ in thinking that while there may be a few unscupulous folks out there trying to pull thsi offer, their credi tbe damned when the old place forecloses, a person who bought a personal residence at the top of the market, but had a legitimate shot at paying because they borrowed ina conventional way, may be PO'd that their house is declining in value. But they realize that they really haven't lost money until they sell and giving it soem time may at least alleviate some of the downside.

Tim

Comment by JJ Hornblass on November 11, 2008 at 8:04am: Tony, Tim, you make good points. I was at SIFMA's Summit on the TARP yesterday and Chris Flanagan, head of global structured finance research at JPMorgan Chase, made an interesting point about the morality of financial services. He said that the moral commitment to fulfill one's financial obligations has been lost in our society. This is exactly what you are writing about, Tony -- the seeming inability for a vast number of Americans to recognize that ditching a mortgage is a form of thievery. But you can't force people to behave in an upstanding manner.

Comment by Tony Rand on November 11, 2008 at 10:22am: Unfortunately, Flanagan is correct as well. There are multiple social intelligence factors at play here. I fear that the media exploited greed of Wall Street/Capital Markets will only give Americans an excuse to walk away. People are fed up, scared and don't see that there will be any major negative ramifications if they do walk away. Regardless if they know it or now, having a foreclosure on their credit, if it is the only negative rating they having, will only have a minor impact on their score. Another issue of social intelligence is the lack of rejection by the masses - so many people are suffering that there is more acceptance and sympathy for those who are "falling down" - the negative stigma has been desensitized.

Comment by David Ruggles on November 11, 2008 at 12:35pm: When corporations take bankruptcy as a pure business move it makes it easier for private individuals to do the same. I have also witnessed a pattern over the years of large companies "slow walking" their vendors and dealers on payment simply because they can. Its pragmatic to maintain a high credit score but "under the gun" people make hard decisions just as companies do.

Again, I am not saying I think there will be a mass exodus from negative equity mortgages. But it does represent an "unknown" and unknowns tend to breed paralysis.

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