We wholeheartedly agree with Nathan Martin in today’s post on the subject:

Nathans Post On The Secret of Oz

Here’s an out take:
After viewing Bill Still’s award winning movie, “The Secret of Oz,” you will never view “The Wizard of Oz” or our economy with the same child eyed unawareness as I once did.

The Secret of Oz is a terrific analogy and Bill walks us all the way to REAL solutions that can move us past naive HOPE, and into a fulfilling future, one without debt based money and one without the manipulations and flaws of a gold standard. Bill pulls back the curtain of history and together we will show how the issues have been boxed in over time – Republican/ Democrat, Gold Standard/ DEBT based fiat.

Pay no attention to that man behind the curtain!

Bill’s movie, “The Secret of Oz” presents history in a fascinating way, he then picks up on author L. Frank Baum’s symbolisms and spells them all out for you – The yellow brick road, the silver slippers, the Emerald City, the mindless Scarecrow, the heartless Tin Man, the cowardly Lion. Even the witches and flying monkeys have meanings that you will find fascinating.

***

And we also heartily encourage everyone to join us, and Nathan Martin in getting your own copy of the film and getting the word out about it. As Nate says:

“Please view the film and enter into a healthy discussion. Help me prove that the people’s heads are not filled with straw, that we have heart, and that with lion-like courage we can have the AUDACITY TO ACT and turn our discussion into reality.”

Buy the Movie The Secret of Oz – Watch it – Spread the Word About it!

Debt Slave Bait and Audit the Fed Bill Gutted: What You Can Do

Debt Slave Bait and Audit the Fed Bill Gutted: What You Can Do
Posted by Michael Shedlock at 2:47 PM …. Print …. Email

Government and Lender Policies of Fear and Shame…

Government, lenders, and various lender-sponsored “help” agencies have acted in unison, using fear mongering tactics and shame to manage the housing crisis for the sole benefit of lenders.

Thanks to Brent T. White at the James E. Rogers College of Law and the Sacramento Bee and for a fascinating called Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

Note: The PDF is 54 pages long and worth reading in entirety but I have condensed the discussion down to a very readable 3-4 pages of so. There is little sense in putting such a lengthy snip into a huge blockquote that will take up a lot of space. Instead, I will make it clear below when the article ends.

Abstract

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

II. Underwater and Staying Put

As further evidence that relatively few homeowners strategically default solely because they are underwater, housing markets with a sharply higher percentage of underwater homeowners as compared to the national average do not have sharply higher default rates.

As the chart below illustrates, this pattern of relatively low default rates compared to the percentage of underwater mortgages holds true almost universally across the hardest hit markets, with the default rate much more closely resembling the unemployment rate than the percent underwater:

III. The Financial Logic of Walking Away

Before examining why more underwater homeowners are not strategically defaulting, it might be helpful to explore why they should. A textbook premise of economics is that the value of a home, even an owner occupied one, is “the current value of the rent payments that could be earned from renting the property at market prices.”

In other words, when the net cost of buying a home exceeds the net cost of renting, one is better off renting. The equation is not as simple, however, as comparing total mortgage payments to rent payments because home ownership carries certain benefits including tax breaks and the potential for appreciation. Additionally, assuming a non-depreciating market, the portion of the mortgage payment that goes to principle rather than interest will eventually inure to the homeowner at the time of sale. On the flip side, homeownership carries significant costs that renting does not, including maintenance, homeowner’s insurance and substantial transaction costs upon selling.

In calculating whether to buy or rent, a potential homebuyer should compare the net cost of owning to the net cost of renting a similar home over the expected period of occupancy. The costs of owning include the interest-only portion of the loan payment, property taxes, maintenance, homeowners insurance, and transaction costs upon selling, minus the expected appreciation and cumulative tax savings over the planned period of ownership. As a rule of thumb, a potential homebuyer is generally better off renting when the home price exceeds 15 or 16 times the annual rent for comparable homes.

For example, a homeowner who bought an average home in Miami at the peak would have paid around $355,400. That home would now be worth only $198,00038 and, assuming a 5% down payment, the homeowner would have approximately $132,000 in negative equity. He could save approximately $116,000 by walking away and renting a comparable home. Or, he could stay and take 20 years just to recover lost equity – all the while throwing away $1300 a month in net savings that he could invest elsewhere.

The advantage of walking is even starker for the large percentage of individuals who bought more-expensive-than-average homes in the Miami area – or in any bubble market for that matter – in the last five years. Millions of U.S. homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages.
Homeowners should be walking away in droves. But they aren’t.

V. The Social Control of the Housing Crisis

Alarmed by the possibility that foreclosures may reach a tipping point, formal federal policy has aimed to stem the tide of foreclosures through programs designed to “reduce household cash flow problems,” such as the Making Home Affordable (MHA) loan modification program and Hope For Homeowners.

In other words, federal policy assumes that homeowners are – for the most part – not “ruthless” and won’t walk away from their mortgages simply because they have negative equity. Most homeowners walk only when they can no longer afford to stay. As evidence of this fact, only 45% of homeowners would walk even if they had $300,000 in negative equity. This percentage drops to 38% among the subset of individuals who believe it is immoral to strategically default on one’s mortgage (a subset to which 87% of homeowners belong).

These numbers suggest that the “moral constraint” is a powerful one indeed – and that, for most people, only the complete inability to afford their mortgage would push them to default. On the other hand, the fact that 63% of “amoral” individuals would default at $300,000 in negative equity, and 59% would do so at $200,000, suggests that federal policy can only proceed on the premise that affordability is the prime consideration as long as the moral and social constraints on foreclosure remain strong.

The government thus has an incentive, along with certain other economic and social institutions interested in limiting the number of foreclosures, in cultivating guilt and shame in those who would contemplate walking away. Similarly, knowing that guilt and shame alone are not enough to prevent many individuals from defaulting once negative equity is extreme, these same institutions have an interest in increasing the perceived cost of foreclosure by cultivating fear of financial disaster for those who contemplate it.

At the political level, government spokespersons, including President Obama, have repeatedly emphasized the virtue of homeowners who have acted “responsibly” in “making their payments each month”. The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford.

Such individuals are portrayed as obscene, offensive, and unethical, and likened to deadbeat dads who walk out on their children, or those who would have “given up” and just handed over Europe to the Nazis.

Indeed, a homeowner contemplating a strategic default would be hard pressed to avoid the message that doing so would place them among the most despicable members of society.

Moreover, a homeowner who turned to any number of credit counseling agencies would also find little sympathy – and much moralizing – should they announce their plan to walk on their “affordable” mortgage. Gail Cunningham of the National Foundation for Credit Counseling declared for example in an interview on NPR: “Walking away from one’s home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities.”

Indeed, the uniform message of both governmental and non-profit counseling agencies (which are typically funded at least in significant part by the financial industry) is that “walking away” is not a responsible choice and should be avoided at all costs.

Social control of would be defaulters is not limited to moral suasion, however. Predominate messages regarding foreclosure also frequently employ fear to persuade homeowners that strategic default is a bad choice. Indeed, almost every media story on those who “walk away from their mortgages” condemns the behavior as immoral and enlists some “expert” to explain that foreclosure is, despite any claims to the contrary, a devastating event.

Similar warnings of disaster pervade the information given to homeowners by HUD-approved housing counseling agencies, such as the following from the Anaheim Housing Counseling Agency:

Losing your home can be the worst and most devastating event to you personally, and your credit history. This is a scenario that you don’t want to occur if you can avoid it! Not only will you lose the comfort of your home and your investment, but a Foreclosure will stay pending on your credit history for as long as 10 years. This will jeopardize your ability to qualify for any future home loan purchases, it may affect your ability to access loans for car purchase and other needed purchases, and loan costs are likely to be higher both in fees and interest paid.

As discussed above, fear alone is a powerful motivator. But guilt and fear in combination are even more potent.

This may be because most individuals have a deep-seated, if ill-defined, sense that if they do “bad things,” bad things will happen to them. Whatever the psychological underpinnings, most people simply do not believe they will escape punishment for their moral transgressions. Guilt and fear of punishment go together.

As explored above, however, there is in fact a huge financial upside to strategic default for seriously underwater homeowners – an upside that is routinely ignored by the media, credit counseling agencies, and other political and economic institutions in “informing” homeowners about the consequences of default. Moreover, the costs of default are not nearly as extreme as these same institutions typically misrepresent them to be. In reality: homeowners face no risk of a deficiency judgment in many states or, regardless of the state, for FHA loans or loans held by Fannie Mae or Freddie Mac; even in recourse states, lenders are unlikely to pursue a deficiency judgment because it is economically inefficient to do so; there is no tax liability on “forgiven portions” of home mortgages under current federal tax law in effect until 2012; defaulting on one’s mortgage does not mean that one’s other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within a two years (and, meanwhile, two years of poor credit need not seriously impact one’s life).

VI. The Asymmetry of Homeowner and Lender Norms

One obvious response to the above discussion is that society benefits when people honor their financial obligations and behave according to social and moral norms, rather than strictly legal or market norms. This may be true if lenders behaved according to the same social and moral norms. In the case of lender-borrower behavior, however, there is a clear imbalance in placing personal responsibility on the borrower to honor their “promise to pay” in order to relieve the lender of their agreement to take back the home in lieu of payment. Given lenders generally superior knowledge and understanding of both mortgage instruments and valuation of real estate, it seems only fair to hold them to the benefit of their bargain. At a basic level, sound underwriting of mortgage loans requires lenders to ensure that a loan is sufficiently collateralized in the event of default.

As such, historical home prices have hewed nationally to a price-to-annual-rent ratio of roughly 15-to-1. At the peak of the market, however, price-to-rent ratios reached 38-to-1 in the most inflated markets, and the national average reached 23-to-1.

If personal responsibility is the operative value, then lenders who ignored basic economic principles (of which they should have been aware) should bear at least equal responsibility to homeowners for issuing collateralized loans that were far in excess of the intrinsic value of the home.

Moreover, since lenders generally arrange the appraisal (which home buyers must pay for) and home buyers rely upon the lender to ensure the home is worth the purchase price, one might argue that lender should bear much more than 50% responsibility for the bad investment of the homeowner and lender.

Indeed, lenders’ mortgage default risk models have long shown that the loan-to-value ratio is a critical factor in default risk. Lenders relaxed this requirement, however, as credit default models showed that few borrowers were “ruthless,” meaning that few borrowers default as soon as the loan value exceeds the market value of the home.

This is not to say that lenders are solely responsible for the housing run-up and bust, but that they do in fact bear a substantial portion of the blame – and thus should thus bear a substantial portion of the cost. One might argue, in fact, that the value of personal responsibility would require lenders to own up to their share of the blame, and work with underwater homeowners by voluntarily writing off some of the negative equity.

But lenders, of course, do not operate according norms of personal responsibility, and seek instead to maximize profit (or minimize losses). Appealing to this duty, it has been suggested that, given the great cost to lenders of foreclosure, they have an economic incentive to modify loans for homeowners in danger of default.

Recent studies seeking to explain this apparently irrational behavior have shown that lenders are simply operating to maximize profit and minimize losses, just as they would be expected to do.

First, lenders know that borrowers with high credit scores are unlikely to default even at high levels of negative equity. To modify loans for these homeowners would be to throw money away – and to encourage more homeowners to ask for modifications. Second, a significant number of homeowners who temporarily default on their mortgages “self-cure” without any help from their lender – though self cure rates have dropped precipitously in the last two years. Again, to modify the loans of individuals who would otherwise self cure would be to throw away money. Third, homeowners with poor credit, or who end up in arrears because of “triggering events” such as unemployment, divorce, or other financially devastating circumstances are likely to default on the modified loan as well. To modify loans for these individuals is to waste time and risk housing prices falling further before the lender eventually has to foreclosure and sell the property anyway.

Given these economic incentives for the lender, a seriously underwater homeowner with good credit and solid mortgage payment history who responsibly calls his lender to work out a loan modification is likely to be told by his lender that it will not discuss a loan modification until the homeowner is 30 days or more delinquent on his mortgage payment.

The lender is making a bet (and a good one) that the homeowner values his credit score too much to miss a payment and will just give up the idea of a loan modification.

However, if the homeowner does what the lender suggests, misses a payment, and calls back to discuss a loan modification in 30 days, the homeowner is likely to be told to call back when he is 90 days delinquent. In the meantime, the lender will send the borrower a series of strongly-worded notices reminding him of his moral obligation to pay and threatening legal action, including foreclosure and a deficiency judgment, if the homeowner does not bring his mortgage payments current. The lender is again making a bet (and again a good one) that the homeowner will be shamed or frightened into paying their mortgage. If the homeowner calls the lender’s bluff and calls back when he is 90 days delinquent, there is a good possibility that he will be told that his credit score is now so low that he does not qualify for a loan modification.

Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations.

*** END OF ARTICLE SNIP ***

There is more in the article including a discussion as to what to do about it all. I do not agree with many of the proposed solutions and indeed the article points out flaws in most of the solutions that have been proposed.

However, I do agree with the basic idea that asymmetry is a huge problem, that the playing field needs to be leveled.

Moreover, I will add that the real moral hazard is attempting to keep people debt slaves by purposely overstating the costs of walking away while ignoring all of the benefits. These “help” agencies are designed to do one thing and one thing only: help the lender regardless of the cost to the homeowner.

If these “help agencies” actually gave a realistic assessment of the advantages of walking away, we would see more willingness for voluntary cooperation between lenders and homeowners to negotiate a mutually beneficial arrangement. Instead we have a one sided winner-take-all approach whereby the only way for the homeowner to win is to walk away.

The current system of offering lenders a few thousand dollars to refinance a loan making the loan “more affordable” does nothing to address the fundamental problem of too much debt that will act as a drag on the economy for a decade to come.

The article concludes …

Regardless of the precise policy prescription, it is time to put to rest the assumption that a borrower who exercises the option to default is somehow immoral or irresponsible. To the contrary, walking away may be the most financially responsible choice if it allows one to meet one’s unsecured credit obligations or provide for the future economic stability of one’s family.

Individuals should not be artificially discouraged on the basis of “morality” from making financially prudent decisions, particularly when the party on the other side is amorally operating according to market norms and could have acted to protect itself by following prudent underwriting practices.

The current housing bust should be viewed for what it is: a market failure – not a moral failure on the part of American homeowners. That being the case, it is time to take morals out of the picture and search for an equitable solution to the negative equity problem.

Other than a single sentence about “market failure” that was a brilliantly written piece by Brent T. White. The market did not fail, government policies to promote housing in conjunction with loose monetary policies at the Fed is what failed. Fannie Mae, Freddie Mac, HUD, the FHA, and the Fed all failed. Every one of those agencies should be abolished.

In the meantime, morality and fear mongering is not the solution. Instead, a rational look at the costs and benefits of walking away will encourage market solutions involving renegotiating debt levels to affordable levels rather than concentrating on affordable payment levels. A focus on the latter will act as a drag on the economy for a decade.

Addendum:

Walking away may be a good thing but laws vary state by state.

This is very important: Please do yourself a favor and Consult An Attorney Before Walking Away. The link will explain why.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Sure, it’s 8 full pages of reading, and that’s a LOT in the world on online jibberish, one liners, sound bits and photo opps but it is the best damn 8 pages of reading you are likely to do in a while on the subject and in terms of providing clarity, let’s just say it will leave you unsettling clear and wondering WTF as well as askign yourself how we get control of what is clearly now firmly in control of our government and our financial system: namely a massive, deeply entrenched system of fraud.

In Wall Street’s Naked Swindle you will discover just how far gone our current financial system is, and just how at this very moment it is being handed over without reservation to the largest and most corrupt banking powers of our day.

You might say, “well who cares?” or “what can I do about that?” but the truth is, if more people in this country knew the truth about the current financial crisis the polls asking who is to blame would not be coming up with the lame-o answers of “Democrats” or “Republicans” and the cherade of blaming politicians for what is now a systemic propblem of mass corruption would be set aside to deal with the real issue which is the wholesale theft of our government by the banking elites. Not to mention that people responsible for this huge swindle would start going to jail, perhaps… just perhaps. The truth is that if they do not, then our system of money and governance as we know it will not be around much longer to talk about.

If you are looking for the facts underlying the realities we are all experiencing, this is a great place to start.

But that change has come to a stand still. It’s as if someone turned back the clocks and threw us back in time.

Nothing seems to have “Changed” at all. We have had a war over health care in the streets as the Media has pitted those who need care against those who do not want anyone including government to control their access to what they believe keeps them healthy – which mostly is NOT the medical establishment – and we have had no movement of any substance on any major issue facing us.

Worst of all, as our nation has gone into this crisis led by the same Paulson, Geithner and Bernanke; so we still are being led down the garden path by the very people who created the debacle. The same who led us here are still leading us further astray. This is not change.

We simply keep falling for the rhetoric and not asking the real questions. Why? Because the guys we hired to do that job up in Washington are still all owned by the guys we need them to regulate.

The change that we came to the table for is not here, and it is time to talk about it honestly and directly.

The United States of Goldman Sachs is still running this nation. and so are the Bandits of America and CountryFine. Homeowners and good people all across the nation are eating dirt because the banks decided to go on a joy ride with credit at everyone’s expense and to their enrichment.

What I don’t get, excuse me, pardon me, is that while the blogs online are talking about it, NO ONE is doing anything about it except the same damn guy who has ALWAYS been doing something about it and that is Ron Paul.

I have watched this country sink into an ever deeper miasma of self doubt and fear and loathing and yet no one seems to be willing to stand up and ask the simple question. Where are the investigations of the fraud mongers? Which CEOs and “Federal Agents” have colluded to create this colossal financial catastrophe and who is on their way to jail?

Yet the land is dark and silent and the people keep taking their lashes and I wonder why they are so patient and so vigilant in a system that will trade their soul for a “loan mod” that will not reduce their principle balance nor their past dues but only trick them once again into an interest only cost inducing kick down the road…

A kick that will cost them only the waiving of all their rights as borrowers in ANY and ALL previous transactions; but which will leave them still completely burdened with the owing of the debt while the property which underlies it continues to fall.

This is like a death trap spiral in a cobra pit.

You cannot get out because you cannot qualify to get out and if you do qualify to get out the cost is everything plus waiving all your rights to any legal retribution to the lender for past wrong doing. Talk about the perfect con. They get you coming or going – with short sales with “borrower contributions required” on non recourse home owner loans (you know the kind of loans that the lender has to agree are limited to the real property for recourse – can’t ask for or seek funds from the borrower if those loans go bad… . – Well, not any more; the terms just changed.

Now they are going to take either a promissory note or cash from the seller losing their home in order to sell their home in a short sale and avoid foreclosure. So you either pay cash or promissory note or you lose your non recourse status, or to keep it you have to allow the house to go to foreclosure, not take the short sale and cost the taxpayer more money and put a foreclosure on your credit history.)

Or loan mods with increased monthly payments, no principle write downs and all the junk late fees and additional charges just thrown to the back of the loan for the borrower to pay later – while he pays off a loan worth twice what his house is now worth for the privilege of going broke trying – it’s all here. You have to try to qualify – to waive all your rights to ever hold them accountable for the fraud they just perpetrated on the entire economic system with their inflated bubble lending and MBS production mills.

MBS. I think that has to stand for More BS. MBS the truth is in the acronym. A pile of it too. They are now making all of us accountable for their fraudulent tactics against us!

MBS. I think that has to stand for More BS. MBS the truth is in the acronym. A pile of it too. They are now making all of us accountable for their fraudulent tactics against us!

This man who came in talking change is now telling us that he thinks the FED can deal with it?

This is bought, sold and paid for. Sorry but that is just a fact, so don’t talk rhetoric to me. The Goldmand Sachs of America still stands and he is their poster child. Change, my ass.

This is a three hour video so you may not be able to take it all at once, but it’s important enough to watch. This is your government in action – all we can say is Ron Paul is worth watching.

Apparently, not here.

Planet Money Interview Adam Davidson and Elizabeth Warren May 2009

We note that all pontificating aside, not much has changed in the five months since this interview came out – the banks are still foreclosing on homeowners at a record clip; the government is now subsidizing private investor’s acquisitions of those “troubled assets”; new hedge funds are springing up to purchase the housing inventory left in the wake of the “credit induced housing bubble”; and, just by coincidence, no one has made a single move to begin prosecution of the most massive control fraud and public fleecing in America’s history. We note that the COP (Congressional Oversight Panel) under Elizabeth Warren DID come out last week and chastise the Tresury for its failure to provide any type of meaningful relief to the millions of Americans still facing foreclosure.

John Taylor – Stanford Economist, Author and Professor

On his blog

Economics One

you’ll find cogent discussions of current events, as well as plenty of resources for learning right along with his economics class students.

For serious students who wish to get a deeper knowledge of the current crisis, we recommend his two most recent books:

The Road Ahead for the Fed

: with George Shultz, Allan Meltzer, Peter Fisher, Donald Kohn, James Hamilton, Myron Scholes, Darrell Duffie, Andrew Crockett, Michael Halloran, Richard Herring, and John Ciorciari, 2009
And

Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis (Hoover Institution Press Publication)

BFR Webmaster note: This educational resource has our highest rating.