Do I walk away?

Should I walk from my mortgage is a very common question right now.  People are wondering about the moral ethics behind walking away from a loan.  I have my thoughts about it.  I found this article on His blog.  He has a very interesting take on this situation.

This article is written by a guy named Mike Shedlock.

Businesses Advised To Walk Away

Before exploring legal advice being given to banks about walking away, let’s review one more time the Moral Obligations Of Walking Away.

In a nutshell I made a case that “business is business” and yes, I encourage people to walk away now if they are going to be forced to do it later anyway. I also encourage people to walk away if they are hugely underwater on their homes.

Banks knowingly and willingly gave homeowners a free PUT option when they financed homes at zero percent down. It’s just a business decision. Businesses break contracts all the time.

In the “moral Obligations” post I also claimed there would be a national referendum on walking away. A few days later an ABC Poll showed that US citizens decided that walking away from Iraq was the single most important thing we could do economically for the country.

The masses have finally caught on and that is one reason why I declared Obama: The Next President Of The United States.

Walking Away Retail Style

In Does The Shopping Center Economic Model Work? we took a look at trends in retail. Consider what Rob Plaza, Senior Equity Analyst for retail stocks at Zacks Investment Research said two days ago:

“Some companies are closing stores to increase profitability, some are doing it just to stay alive. A lot of retailers already had their plans for 2008 laid out, had already invested in signed leases, ground-breakings, pre-opening, etc, so they couldn’t just stop those new stores on a dime. Looking back on that, they’re going to wish they had just walked away and paid whatever it would have cost them to stop the process. ….. For the next decade, retailers are not going to have to open a brand new store because there’s going to be so many empty ones that need to be filled.”

The interesting thing from the morality standpoint is that some stores are walking away, not to stay in business but to increase profitability. Others wished they walked away right during construction to say costs. Are such decisions morality issues or business decisions?

Wilson’s Leather Walks Away From 160 Stores

“Sandi”, one of my readers, sent me a note this morning that Wilsons Leather will close up to 160 mall locations.

Wilsons The Leather Experts Inc. will close the majority of its 260 mall locations and cut more than 1,000 jobs, the clothing retailer said Friday.

Wilsons will keep 100 stores open, revamping them under a “Studio” concept focused on fashion accessories for women. All stores should be remodeled by August.

About 938 store-related jobs and 64 positions at the company’s corporate headquarters, overseas offices and distribution center in Brooklyn Park, Minn., will be cut.

Clearly Wilson’s Leather had contractual agreements on all those leases. Is there a morality issue here when they just walk away like that?

Banks advised to walk away from big deals

Today, the Financial Times is reporting Banks advised to walk away from big deals.

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

Oh! The Morality!

Note the irony. Numerous programs are being put into place in an attempt by banks and mortgage holders to encourage home owners to stay debt slaves forever, while lawyers are advising banks to walk away from contracts and pay the penalty of loss of reputation.

Exactly how does this differ from homeowners choosing to walk away from their obligations with a price of “loss in reputation” otherwise known as a black mark on their credit score?

Here’s the answer: There is no difference, and that is precisely why all these programs to keep homeowners in their homes when it is a bad economic decision for them to stay, will fail.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named said Mish, who was willing to be named. “The banks Consumers have so many issues with their balance sheets that they are considering a new policy.”

If it’s in your best interest to walk, and you are willing to pay the penalty price, then walk.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Suze Orman or Crazy Joe?

Have you ever seen the cartoon Shark Tales?  There is a deranged hermit crab that normally lives in a dumpster.  He all of the sudden decided to become Oscars financial advisor.  Oscar is an underachieving worker in the Whalewash of Reef City. He wants to be rich, but his schemes always fail and he owes five thousand clams to Sykes (a loan shark).  My favorite line in the movie was at the end when everyone was coming clean from there little lies…Crazy Joe: remorsefully said “And I’m not a real financial advisor!”

I get this question from people all of the time.  “What do you think about Suze Orman’s advice?”  I have many answers.  Here is an interview that was done back in 2007 with Her.  It was an article that I mentioned to people to check out.  So I’ll just post it here so it’s easier to find.  I will throw in a few of my comments on the content.

The New York Times

February 25, 2007

Questions for Suze Orman

She’s So Money

Interview By DEBORAH SOLOMON

Q: As one of the most widely read financial gurus of our time, why would you write a book like “Women and Money,” which is based on the regressive premise that women are birdbrains when it comes to managing money? I would think women are better at saving than men. No, they save and then they give it to their best friends, who need it. They give it to their children, who need it. They give it all away once they’ve saved it.

Isn’t that admirable? That depends on what it leaves them with. It’s not admirable when it leaves them with nothing. I want to change women from savers to investors. Why then is most of Her money in the form of a saver? I do think eventually they should all have Roth I.R.A.’s. You don’t want an I.R.A. You want a Roth I.R.A., if you qualify.  Why should all women have a Roth IRA?  That is a blanket statement that many financial advisors make.  Where is the proof?

I know. I read the book. Did you like it?

I found it a little basic. I can’t believe you thought it was simplistic. You are in denial. For instance, do you have a will and a living revocable trust in place?

No. Oh, my God! Actuarially speaking, your husband will die before you. That’s actuarially speaking. Your husband, let’s say, has just died. You now are by yourself. You have a stroke. You’re totally incapacitated. It’s reality. It happens. Who is going to be able to write your bills for you and take care of the money you have?

Do we have to decide this right now? Girlfriend, you don’t have a healthy relationship with yourself or your money. You put yourself on sale. You have shame, and you have blame. You view money differently because you are a woman.  What does that even mean?

Is this what feminism has bestowed upon women? The right to berate other women? Women don’t understand money. They will go into debt to pay for this and that.

Are you married? I’m in a relationship with life.  HUH??? My life is just out there. I’m on the road every day. I love my life.

Meaning what? Do you live with anyone? K.T. is my life partner. K.T. stands for Kathy Travis. We’re going on seven years. I have never been with a man in my whole life. I’m still a 55-year-old virgin.

Would you like to get married to K.T.? Yes. Absolutely. Both of us have millions of dollars in our name. It’s killing me that upon my death, K.T. is going to lose 50 percent of everything I have to estate taxes. Or vice versa.  Good Planning!

How much are you worth these days? One journalist estimated my liquid net worth at $25 million. That’s pretty close. My houses are worth another $7 million.  I wonder what it is today?

What are your qualifications for giving financial advice, which you do in your books, your column in Oprah’s magazine and your CNBC television show? For seven years after college, I was a waitress at the Buttercup Bakery in Berkeley, and from there I got a job at Merrill Lynch as an account executive, from where I went to vice president of investments for Prudential-Bache Securities. I started my own firm in 1987.  AND?

Do you enjoy spending money? Oh, yes. My greatest pleasure is still flying private. I spend between $300,000 to $500,000, depending on my year, on flying private.  Nothing against spending money but this ist he person giving you advice.  Most people taking her advice are not even close to being in the same position as her.

What do you do with the rest of your money? Save it and build it in municipal bonds. I buy zero-coupon municipal bonds, and all the bonds I buy are triple-A-rated and insured so that even if the city goes under, I get my money. Sounds like the same advice she gives right? I take a little lower interest rate to make sure my bonds are 100 percent safe and sound.  I understand that she tells everyone else to stick it in mutual funds.

Do you play the stock market at all? I have a million dollars in the stock market, because if I lose a million dollars, I don’t personally care.  This makes me laugh.  She doesn’t even live what she teaches.  She talks about it like its gambling, yet she tells us to plan our futures on it getting a 12% return?

We need to really beware of who we take our advice from.  Let’s stop basing it on emotions and hype and start looking at the facts.