At a recent networking event, I had the pleasure of hearing PENSCO CEO Tom Anderson share a bit about his trip to Washington to participate in the Future of Finance conference hosted by the Wall Street Journal. Tom was part of a very distinguished group — including such familiar names as Laura Tyson, Arthur Levitt, Myron Scholes, Robert Rubin, Paul Volcker and Treasury Secretary Tim Geithner — assembled by the Journal to provide input to Geithner’s team, the Obama administration, and the financial industry on how to prioritize the list of needs and goals for economic policy.
Tom originally sought to participate to ensure that retirement planning needs were represented in the discussion — after all, there has been talk of changing the rules for tax-advantaged accounts (to make them less tax advantaged, naturally). While looming problems with the Social Security system are overshadowed at the moment by other crises, there’s no evidence the problems have been solved — and, with retirement nest eggs undercut by the stock market downturn, the last thing retirement investors need is an unexpected tax bite. So, Tom attended with the primary goal of representing the self-directed retirement industry, which can play a key role in helping investors diversify and protect and rebuild what’s left of their portfolios, and retirement investors in general.
Interestingly, though, Tom reported that he wound up advocating for a very different issue: preventing foreclosures. Given that Tom has a 40-year career in banking/financial services, it’s not surprising that he has informed views on many banking issues. But, his reasons for advocating for foreclosure policy were interesting and somewhat surprising.
Tom was quick to point out that he “didn’t vote for the current president,” but nonetheless agrees that slowing the tide of foreclosures should be a key priority. Tom said that while some argue that such intervention would “merely keep people who bought homes they couldn’t afford in those homes” and that “the markets should be allowed to clear,” there are systemic reasons to do it anyway. Otherwise, banks will continue to be saddled with real estate they don’t want and can’t effectively manage — and, jingle-mail will continue to be a problem. That, in turn, will continue to choke off credit that must be loosened for the economy to rebound. What’s more — and, this is the part I found most interesting — those who make the “fairness” argument might change their mind if they knew how Kafkaesque the system has become.
To make his point, Tom described the situation of a PENSCO employee whose property in California was facing foreclosure. Employed by PENSCO for almost 20 years, she’s hardly an unstable or “high risk” borrower from an income perspective. Her complicated mortgage had adjusted to an unaffordable rate — but, even though she should have been able to modify it or refinance, she was unable to. Of course, part of the problem was the overall stall in all types of lending, but, as with most unsuccessful modification attempts, the servicer’s lack of incentive to negotiate also played a role.
Most impressive to me: Tom even tried (to no avail) to personally intervene as a co-signer. In the end, a relatively solid borrower with good backing — who was willing to stay the course in her devalued property — wound up going through foreclosure (a highly undesirable outcome not just for her, but for the bank!). Now the bank has a devalued property on its hands it will have a hard time selling, and has lost the opportunity to have payments flowing back from the borrower. This last bit is crucial: imagine this scenario playing out over and over again, and it’s easy to see how massive foreclosures will force financial institutions to stay on the lending sidelines while working through huge stocks of REO.
When refinancing is not possible in situations where everyone would be better off — including lenders — it’s hard to argue that foreclosures are necessary or efficient market-clearing events. My take is that the notion of efficient markets requires rational actors and adequate information flow. Servicers separated from mortgage holders (and not empowered or motivated to modify mortgage terms) can’t be relied upon to make “rational” decisions that constitute the best outcome for banks, mortgage holders or the credit system.