Trusted advice? Hardly.
By alxndr on Flickr
Dale Westhoff is currently the Global Head of Structured Product Research at Credit Suisse. He has worked in finance for 22 years, but he started out in the world as an aerospace engineer. (Another scientific mind lost to the big money of big finance.)
Westhoff moved from JPMorgan to Credit Suisse about a year ago. As is the custom his new employer put out a press release when he joined, describing how wonderful he is and how the two would go on to slay dragons and warp space-time together. Westhoff was described as a “pioneer in the evolution and growth of the structured products business on Wall Street” who was “voted ‘First Team All-America’ by Institutional Investor Magazine in the Mortgage-Backed Prepayment/Strategy category for fifteen years in a row.” In his new role he would be responsible for the firm’s “highly innovative mortgage-backed security prepayment models”.
Well in addition to his other duties, it looks like Westhoff has also been tapped as Credit Suisse’s chief propagandist. From Businessweek:
Reducing mortgage balances is a risky idea that hasn’t been shown to keep borrowers who owe more than their property’s worth in their homes, according to Credit Suisse Group AG.
[...]
Widespread principal reductions may drive defaults “much, much higher” as borrowers seek the aid, [Westhoff] said.
Data Credit Suisse examined show essentially no difference in re-default rates among delinquent borrowers given only payment reductions and those also offered smaller mortgages, Chandrajit Bhattacharya, an analyst at the bank, said [...].
This is just…false. Here’s why.
Westhoff and Credit Suisse are right to question whether the availability of principal modifications — reducing the mortgage balance directly — would drive more homeowners to strategic default. However this risk must be weighed against the costs we are now experiencing of a housing market that has been the ground zero for our poor economic performance. Further, there are very real costs to borrowers who choose to default strategically — they’ve still got to find a place to live and their credit score will be junked for years. Despite the fact that we ought to maybe learn from how the banks operate and adopt the same “Me first” attitude, I would argue that the majority of Americans still find it dishonorable to not pay their debts while knowing that they could actually afford to do so. I could be wrong, but that’s simply my hunch.
As to whether principal mods would help borrowers avoid re-defaulting, Credit Suisse is dead wrong: many have found otherwise.
Joe Nocera of the New York Times did a column on the views of Laurie Goodman, a managing director at Amherst Securities. He wrote
The only way to stop the [housing market] death spiral is through principal reduction. The reason is simple: “The data show that principal modifications work better” than other kinds of modifications, [Goodman] says. Interest rate reductions can lower monthly payments, but the home remains just as underwater as it was before the modification. And the extent to which a home is underwater is the single best indicator of whether the homeowner will default. The only way to change the imbalance between the size of the mortgage and the value of the home is to reduce principal.
Even the Federal Reserve Bank of New York agrees. It studied almost 54,000 subprime mortgage files and found that
the re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.
So why do Westhoff and Credit Suisse reach a different conclusion? Two theories.
First, it doesn’t surprise me one bit that the guy in charge of their “innovative financial models” has magically found that the data supports their position. As I wrote last week, financial models are basically glorified spreadsheets that are uniquely open to manipulation, if not outright fraud. The degree to which modern finance relies on them, versus the degree of their general robustness, is downright scary.
Second, lo and behold, Credit Suisse has just bought $7 billion in mortgage-backed bonds that used to be owned by AIG before the Fed bailed them out. Investors who hold mortgage-backed bonds don’t like principal modifications because it directly affects the value of their investment.
So that’s why Westhoff is stepping up to help Credit Suisse distort the data and talk its own book. I guess he just can’t relate to the 10 million American homeowners that Goodman cites as being likely to default. After all, his own living situation is quite luxurious – good for him. But his propaganda has no place in the discussion of how we can help the homeowners who need it and get our economy moving again.
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Category: Housing
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