Tragic Beyond Belief

The death of an entire family at the hands of the father is always a disturbing and sad story and this one in particular was made all the more so for me because its a family that looks like mine. The Lupoe family was found dead a day ago. A suicide note faxed to a local tv station told the tale:

In a letter faxed to Los Angeles television station KABC before his suicide, Ervin Antonio Lupoe blamed his former employer for the deaths, detailing his grievance against Kaiser Permanente's West Los Angeles Medical Center, where he and his wife Ana had worked as technicians.

Lupoe, 40, claimed the couple was being investigated for "misrepresentation of our employment to an outside agency for the benefit to ourselves's [sic], childcare." He said the initial interview was held on December 19, and when he reported for work on December 23, "I was told by my administrator ... that 'You should not even have bothered to come to work today. You should have blown your brains out.'"

According to the news reports, Lupoe and his wife, distraught over the loss of both their jobs, concluded it was better to end their lives and that of their children rather than face going on destitute. I'm sure they were staring into the face of imminent financial ruin with the loss of both their incomes. They had apparently already taken their children out of school no doubt from financial strains.

Some reports indicate that Lupoe called 911 and claimed he returned home to find his family dead. That does not jibe with the suicide note claiming that it was the wife who suggested they would all be better off dead and I find it a bit hard to believe that both parents had an extreme death wish at the same time. So I think on further analysis that this trajedy will turn out to be the standard "family destroyer" scenario, where a man, facing financial ruin, ashamed and humiliated at his failure to take care of his family, kills them and himself.

Whether this story is truly one of two parents in such despair at their finances that they destroyed themselves and their family, or is yet another story of a man made desperate and overwhelmed by his obligations and taking care of his family, its a horrific tragedy. For me, its horror is magnified because his family looks like mine and because I know the taste of his fear, the sick feeling that you are going to fail in your job to take care of your family and that you will lose it all.

Even in my most desperate moments though, I would never think to kill my wife and children as the way out. How sad and dark the world of a person for whom killing his whole family is a better alternative to living.

Even if you would not make this decision, do you feel like you know their fear? Can you understand their desperation, if not their decision?

The Mortgage Crisis, Part 1: When too much of a good thing, isn’t.

An Analysis of the Mortgage Crisis from my colleague David Dworkin at Affiniti Network Strategies

If you've been waiting for the mortgage crisis to hit bottom, get yourself a couple of good books, because it's going to be a while, well into 2009 or 2010 at least. Count on it getting a lot worse before it gets better, and even that may be a rosy scenario if Congress passes bad legislation in an election-year panic.

Recent studies estimate over 1 million additional families will lose their homes over the next six years, due solely to subprime mortgages made between 2004-2006. And every time a home goes into foreclosure, the other homes on their block depreciate an average of $5000. To complete the viscous cycle, for every 1 percent reduction in home value, twice as many homes will fall into a negative equity position, where the mortgage is for more money than the house is worth and 70,000 of them will go into foreclosure. (source: First American CoreLogic, Inc. http://www.corelogic.com/)

Like all crises, everyone wants to know four things:

1. Who's to blame?
2. When is it going to end?
3. How did we get in this mess?
4. How do we get out of this mess?

In the next two entries in The Leading Edge, I'll try to answer three of these questions in plain English. I will not try to assign blame. It is human nature to identify responsibility when something bad happens. This reassures us somehow that justice has been done and we are safe from more bad things happening to us. A crisis of this scope requires lots of cooperation. While there are many truly innocent victims, there are many more who went into this with their eyes wide shut. Take your pick: lenders (including mortgage banks, commercial banks, S&L's and mortgage brokers), rating agencies, the Administration and Congress, GSE's, and consumers as well.

Homeownership is tremendously important and has broad community benefits, but only when it is done responsibly. The perception that everyone should be a homeowner runs into trouble when nearly everyone who should be a homeowner is one. By 2004, the national homeownership rate was over 69 percent. Interest rates were low and the entire economy benefited as the technology boom of the 1990's was replaced by the housing boom. No one had any interest in downshifting. Besides, housing had become a critical part of the overall national economy and a lot of the new home equity generated by rising home values was being spent to support it. Slowing down the housing market became synonymous with slowing down the nation.

To keep the mortgage market and housing machines running, mortgage underwriting (the rules that help ensure we buy homes we can afford), became a useful tool to expand historic growth even further. Loosen up on the rules, and more people can get on for the ride. The balloon metaphor is useful because the same air that fills up a balloon and makes it functional can also burst it. And that's exactly what happened with mortgage underwriting standards. Books will be written about the many "exotic" and "hybrid" mortgage products that contributed to this crisis, but the one product that has done the most harm is the "2-28".

A typical mortgage is a contract to repay a debt over 30 years. Most mortgages in the US are 30 year "fixed rate" mortgages. That means that you pay the same "fixed" interest rate every year, and your payment is the same every month. An adjustable rate mortgage, more common in the rest of the world, adjusts the mortgage interest payment to the market rate on an annual and sometimes monthly basis.

The difference comes down to who is taking the risk that interest rates will go up and down. In an adjustable mortgage, the consumer takes most of the interest rate risk because the mortgage payment changes with the market. When rates go down, the payment is less. When rates go up, the payment is more. With a fixed rate mortgage, the payment stays the same when rates go up, and they can refinance into a new mortgage when rates go down. An adjustable rate is better for banks, but only as long as most consumers are able to afford their mortgage when rates rise.

As a result of this risk imbalance between the two choices, the market usually makes adjustable rate mortgages cheaper than fixed-rate mortgages. From time to time, complicated factors reverse this trend, and the rates are pretty similar or even the reverse. But this time, lenders who made a lot of adjustable rate mortgages, which are more profitable for them, made some key changes to how the interest is calculated and how buyers were qualified.

Borrowers are qualified on their ability to make the first payment, not the 25^th payment. So lenders began offering mortgages with "teaser" or introductory rates that were a lot less than the interest rate that would be paid after the two year teaser period ended. In some cases, the teaser rate ended in a few months, but the payment stayed the same for two years while the shortfall (the difference between what the payment was and what the payment should be) was paid by the borrower in home equity - the small part of the home they actually owned. Teaser rates were sometimes less than 2% in a 6% market. Homeowners were qualified based on this rate, even though it would adjust after two years to a much higher rate.

That's why many lenders privately referred to these loans as lender crack. They knew these loans would kill them eventually, but they couldn't stop because they were addicted to the revenue and volume they generated. How much volume? Between 2003 and 2006, lenders originated 1.12 million loans with initial interest rates of less than 2 percent - $431 billion in credit. But these are just the worst of the worst. Nearly 60% of all adjustable rate mortgages originated in 2004-2006 will have payments reset more than 25% of their original amount. For a $300,000 mortgage with a 1% teaser rate, that means a payment increase from $965 per month to $1896 per month at the prevailing interest rate of 6.5%. (source: First American CoreLogic)

For low- and moderate-income consumers, this mortgage almost guarantees foreclosure. If you have plenty of cash, and have high yield investments, this kind of a mortgage may be a good deal. But for first time homebuyers, or those on limited or fixed incomes, it's financial Russian roulette with five rounds in the chamber. A low- or moderate-income homebuyer, who can't afford the increased interest rate now, is not going to be able to afford it in two years. When the biggest raise you've ever received was 10% and your mortgage payment goes up 50%, you're going to lose your home.

And that brings us to when this crisis is going to end. If you're an optimist, late 2009 is probably a good target. If you're a pessimist, tack on another year or two. Until then, if you see any light at the end of the tunnel step aside, because it's probably another train.

Foreclosures will continue to increase as more of the 2-28's reset. When resets peak in March of 2008, we will be approaching the beginning of the end. But remember, those homeowners will just be starting the process of getting behind on the payments. They won't loose their homes for another 6-12 months, depending on the state in which they live. That means that the real estate market in most states will be glutted in the spring of 2009. As that inventory is absorbed (or in the case of some urban neighborhoods, demolished), the market will finally bottom out. Personally, I don't know how much value my home will lose, but I am quite sure it won't appreciate another dollar until 2010.

When Greed Is Your God

Jay-Z. Rap Icon. Media Mogul. Beyonce's man. Drug thug culture glorifier. Poster boy for greed. Jay-Z's American Gangster inspired single "Roc Boys" is a national anthem for the crack dealing purveyors of death in communities across America. The entire tune is an arrogant, indulgent offensive mockery of that which is good, to glorify evil, for money. Made even more reprehensible by the fact that its catchy. You want to bop your head to it. When it comes on my XM, I have to exercise an act of will to turn the channel. Jay-Z is filthy rich and while its quite possible I missed it, I don't think I've heard a more unabashed commercial glorification of drug dealing from him. For a guy who has more money than he knows what to do with, that he feels the necessity to make such an irresponsible piece of music lets you know that the only thing thats really important to him is the dollar. Sadly, there really is no outcry about this callous creation of Jay-Z's. On top of this, he appears to be a punk of the first order, on display in this video where he violently mugs the face of a young girl. A prequel of Beyonce's fate? Hat tip to Electronic Village.

Maybe he's Beyonce's fella because birds of a feather. My wife and I often remark on the fact that the difference between Alicia and Beyonce seems to boil down to the fact that Alicia sings about things she cares about, while Beyonce sings whatevers going to make some money and if you asked us which young lady we'd be more comfortable with our daughter emulating, its Alicia. Alicia is a singer and musician, Beyonce is a businesswoman and Jay-Z is clearly a businessman. There is nothing wrong with the latter, except when making money becomes the only thing you are accountable to.

Christian Ministries in the Crosshairs

FOXNews.com - Just 2 Ministries Submit Financial Data - Local News | News Articles | National News | US News

Charles Grassley and the Senate Finance committee have put christian mega ministries in their gun sights, on a crusade to ensure there is no abuse of tax exempt status. Of the six ministries they have asked for information, only a few have submitted the information. Still others, notably Creflo Dollar, are resisting the request and say the committee should either refer it to the IRS or subpoena them.

I have mixed feelings about this probe. I think its curious that only large christian ministries are being approached in this manner. Why these six in particular? Just because they are large and successful ministries? The probe seems to be based on the subjective judgment by the committee that the leaders of these ministries are living too good for preachers. Is that the basis upon which a senate investigation gets to be initiated? Grassley isn't saying he has evidence or allegation of wrongdoing. In fact, in media reports he actually said the following:

On referring the whole matter
to the IRS, Grassley said Thursday,

"I can't tell (the IRS) what to do.
I can't refer anything to them unless I know something is wrong. And I
won't know if anything's wrong until we get the information."

So this is nothing but a fishing expedition. So I have a problem with it on those grounds. He has no allegations of wrongdoing, nor even irregularities pointed out by the IRS.

As someone who has been a member of a large "mega-church" (Word of Faith International Christian Center - pastored by Bishop Keith Butler), I think its important to have some perspective about the people who lead ministries of that size. At Word of Faith, Bishop Butler is responsible for a ministry which has over 10 satellite churches in the US and abroad, which contributes to missions work world wide, and which ministered to the needs of a congregation numbering 20,000 plus. Doing all of that well requires organization and leadership identical to that of any corporate CEO. Dollar ministries took in over $69 million dollars last year. The management of that level of resources and the ministry operation that money supports requires serious CEO level business management.

Just as with CEO's of large companies, the demands on these ministry leader's time is severe. When satellite ministries are being established in locales which are far apart for example, the practical, business necessity of private planes is just as apparent for them as any other type of CEO. Large ministries require excellent management, perhaps even more so than private for profit companies.

Now, in the stories, some attention is paid to Creflo Dollar's million dollar mansion, Manhattan apartment and the Rolls Royce he drives. I can say out of my own experience that Bishop Butler did not engage in that sort of ostentatiousness. I find myself a little uncomfortable with that lifestyle choice on his part. Nonetheless, if thats all the basis for Sen. Grassley to initiate a Senate investigation, then I think thats an overreach. If anyone or anything can be the target of a Senate investigation simply because committee members sense of propriety and appropriateness is offended, I got a problem with that.