From Wall Street To Foreclosure - Aldon Hynes Interview

I asked Aldon Hynes of the Orient Lodge to discuss with me some of his history with Lehman Brothers, Wall Street, and mortgage-backed securities. I find his knowledge and experience to be interesting and insightful for anyone in Ohio going through a housing problem or just looking for a different perspective on the current economic situation. After many years and many roles, he's had to face foreclosure and bankruptcy in this unstable market. His advice, story and knowledge have traveled this far and will continue to here on this blog. Here's my interview with Aldon Hynes.



Aldon, can you provide a little life and experience background?

I was born in Maine in 1959, the third of four children. Our family scraped by when I was a kid. I wore hand me downs and clothes bought at factory outlets, yet I never really understood that we weren’t as well off as many of my classmates. I went to college in Wooster, OH studying philosophy and after school moved to New York where I got jobs working on computers. In 1987, I took a job at Lehman Brothers where I wrote programs to analyze mortgage-backed securities. I moved the around Wall Street a bit, ending up as the director of technology for a large, very successful, hedge fund. My wife and I became very politically active. I left the hedge fund in the end of 2000, and continue to consult on Wall Street as well as work on politics and non-profits.

After working with mortgage backed securities and Lehman Brothers in the late 80s, what did you see then that could have led to where we are today?

I worked at Lehman Brothers in the late 80s writing programs to help financial engineers slice and dice up the cash flows from large pools of mortgages in ways that they could sell off different portions of the cash flows to people who were most interested in investing in one type of risk or another. Did people want to invest in interest rate risks, prepayment risks, or be protected against such risks? Did they want short-term investments or long-term investments? Whatever they wanted, the engineers would find a way to produce it. However, this process always left a very small amount left over, with really weird and undesirable risks attached. The success of doing a deal usually rested on finding someone willing to buy these residual pieces of cash flow. These residuals were the precursors to the toxic waste that seems to be causing so much havoc on the street today. Yet it isn’t the first time that happened. Kidder Peabody went down, at least to a certain extent, because they had too much of this toxic waste. Another precursor was the crash of Long Term Capital Management. They took particular bets on their markets. What is similar to the LTCM bets and some of the bets on Mortgages and then later on credit derivatives is that they were all highly leveraged.

What were the largest mistake trends in Wall Street during and after your years there?

I believe that this heavy leverage has been the biggest part of the mistake. When you are heavily leveraged, if you win, you win big, but if you lose, you lose big. The other big mistake is that as these securities became more and more complicated, they became harder for people to understand. I believe this led to the collapse of Orange County’s investments and is another large problem, still not really well addressed.

You and your wife have been involved with politics for years and have campaigned for the Democratic Party. During this election, which party has the best plan for bettering the real estate market and stabilizing the economy? Do either have a real plan for action?

As a good Democrat, I should say that I think they have a better plan of action. Their plan might be a little better, but I don’t think either have a real plan of action. If anything, I believe that John Edwards had a much better plan for Democrats, and T. Boone Pickens has a much better plan for Republicans. The car industry got into trouble years ago by looking at short-term profits and plans, and not enough at the long term. That is why the U.S. Government ended up bailing out Chrysler years ago, and may end up bailing out another car company before we know it. No, we need to think much more seriously about what will happen long term. We’ve had an oil crises in the past, but the car companies always figured they would pass and kept making inefficient cars. The same is the case with the current credit crisis. Not enough long term planning. It doesn’t make me feel very comfortable with the bailout plans.

In your opinion, what led to the mortgage meltdown?

Changes in the mortgage market, facilitating the securitization of home loans, together with a decrease in oversight of companies involved in home loans made credit easier. This, in turn, led to home price increases above and beyond what was reasonable. Ultimately, the cheap credit ran out, the ability to earn enough to cover mortgages was hampered by economic downturns and the high home prices lost their support and started coming down.

Having personally gone through a foreclosure and bankruptcy, what advice can you give new home buyers or current home sellers?

To people considering buying right now, I’d suggest a few things. First, make sure you can afford the house, even if the economy gets much worse. It used to be a good idea to stretch a little bit, the value of houses typically go up, as do people’s salaries. In good economic times, a little bit a stretch isn’t bad. However, right now, we are not in good economic times. Buy something you can afford, even if your salary goes down a little. Buy some place that you feel like you want to live in for ten to fifteen years, and not just three to five years. Then, when you get in, just ride things out. If you can do that, this is probably a good time to buy. If you are selling a home right now, good luck. Do whatever you can to get the deal to close.

A quote from your article $700 Billion = A Million Good Jobs For Ten Years: "Other companies, by the unwillingness to negotiate in ways that might have prevented the foreclosure and bankruptcy from occurring are suffering, in my opinion, from their own stupidity." How do you think the foreclosure and bankruptcy could have been avoided? What could they have done to remedy your personal situation?

In my case, I had a first mortgage at about 50% of what the house had been appraised at. I had a second mortgage at about 15% of what the house had been appraised at. If the market hadn’t dropped so much and if the appraisal was a good appraisal, I could have sold the house for 10-20% less than the appraised value, and still taken cash out after paying all my bills. However, my Realtor stated that the current value of the house was probably 65%-70% of the appraised value. 65% would have covered my first and second mortgage, but wouldn’t have left me money for closing costs. I listed the house at about 70% of the appraised value and just didn’t get any buyers.

The holder of the first mortgage said they might consider working out some sort of short sale, but it would take a couple months to process. The holders of the second mortgage were unwilling to talk about a possible short sale. If either of them would have stepped up to the plate and worked with us, we could have sold the house at about 65% of the appraised value and they would have lost a little, but not that much. Instead, it went to foreclosure. At the foreclosure auction, the first mortgage holder put in a backstop bid of about 50% of the value of the property, and although many people showed up for the foreclosure auction, do to the historic nature of the house and articles that had been written about the foreclosure in the papers, no one was willing to bid 50% and the bank ended up with it.

Some of this is complicated by the foreclosure laws in Connecticut. A successful bidder at an auction has 30 days to come up with the full amount, or they lose their deposit. Given the current credit crunch, unless you have the full price on hand, you are going to have a very difficult time coming up with the full amount in 30 days, and I know a few bidders that did not bid because of that clause. In addition, some states discharge the debts on your house when you lose it in foreclosure. That is not the case in Connecticut, so we still had large debts to the mortgage holders and there was nothing that could be done to avoid bankruptcy.

In your article, My Role And Collapse of Lehman Brothers, you're quoted as saying, "None of us fully understand our investments." Can you elaborate on that in regards to what a young investor right now should or shouldn't be doing?

Let me come up with a few simple examples. You may have some of your money in a money fund. These funds typically invest in short term securities, such as commercial paper. Commercial paper is the money that companies lend to each other to cover short term operating expenses. It is rare that money funds ever go down in value. They may make more or less money during certain times, but they’ve always been fairly safe. However, when Lehman Brothers went under, its commercial paper became worthless and some of the money funds ended up losing money. Likewise, a mutual fund that invests in "government backed securities" may actually be investing in mortgage derivatives that are very risky. So, what should a young investor do? Try to find out as much as possible about what’s their money is really being invested in. Younger investors should have more of their investments in stocks and less in bonds. So you may want to look at investing in companies that make good quality products. Like buying a house, don’t go overboard, but look for a long term investment.

Knowing all that you do now, and with your background experience, what's your biggest regret and largest success?

My largest success is having a wonderful wife and three wonderful daughters. Listen, this should be why we buy our houses and make our investments, for the sake of our families. I probably stayed at jobs, or perhaps even my old house longer than I should have for the sake of my family. I don’t regret that. Instead, I regret the piano or dance recitals I’ve missed, the softball, field hockey and basketball games that I’ve missed. If you focus on your loved ones, you are less likely to make investing mistakes.

What can new home owners and home buyers learn from your experiences?

The worst that can happen, as long as you stay close to your loved ones, isn’t really all that bad. If you have to sell your house at less than you hoped, or even worse, if you find yourself in foreclosure or bankruptcy, it’s okay. You’ll get through it. Likewise, if you’re buying a house, don’t get all wrapped up in whether or not you can find someway of knocking another couple thousand dollars off the price. Ten years from now, it won’t matter.

If you could do everything over, starting from Lehman Brothers in the 80s, what would you do differently?

To be perfectly honest, as I sit here in a small rented house, looking back over some good years and some painful years, there isn’t a lot that I would do differently. If anything, I might have tried to take things a little less seriously and spent a little more time with my family, but even that, I think, I’ve had in pretty good proportions.

What is your opinion on the 700 billion dollar bailout? What should the government and the average American be doing right now?

I’m pretty skeptical of the bailout. If it is so urgent, why not seek authorization for a much smaller amount, with the understanding that as that amount gets used, there will need to be more money spent? If it isn’t quite that urgent, then we need to spend much more time talking about how we will address the problems, not only short term with regards to the credit crisis, but longer term as well. Most importantly, all of us need to be speaking with our Representatives making sure that whatever is spent on the bailout is done as efficiently and transparently as possible. We need good oversight. We need citizens to pay very close attention to what is going on.

Aldon, thank you very much for your time and sharing your thoughts on my blog. Do you have any closing thoughts or opinions?

Well, I guess I’d summarize it this way. In spite of all the gloom and doom, we still live in a great country with great people. We need to look out for one another. Help each other through the rough times. Take a long-term view. Be frugal. Look at buying or selling a house this way, as well as just how we live our daily lives.