I think we all know the answer to the question in the headline, courtesy F. Scott Fitzgerald, “The rich are different than you and me.” And the fact that they have more money means their defaults are couched as pure business decisions. But mere homeowners, told to view their house as an investment, are now castigated if they act as any professional would and cut their losses.
The Wall Street Journal article on, ahem, voluntary commercial real estate defaults points out that some of the very biggest names are in the walk-away camp and through the article points out the similarities in decision process between commercial real estate strategic defaulters and their retail kin:
Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.
Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as “jingle mail.” These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.
Yves here. Note another difference with having more money. The bank might actually negotiate with you. Back to the article:
These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about “strategic defaults,” when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is “underwater,” meaning its value has fallen to a level less than its debt.
Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.
But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG’s RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, loans that don’t allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.
Yves here. And similarly, it might be better for consumers to get a millstone of a house off their neck and get on with trying to rebuild their finances…..
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Doesn’t the saying go “if you can’t repay $50 thousand to the bank, you’re in trouble; if you can’t repay $50 million, the bank is in trouble.”
this is not true john the banks own and control the government and simply order the feds to print more money and have the slave/homeowners pay it back till the dollar collapses then the go on to another country and loot them converting all the money toilet paper to real assets
I like how for the most part even the MSM has been embarrassed to try to argue for the double standard they really want to uphold on this.
Instead the most common MO (in the NYT and among some others I’ve seen) has been not to condemn walking away as such, but to give a dubious anecdote about someone walking away and using the money freed up for a frivolous binge, and implicitly or explicitly represent that behavior as the norm.
This is of course a lie. People default because they’re unable to pay or because they fear they’ll soon reach that level of difficulty. There’s no such thing as a “strategic default” among individual non-rich housedebtors, only among corporations and the rich.
Meanwhile we have the documented beahvior of e.g. Morgan Stanley voluntarily defaulting and then using the money freed up for “bonuses”. I imagine that’s closer to normal corporate behavior post-default than the cited piece’s claim that the money will be used more constructively than just paying the debt.
So here, as everywhere else, it’s the elites who are the real perps of any turpitude you care to name.
“it might be better for consumers to get a millstone of a house off their neck and get on with trying to rebuild their finances”
Amen!
How come people do not get it that the sooner they walk the better they are. Some Psychologist may be able to explain this. I think it is the hope that the prices will rise.
Default enmasee! That ius the best way to take on the government which is hell bent on helping the banks. Government propoganda should be understood for what it is.
Walk man Walk .. all underwater home owners .. just consult a good lawyer before you do to understand how you can recover your credit score (& how soon) and whether these guys can come after you with some legal stick to beat you with.
As one who has walked the walk this very week, perhaps I can answer the question “Why don’t more people do this?”
Most underwater homeowners are families. Families often have children enrolled in a school district. Often these districts are geographically small. The children blab to each other that “mommy and daddy are going to be kicked out of their house.” Junior tells his mommy and daddy. Soon the whole community knows.
Now, the underwater homeowners must decide not only if it is worth spending 8 out of 10 dollars of income maintaining the facade of middle class respectability (which has, at any rate, already been blown). They must also decide if they can afford or desire to rent a smaller, crappier house or apartment within this small community, thereby trumpeting to the remaining 3 people ignorant of one’s economic straits “hey, I’m downwardly mobile! look at me.”
Rationally, we can all talk about what “makes sense” to one’s “bottom line.” It’s much harder to carry out. And here’s a newsflash: kids are cruel to other kids they perceive as part of a losing team (i.e. the downwardly mobile family). One of my kids was taunted by classmates who suggested he kill himself to save money for his family. Funny. Ha.
So, lots of people move out their district/community altogether. Well, when is the best time to do this? Ideally, right now (August) so the buggers can start the school year right. But timing for the foreclosure-bound family is tricky. You lose the “free rent” everyone goes on about as the one advantage to your appalling situation. Or you wait to be thrown out, in which case your bargaining power with the lender slides, your credit score worsens considerably, and you risk having to move to whatever is available on a moment’s notice. Might work to your advantage, might not. Not a lot of good American bourgeois can take the strain of that uncertainty. Takes a toll on the marriage, family relations, etc.
This is not an easy scenario in the best of circumstances, but it is made infinitely worse by the contradictory signals coming from lenders, friends and especially officialdom. The husband and I have advanced degrees and a good income and we were still baffled. I have no doubt that your average couple is beside themselves with anxiety and confusion.
So, what to do? I can only say what we have done after months of research (thanks, Yves!) and discussion. We negotiated a deed-in-lieu of foreclosure with our servicer, who we have to say was a model of efficiency and actually quite decent to us. We owe nothing. We did not pay our outrageously high property taxes for a year–they did. Our credit score will go no lower. We suspect we could qualify for a new loan in a year, though we lost all our down payment so won’t be doing so anytime soon.
We have had to deal with the perplexed stares and questions of friends and neighbors who ask why you are moving THERE (three towns over, perceived as less desirable). You stress the great schools and good services (all true). You admit it will be nice to pay less, save more. Your friends know the full truth. Even so, the pity and condescension are palpable. I don’t know how my husband stands it. The male ego is a fragile thing.
And in the back of your mind there is always the nagging suspicion that Geithner and Obama, in a desperate attempt to stave off electoral armageddon, will open the spigot for homeowners at last and you will have left with only a few parting gifts (your dignity, the shards of your savings and moth-eaten credit score).
I will say I am glad we did what we did and, in light of the numbers that came out yesterday, would do it again. But it is not an easy path to take and one should not wonder too much that more don’t go there on their own.
A little positive incentive–for instance, the promise of a credit-score amnesty, help with moving expenses, etc.–would move more people in this direction for a fraction of the cost of HAMP and to better effect.
Just my two cents.
Thanks for sharing your story. Most people who are not under financial stress (either immediate, or long term, having lost what they thought was a nest egg in their home) find it hard to relate to what people in your position go through.
I agree with the implication of your story, that the level of strategic defaults is exaggerated. Defaulting is hard to do on a practical level with a primary residence. And no one has good data, the few studies to date are bunk and lead to numbers that look way too high. True strategic defaults are likely to consist largely of investment properties (which the bank may have been told is a primary residence) and second homes.
Defaulter, I am truly sorry to hear of your trials and the cruelty of your community. I suspect a large number of us will be similarly humbled, and that this will lead to a desperately needed transmutation of character and values.
While default may not yet be epidemic yet, TPTB must be desperately worried that, following the free-fall in house sales and eventually, prices, it is destined to become pandemic. At some point, the calculus will be so skewed that only fools will remain in mortgage-debtor prison. The banksters will then be toast; that is their (and Obama’s) foremost fear.
Thanks for the post. Best of luck with the move.
I don’t understand this your comment at all. If you are not a strategic defaulter then what does the comment about you and your husband having “good” income mean? Please add some clarity: with the “good” income you and your husband have, could you have continued to service your loan? If the answer is “no” then what does the word “good” mean? I’m sorry if I misunderstand, but having “good” income and having done months of research makes it sound as if you and your husband might be strategically defaulting.
Have a look at the “Anatomy of a Housing Bubble” link from the Links section directly above this post.
Short answer: in many communities it is possible to have a “good” (i.e., at or above the community median) income and still be unable to afford the mortgage payments on an average home.
Here’s a question I’d like someone to answer: If corporations are “persons” under the recent Citizens United decision, why do corporations get treated differently than real living individuals? Doesn’t this run counter to the equal protection under the law concept?
Orwell taught us that “some animals are more equal than others”… and woe to us chickens, pigs, and calves, for attempting to flee our cages. The foxes of media and government are increasingly worried.
Corporations enjoy more rights and protections as “persons” than real people, and thanks to SCOTUS, they can now even(openly) rig elections. They cannot be thrown into prison; nor under neo-fascism, can their officers be even prosecuted. Oh, and lacking souls, they can’t even be thrown into the lake fire which is never quenched…though I’m not sure the same is true of CEOs.
Noone survives the henhouse unless fighting with their neighbours weapons.
Whether we like it or not, everyone of us needs to act like a company : amoraly. This is the world you elders voters gave to us and we won’t get rid of it soon.
The loan, and its companion, the mortgage/deed of trust; they’re a contract that explicitly and implicitly grants the right of default. The presence or absence of a deficiency clause tells you a great deal about the wisdom and competence of the lender. If the contract does not address the potential of having the ability to perform but electing to default, it’s loan originator and ultimate note holder’s fault.
All this hullabaloo about the morality of defaulting is just rubbish. It’s a contract, and if there is any immorality present it lies in the fact that the lender granted the loan at an excessively high loan to value, and a ludicrously low cap rate on non recourse terms to a party whose ability to perform was questionable.
The fact that the loan balance is greater than the current property price is testament to the fact that the underwriting and due diligence for the loan was not done or was incompetent. There’s the point of immorality, the loan originator didn’t do his job! Neither did the assembler, packager and issuer of the MBS that served as the intermediator of loanable funds.
This nonsense of berating the retail homebuyer for defaulting is merely an attempt to mitigate impedending losses on loans that should not have been made in the first place. These are losses that were inherent to the loans when they were purchased. If the current owner paid to much for the paper, it falls to him to absorb the loss. As to the defaulter, if the contract is non-recourse, he/she is a fool not to default.
In the commercial space the same can be said if you tell me that a property is being financed based on 75% LTV and a cap rate lower than 7%; I’m wondering whether you’ve been abusing your meds or just what great improvement in lease structure you expect to achieve. Or perhaps you believed that there was another and greater fool who would relieve of your folly.
As our society has increased in size, the presence of mediocrity is becoming more apparent. This apparent bias and absence of competency of the WSJ is telling in that it reflects a point of view that is naive to the point of being stupid. I would not be the least bit surprised to learn that the writer and the editor have really good facebook pages and that they can twitter like mad. As to whether they understand what it is that they are reporting on, that is quite another matter. In fact it is clear to me that not infrequently stories that are patently propaganda are being placed with so called reporters. Why does anyone subscribe to a paper that can’t get the fact set right and that insists on introducing morality where it is not a consideration?
It is not immoral to exercise a right that is either implicit or explicit in a legal contract. Retail home buyer or commercial developer, owner, operator; it’s a contract, honor it and we’ll all get along nicely albeit somewhat poorer for the fact of our profligacy.
Many public companies have class A, class B and other classes of stock, with different properties, like the ability to vote, hence control the company. There are different classes of debtors, some that are hard ball playing remorseless profit driven businesses, that see a weakness in their creditors and improve their position. Others are dumped upon as violators of the most sacred of trusts, their word as bound by legal contract. Oh My! In the tug of war between the 2nd class citizens and the first among equals, there is no class war. That only happens when the victims decide to blame the predators for collapsing the system. And of course, the ideological position which has not fooled any working person in history, has not fooled social scientists outside of economics for over 150 years, continues to be brazenly presented as an iron law of divine right, as unrepealable as the 2nd law of thermodynamics. It would be great if the blind pursuit of an abstract concept, such as profits are, was profitable, I might not complain so much
I realize I’ve already gone on too long, but I wanted to add one important point. The loan we just got out of was a jumbo, so there was no intervention by government, just a negotiation between homeowners and the servicer. The servicer, as I mentioned, was very professional and open to making any sort of a deal we thought might work. We could have gotten a reduced interest rate, but only for a year (and only if we paid the arrears, which were substantial). Had we had this servicer from the start of our problems we probably could have “saved” it. But the bankrupted ghost of Thornburg was in charge of our loan for a year and a half and all they did was kick the can. Worse than useless, but I guess that’s the best our bankruptcy courts can do.
There’s so much more that can be said, but you’ve probably had your fill and anyway I have boxes to unpack.
“…Banking-industry officials and others have argued that homeowners have a moral obligation…”
This is like being lectured on the evils of sin by Satan.
I’m a strategic defaulter, or rather I’m about to be. I can pay my condo price 2x over, I have cash to pay off a substantial portion of my mortgage, I have a stable job.
But I refuse to pay, since my house is 50% below what I bought it for.
I’m doing it for exactly the same that the commercial companies are walking away from their loans: because it’s not worth it.
Of course banks will try to arm-twist people into paying, because it’s in their best interest to mind-fuck with society and let Main Street be the stooges for Wall Street. The sad part is how so many people actually buy the idea that a mortgage is an “obligation” and that you are going “against your word.” It’s a business transaction, period.
Sorry, but in the 21st century, we’re much more savvy than that.
I don’t blame you a bit. Just curious, are you single and in your 20s or 30s?
Like Yves, I suspect “strategic” defaults are concentrated in second homes, investment properties and condos or starter homes occupied by singles or young marrieds (no kids yet).
I’d be less conflicted about your position if your ultimate goal was to pay 50% of the mortgage, to force the lenders to share in a portion of the losses. I have a tough time enthusiastically endosing full default based on the circumstances you describe.
In Defaulter’s case it sounds like there was a negotiation that left neither satisfied, which is how it should be IMHU.
I’m generally in favor of mass defaults ( or ideally an organized ‘rent strike’ ) by buyers who financed with subprime debt to force the bondholders/bankers who fueled the bubble to take their share of the losses. They need to organize to be effective, and I don’t see that happening yet.
An organized movement to strategically default is what the gov’t is terrified of, but there are no signs of that happening soon, so they’ll demonize those , like yourself who decide to rationally default.
A combination of a still way over inflated housing market and a thirty year trend to less good jobs and less good pay is killing the country.
Unluckily for the American people, those in charge have figured out how to shove the rather substantial housing market downside onto the American people rather than actually try to fix the large structural economic problems facing the middle and lower class. So we’re all now defaulters (strategic or not)!
I totally concur. There is a desperate need for organised mass default … underwater people have to come together sooner the better to have a semblance of chance to beat government propaganda. I am not saying it is easy or anything like that. It is the NEED OF THE HOUR! Underwater homeowners should band together to put the banks and politicians on the mat!!
And let’s not forget Tishman Speyer.
Risking the wrath of this board, I will say that there is one difference between Joe Homeowner and a given strategic defaulter company. Joe does not employ anyone.
A graphic presentation of the condition of the ex-middle classes financial health—. And the winner is Nevada, with an amazing 69.9% of mortgages underwater, followed by Arizona with 50%. It would be interesting to see a study of the level of functional bankruptcy (negative net worth) as well. I suspect it would come close to 40% nationwide.
http://www.businessinsider.com/the-15-states-with-the-most-underwater-homes-2010-7#idaho-227-of-mortgages-underwater-1
If the corporate defaulters are “evil” and the proles are “good”, it does not improve society by having the proles become “evil” as well.
Strategic Defaulter, thanks for the information.
I think the attempt to maintain the credit score is a key to explaining why people are trying to hang on. You never know when you might need access to credit. Though if this is true, strategic defaults would make more sense for the elderly than for young couples starting out in life.
As for middle class respectability, perhaps one key to being poor is to just be poor. Move to the poorer neighborhood, put the kids in the public school with the poor kids, don’t try to keep up with your middle class friends. I realize how difficult this is. Sometimes the last thing to die is hope.
Thanks, all, for the well wishes.
Poverty and Respectability are all relative (and more than a little subjective) terms.
No one is suffering here, and to the extent that this forced a reevaluation of life values and parenting strategies, it may all work out for the best.
Make no mistake, I remain mad as hell about the larger economic and political forces that pushed us to this impasse. But I have empathy for anyone (99 percent of us?) squeezed by said forces.
There will be hell to pay. As soon I get the kids off to school tomorrow.
Be well, all.
There will come a time in the not too distant future when you will realize that you have made a very sound, wise and moral decision.
The soundness wisdom is reflected in your improved cash flow, the morality is in the preservation of your economic independence.
Cruel as children can be, it is your children who will need your explanations and your support. As to any other social pressures that may come into your life, ignore them and keep and observe your own counsel. You have acted wisely.
All life is a negotiation. Sometimes I wonder if anyone has ever been in a single long-term relationship. How many people “loved, honored and obeyed” or instead “defaulted and renegotiated?”
I suspect that some defaulters that bought a little over their heads can default and move into a nicer rental for substantially less money… in this case it would be easy to convince the kids that you had moved up.
From what I’ve read, even in non-recourse states, a junior lender can come after your assets to collect on the debt of your 2nd mortgage well after the forclosure has gone through. Many homeowners like myself who got in their homes with 80/20 zero-down standard loans will have to decide if it’s worth the potential of being sued after going through the whole forclosure process. I’ve been on the fence for a few months now…
“banking industry officials argue that its the homeowner’s MORAL obligation ” hahahahahahahahhahahahahahahahahahaha yeah nice try, geez my stomach hurts from laughing so hard
Many private clouds have public silver linings, and one might be that if strategic defaults by individuals become widespread enough, and join those by corporations, it may sufficiently scar bank employees and bank shareholders, and indeed borrowers, to produce rational and prudent attitudes to lending and borrowing for a generation.
We may see 30% deposits, substantial coverage of loan repayments by earnings or by proven salaries, and loans which are a lower percentage of conservatively appraised value.
Accompanied by, causing and caused by, a continuing fall in purchase prices.
Ain’t an elastic money supply grand? Except it isn’t much fun when it shrinks, is it?
Don’t you get it? you are either the elites or you are the slaves. homeowners are the blood bag slaves to serve. they tell home owners they have a moral obligation to manipulate and control you. If you are one of their elitist counter parts it is ok. Is not about being a business that it is about to default it is about being in the who you know. They elitist simple go to the congressmen and president which the own tell them to print more money and let the slave homeowners/taxpayers pay until the dollar collapses because to much was printed. then the elitist move on to another country and pull the same scam. This is why they expect the homeowners surfs to pay. You are slaves. The bilderbergs have owned our government since 1913.
i might ad most busineses have good legal teams and it is impossible to collect where as undividual homeowners you are the slaves who do not have the people or assets to defend yourself
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