So, Where is the "Moral Obligation" on Commercial Loans and Strategic Defaults?

By
Real Estate Agent with CENTURY 21 American Homes

There has been article after article and blog post after blog post on the subject of strategic defaults and the 'moral dilemma' of it (or lack there of, if that's your position).  Many believe that it is immoral for a person to decide to strategically default on their mortgage.

Let's stop there for a minute and define strategic default.  In a nutshell, strategic default is when a borrower who is financially capable of making the monthly mortgage payment, decides to stop paying and let the bank foreclose on the property.

People who think that it's immoral to make the decision to default strategically have pretty much called those that do every name in the book.  The best: if you can pay, but choose not to, you're a low-life, greedy SOB.  My response to this is pretty simple: umm...so were the banks that chose to lend the money.

So, why am I bringing this up again, when it has been knocked around til it's already battered and bruised?

Because recently, the largest ever residential property purchase in the nation just ended in a strategic default.

In 2006, Tishman Speyer Properties bought the 56-building, 11,232 unit Peter Cooper Village & Stuyvesant Town apartment complex in New York City for 5.4 BILLION dollars.  Last week, they decided to "hand over the keys" (ie, strategic default/walked away) to their lenders on a 4.4 BILLION dollar debt on the property, which is now estimated to be worth 1.8 Billion.

Where are all the outcries of "that's immoral!" "those greedy SOBs!"

They were replaced with "they made a sound business decision."  After all, this is a commercial company and that was a commercial loan.  It's only business, and business understands that sometimes you default.  Since it's "just business," it's hardly made a splash on the strategic default radar.

Now, just to be clear, I'm not advocating strategic defaults.  If you default on your loan, there are repercussions to doing so, and if you're considering it, I'd strongly advise you to talk to your legal counsel as well as your financial adviser and tax professional, so that you will fully understand the position BEFORE you choose that option.

Still, I think it's an option that must be considered from a business standpoint and not a moral obligation.  I'll say what I normally say about it here: "please show me where, in the loan documents, that the borrower is morally obligated to make payments."  Otherwise, I'll stick with if it's good enough for big businesses, then it's good enough for little home owner as well.

 

For further reading, try: Strategic Defaults and the Moral Imperative and The 'walkaway' double standard

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Hickory Home SearchForeclosure Hunter

 

Roger Johnson is a Realtor with CENTURY 21 American Homes in Hickory, NC.

 

I service the Catawba and surrounding counties, and the Hickory, Newton, Conover, Taylorsville, Claremont, Statesville and Charlotte, NC real estate markets.

Visit us on the web at: www.HickoryNCHomes.com

You can contact me via Email or give me a call at 828-381-9245 or 828-568-2121 ext 310

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Ambassador
883,219
Lane Bailey
Realtor & Car Guy
Century 21 Results Realty

There isn't a specific morals clause... but the borrower does agree to pay back the loan.  They make a promise... hence the promissory note. 

Ask your kids... if you make a promise, is it ok to change your mind and then tell tham that it isn't in your best interest to follow through on what you promised? 

Of course it is different, because you like your kids.  Screw the bank... 

But if you can just forget about the agreement, can the bank do it too?  Maybe they can raise your rate later...

BTW, if mortgages are only meaningful during an up market, do you think bank rates will rise as the banks take on more risk with a loan?

May 10, 2010 09:19 PM
Rainmaker
236,199
Roger Johnson
Realtor - Hickory NC Real Estate
CENTURY 21 American Homes

Katerina - Thanks, and I agree.  You don't know until you've been there.

Michael - Agreed.  If you can live with the consequences.

Jackie - knowing your state law is part of fully understanding before you decide on a course of action.  And I agree, many will be able to do better in a few years simply by choosing a strategic default.

Cindy - Thanks for the comment.  Agreed, each person has to decide for themselves.

Lane - Again, your putting personal morality on a business transaction.  I can't even begin to see how my kids and the banks are remotely similar.  See, I'm comparing a commercial loan to a personal loan.  In commercial lending, 'strategic defaults' are pretty common.  And yet, the lenders still loan the money.  So my question again is why is it "just business" when a corporation does it, but it's all fire and brimstone and shame on thee for thy lack of moral judgment?

And to answer your questions, yes...the bank can decide to not honor the agreement, too.  In fact, I've seen that happen a couple of times.  They, too, have to be prepared for the outcome.  How about when lenders give pre-approvals out, finalize everything, then pull out on the day of closing?  Been pretty common here, how about there?

Yes, interest rates will (and do) rise as the loan risk increases.  Did you see some of the rates on those sub-prime loans?  Lane, as always, thanks for commenting.  I may be coming off a bit sarcastic, but I do always appreciate your point of view

May 11, 2010 12:23 AM
Ambassador
883,219
Lane Bailey
Realtor & Car Guy
Century 21 Results Realty

That is exactly it...  I am a person.  I run a business, but I am still a person.  As such, when I look in the mirror, I have to accept who I am.  A business is a conglomeration of people, and I'll bet you almost every one of them is putting the blame on someone else.  There is no personal responsibility. 

In fact, that is one of the biggest problems this country faces.  We have politicians and business leaders that refuse all personal responsibility. 

Wouldn't you rather do business with someone that honors their word?  Or, when the contractor finishes your remodel and then tells you that the contract price is no longer valid because his costs went up, you'd be cool with it...  It's just business. 

And there are always weasel words in those pre-approvals so the bank can get out... or sometimes, there is something hiding in the borrower's file that takes a while to uncover.

May 12, 2010 12:26 AM
Anonymous #20
Anonymous
Heather Davis

I posted this on the post about the ehtical decisions of strategic defaults.  i thought I would post it here as well even though I know that this thread was posted way back when.  I just think a personal picture to this situation is important for those who might not understand the dilemna that some borrowers face.  I am divided on this issue because I am one of those people who are in this predicament.  My husband died a little over two years ago leaving me with a mortgage on a house that I love.  We bought the house nine years ago and refinanced to add on for our ever growing family.  We did not pocket the money, buy expensive cars, or go on elaborate vacations.  We put the money back into the home thinking we would live in it until we both passed away and then hand it down to our children.

For the past two years I have been paying the mortgage payment out of the proceeds from my late husband's estate.   I can't afford to pay it in any other way.  I have paid a little over $73,000.00 in payments hoping to keep my home.  But, I can't do it any longer.  It just is not prudent for the sake of my family.  I feel I have an obligation to the bank and so I am trying to find a buyer that will work with the bank.  The loan I owe is probably between $50,000 to $80,000 more than what the house is worth.  Pretty much the only way this is going to work is through a short sale. 

in the meantime, I guess I am a strategic walker (or maybe I fall into another category) because I have purchased another home with cash from the life insurance money that is left.  I am debt free on that home.  I guess I could have, maybe even should have, continued to pay on the other home but in the end it gives me no savings and still leaves me in the precarious position of possibly losing the home anyway. 

I wish someone could just ease my mind about the moral obligation I feel in paying off this loan.  And, yet on the other hand I can see it as a contract that both the bank and I agreed upon and the house is the collateral that they get if I step away from this loan.  Let me tell you, walking away from your dream home after saying good-bye to your husband of twenty years is not the ideal situation for anyone to be in.  The only comfort I find in owning another house outright is that there is security in not having to deal with a bank at all. 

So, for those of you who think that this is just an easy decision for us, the borrowers, to make I hope this comment will leave you with some food for thought.

Heather Davis
October 21, 2010 03:25 AM
Rainmaker
236,199
Roger Johnson
Realtor - Hickory NC Real Estate
CENTURY 21 American Homes

Heather, I want to thank you for taking the time to leave this comment.

I understand.  It's not an easy decision to make, as many that are not in the situation seem to think.  Can someone ease your mind about it?  Probably not.  But, you have an obligation to your family and their needs as well.  So which obligation should come first?  I think most people would agree that you have to look to your family first.

Bottom line, you're the one that has to ultimately make the decision and be prepared to live with it.  Make sure that you completely understand the potential consequences of it, though.  After you have the facts, you can make an informed decision and hopefully, find peace in the decision.

October 21, 2010 06:42 AM
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