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

Posted by

__________________________________________

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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Tags:
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Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

Thanks for the comment, Mike.

Feb 04, 2010 04:03 PM #2
Rainer
31,299
Carlos DeJesus
Exit Elite Realty Group - Ironbound, NJ

Same as Mike above....

Feb 04, 2010 07:50 PM #3
Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

Thanks Carlos.  See even though this is true, it's not as much fun as playing the "blame game" and acting like the "moral police" I guess.  Thanks for commenting.

Feb 04, 2010 07:55 PM #4
Rainmaker
438,313
Marcy Moyer
Keller Williams Realty Palo Alto Probate & Trust Specialist - Palo Alto, CA
CDPE

Mike,

I completely agree with you. There are consequences to every decison, but for some people giving he keys back makes the most sense. the banks are looking out for their interests so why shouldn't the homeown look out for his/her own interest?

marcy

Feb 04, 2010 10:18 PM #5
Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

Exactly, Marcy!  It seems a lot of people want to through the home owner under a bus if they even consider defaulting on a loan (strategic or not) yet don't seem to have a problem with the banks foreclosing (or putting people in the loan in the first place, but that's another post).

Pay, not pay.  Keep house, house foreclosed.  It's all plainly laid out in the contracts that BOTH parties signed on what happens if the home owner stops paying.  BOTH parties read it, agreed to it, and signed it.  BOTH parties took risks (the bank alot less, but again, another post).  There isn't a "morality" clause in the contracts.

Commercial deals understand this.  To them, including the lenders, it's just business.  How many times has Donald Trump declared bankruptcy or been foreclosed on?  It's not even news anymore.

Feb 05, 2010 06:48 AM #6
Rainmaker
514,775
Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX
Broker,CLHMS,GRI

I hate to say this but for as long as I can remember, Commercial Loans and business have always been business decisions for BOTH the Borrower and Lender's side!

May 10, 2010 12:16 PM #7
Rainmaker
1,323,197
Carla Muss-Jacobs, Principal Broker/Owner
BuyersAgentPortland.com | (503) 810-7192 Portland Metro Exclusive Buyers Agent | 100% Buyer Representation ~ 100% o... - Portland, OR
Buyer Focused ~ Buyer Results

With that type of money invested, can't imagine the company not talking with legal counsel first. 

May 10, 2010 12:57 PM #8
Rainmaker
315,645
Michael Russell
Keller Williams Realty Partners, Inc. - Overland Park, KS
Overland Park Kansas Real Estate

The biggest problem is that there are no consequences, at least not to the defaulter. We all know what runs down hill and it always seems to end up at our doorstep.

May 10, 2010 01:03 PM #9
Rainmaker
67,166
Janet Fetterman
Royal Shell Real Estate Inc - Ocala, FL
Selling Luxury Lifestyles...

WAY TO GO ROGER! Thanks for the post.

May 10, 2010 02:41 PM #10
Ambassador
438,896
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

In residnetial, a strategic default that becomes a foreclosure can result in a 1099 phantom tax bill, and a lawsuit for the lender for a deficinecy judgment in our state. I think the bank should look to do the same on this. If they are possessing of assets then the bank should go after them not because of morality, but because that is the right business decision based on the contract.

May 10, 2010 02:45 PM #11
Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

Russell - you're right.  Strange how that model changes when we start talking about residential loans.

Carla - I'm sure that they had a whole team of legal counsel!

Michael - there are always consequences, whether business or personal.  Consequences, however, have little to do with moral obligation.

Thanks Janet! :)

Joe - Yes, there are consequences.  How the lender chooses to act in the above situation depends on the contract and state laws.  I'm sure it's not going to stop at an "ol' well, we tried."  Whether it's a good business decision or not is up to the lender to decide, exactly like doing a strategic default or not is up to the borrower to decide...AFTER they have researched all outlets and know all possible outcomes to doing so.

May 10, 2010 05:25 PM #12
Ambassador
1,954,806
Nestor & Katerina Gasset
International Properties and Investments LLC - Wellington, FL
Realtors, Wellington Florida Homes For Sale

Roger- Congrats on the feature. Well deserved because this is one of those topics that gets heated. 

Morality can not be legislated. 

Don't throw stones when you live in a glass house. 

Judge not until you have walked a mile in my shoes. And we can find so many more sayings that have to do with this. 

I am not the judge of those we service in our business. 

I wish agents would stop telling sellers that they can not do a short sale if it is strategic. 

Heck, even when there is a financial disaster pending in their personal lives- that is still 'strategic'! 

This hurts many sellers who can benefit from strategic defaults and then that house goes to another person and so it goes. We are working on 3 strategic short sales with offers right now with the banks. When agents spread non truths about who can do a short sale and who can't- that is not helping the economy. They can refer those listings out to those that will do strategic shorts. 

I agree, what is good for the goose is good for the gander. Katerina 

May 10, 2010 06:44 PM #13
Rainmaker
1,027,674
Michael J. Perry
RE/MAX Associates of Lancaster, PA. - Lancaster, PA
Lancaster Relo Specialist
Survival simply comes first !!!!!! I can t blame anyone who defaults when there is no clear cut solution for years!!!!!!!
May 10, 2010 06:58 PM #14
Rainmaker
219,227
Jackie Hawley
ReMax Encore - Clarkston, MI
Southeast Michigan Real Estate

In Michigan the bank can sue for the deficiency- I figure they will either sue or sell the debt at some point in the future. I think that now that consumers are becoming more educated, our foreclosures may be decreasing and our short sales are definitely increasing (and negotiating away the liability for the deficiency). Heck- when they can get a mortgage again in a few years they will probably be able to buy a comparable house and have half their current mortgage payment.

May 10, 2010 07:41 PM #15
Ambassador
1,829,044
Cindy Jones
Integrity Real Estate Group - Woodbridge, VA
Pentagon, Fort Belvoir & Quantico Real Estate News

I don't remember that there is any morals clause in any loan document I've ever signed.  Each person has to make the decision that is right for them.  Most homeowners today are well versed on the consequences of short sales and foreclosure.  Make the decision that makes sense for you and your circumstances.  No judgement will be forthcoming from me.

May 10, 2010 08:44 PM #16
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884,011
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

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 #17
Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

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 #18
Ambassador
884,011
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

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 #19
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
Oct 21, 2010 03:25 AM #20
Rainmaker
239,125
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

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.

Oct 21, 2010 06:42 AM #21
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