February 03, 2010

So, Where is the "Moral Obliation" on Commercial Loans and Stategic Defaults?

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

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.
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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