I have another dispatch from the front lines of the debtor’s revolt.
This is story from one of the ladies in my wife’s Bunco group. Her brother, let’s call him Adam, had a house in Lake Worth, and decided to rent that out and buy a new house in Loxahatchee – at the top of the housing bubble.
Two years later, Adam’s $450,000 Loxahatchee House was worth only $189,000. And he couldn’t find a renter for his home in Lake Worth. He tried working with the bank (one bank had given him mortgages on both properties), but they refused to budge on the amount he owed on either home or the terms of the mortgage.
So, Adam stopped paying both mortgages. He piled the money he saved up, figuring that if he lost both houses, at least he’d have a cushion of cash for a rental. The furious bankers threatened to foreclose. Adam said: “Go ahead.”
Months went by. Then the bankers came to him with a new deal. They offered him “a lot” of forgiveness on both loans, and the interest rate on the Loxahatchee home dropped to 2.9%.
Now I don’t know how it’s possible that a bank can give a 2.9% rate, but that’s what Adam says he was offered.
He took the deal. Around the same time, he found a friend to move into the Lake Worth house, so that mortgage is covered.
Adam came out a winner, but it could have gone the other way, and quite badly. He had to be willing to walk away from everything. I would not be able to sleep at night doing what he did. But obviously more people are doing it – they feel no moral obligation to continue paying a mortgage that isn’t working for them. And why should they? Wall Street is doing the same darned thing …
Don’t Look Back: Major Players Continue to ‘Walk Away’ From Poor Mortgages
As underwater homeowners around the country despair over whether to keep paying their mortgages or just walk away, investors in the largest residential real estate deal in U.S. history have just walked away from 11,232 properties in one fell swoop.
On Monday a group led by Tishman Speyer Properties gave up the 56-building, 11,232-unit Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan, turning the properties over to its creditors after defaulting on some $4.4 billion in debt. The group decided to “transfer control and operation of the property…to the lenders,” it told the Wall Street Journal. The $5.4 billion acquisition in 2006 was the single biggest residential property purchase in U.S. history.
It’s now worth an estimated $1.8 billion, putting the properties’ owners “underwater.”
The Tishman-led venture is just the latest Wall Street walk-away.
Last month, Morgan Stanley, the country’s sixth-biggest bank by assets, walked away from five San Francisco office buildings it purchased as part of a landmark $2.43 billion deal near the height of the real estate boom. The $770 billion firm called it a “a negotiated transfer to our lenders.”
So if Wall Street can do it, why can’t homeowners?
XX Sean’s note – as I’ve said before, I think a debtor’s revolt is going to be one of the defining trends for 2010. How do you feel about it? Do you think people have a moral obligation to stick with mortgages that aren’t working out for them, or should they walk away?
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{ 13 comments… read them below or add one }
a moral obligation to pay a mortgage? yes though the morality of most folks seems to be evident only when they can manipulate and gain, (temporarily).
two thoughts come to mind: the first is “what does it profit a man if he gains the whole world but loses his own soul?” and the other, “do unto others as you would have them do unto you”. Quaint, perhaps. Still effective.
In my Dad’s day, your word and a handshake were your bond. In my day, your signature was. Today, it’s see you court but no blood comes from a stone. Progress….
Creditors are not fools and will soon be even more restrictive in their lending with much more collateral and personal guarantees req’d, more equity up front and cut off points rising. Heck, just sit on the .25% money and buy Tbills at 3.5% risk free. Actions have consequences all the way around.
My uncle by marriage went bankrupt (during Canada’s National Energy Programme/War against Alberta) but paid back every dime. How quaintly ‘old school.’
These big companies are playing with other people’s money…..They never had to put up so much money to buy these expensive properties in the first place…actually very little money.
If these big firms walk away, why can’t the small people do the same thing? After all, they bought overpriced homes.
hero
I agree: walk away. See also:
http://www.nytimes.com/2010/01/24/business/economy/24view.html
and
http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html
A mortgage commitment is made based upon the property in question being collateral. Therefore, if borrowers “walk away” from their mortgages and return the property, they have not violated their word or their agreement.
Clearly, they lose their properties suffering significant loses and do not enjoy the situation in the least. Those having given the loans gain those properties, that although underwater for the borrower, are picked up at a discount (Based upon loan payments paid to the date of default plus the down payment). Certainly they would rather have the borrower pay out the loan; however, if they manage the property well, they can come out ahead.
Walk away. Businesses do not treat the bankruptsy decision on ethics. Its financial, just like when an airplane only gets fixed when the cost of the repair is less than the liability from the probability of loss of life. If home prices fell 5, 10%, I’d argue borrower ethics, but the greater portion of the 30-50%, peak trough, home price declines which are endemic to what is going on were from overly loose lending standards to unqualified borrowers. Banks choose to lend into a housing market where the fundamental home price/owner income ratio had climbed to 4+ (normal is 3, or less). That they are so reluctant to come to the table on loan principal reduction is something they do at their peril. You can’t expect homeowners to ruin 10+ years of their life because an asset as levered up as a house looses half its value. That’s a tunnel with almost no light at the end.
Absolutely not! The average person did not make this horrible financial crisis take place. It would be foolish to spend years of your life paying your hard earned monies to an institution that could care less if you live or die. Walk away and start over. We all have a moral obligation to do our best, but not at the cost of devastating your entire life and that of your children. After all the bankers and wall street institutions are not going to give up years of their life because of the melt down. They will go the goverenment trough and steal tax payers monies and star over. Ron
No. There’s another old school idea that you have to do what’s best for your family and that especially applies to finances. If I was in this position, I wouldn’t hesitate to walk - and earlier rather than later. It’s better than pouring money into a black hole and ruining your family’s future.
I lost my house about 18 months ago. I had a fixed rate, low interest loan. I had owned my home for fifteen years and never missed a payment when this crap started. The bank added $500/month in “escrow overages” which they refused to explain. These extra charges did not apply to either interest or principal. They went directly nto the bank’s pocket. I tried for months to get an explanation about what the hell this was for, with no answer. The bank said they had turned everything over to a management company who simply refused to talk to me. It raised my payment from $750 to $1250.
I quit paying. Then they wanted to talk, but they refused to deal honestly and still refused to remove or explainn those charges and they added $10,000 more to the mortgage. I went to a lawyer who was no help at all. I know they cheated me, but I cannot afford a lawyer.
It took them 12 months to get me out, I saved $12000 so I could move. I ended up filing bankruptcy because they already had my house sold for $50000 less than I owed before I moved out. They don’t admit this but the people moved in as I was moving out. Almost a month before the foreclosure was final.
Then I started getting harassment from a collection agency over the rest of the loan. My credit was completely shot already because foreclosure shows up on it. It was time to start over. After I had already filed bankruptcy, the collection agency filed a case against me (under a different name) and got a judgement on that loan. I had to threaten to sue them, the bank and their lawyer to get them to drop it. They are all bastards.
I am better off I guess. For the first time I do not have to be fixing things all the time. I saved 90 miles a day in driving. My son is in a better school. But it is hard to leave the home your kids were raised in. It does not always work out that the bank will deal. Some of them are just evil.
I say if it makes economic sense, do it. It’s what the banks do. For too long we have lived with the double standard of, “Do as I say, not as I do.” This is the message of both politicians and the financial sector, and it puts ordinary Americans at a severe disadvantage. There is no point in having higher morals in this scenario. Washington has shown us all that it will do whatever it can for Wall Street and when we raise a voice in protest, it’s suddenly a spending freeze for us. We get one life, and the most moral thing a person can do is disengage the system in order to dismantle it.
apishapa, thanks for your story. It’s important for people to realize that the banks will not always make a deal, and that you can lose in these situations.
The suggestion of “morality” in any business deal is laughable at best. All of the morality you need is located within those 4 corners of the document you signed. If you are foolish enough to fall for the “you are a worse person for not paying” game, then you deserve what you end up with.
The reality is that the pricing of all assets have been pyramided for decades by fancy liquidity inflationary games played in the capital markets led by reckless short-term federal reserve thinking. Greenspan will no doubt by vilified by future monetary policy historians. The government supported these games under the guise of “free markets always know best” type philosophy, but even the public is now well aware of the game that has been played. Also, now that reality has finally reasserting itself, the only game these people can play is that you are a “bad person” for not playing their game anymore. Do yourself (and your country) a favor and walk when it makes sense.
Once all of these games are over and the system finally rebalances itself (aka global financial reset), we will then be able to reconstruct a financial system that makes long term sense, and complete the vision of what was attempted back in 1914. We will also be able to go back to a global economy forged on increasing productivity instead of playing these short term monetary inflationary games. Until that time, the more liquidity games that are played, the more damage to the fundamental economy that done.
Walking away without thought makes sense IF you live in a state where no deficiency judgements can be filed, and follow you around. I think trying a short sale and Deed in Lieu first makes sense in these states since the court will see you tried to do this the right way. I think ChaoticGeorge summed it up nicely…