Strategic Defaults – Moral? Ethical? Pure Business?

CBS did a fluff piece of reporting last night about strategic defaults, whereby a homeowner makes a business decision to walk away from a mortgage – the way businesses do all the time. Spend a few minutes watching this. I’d love to hear your opinions about whether homeowners should be held to a higher standard.

Watch CBS News Videos Online

We are certainly in interesting times, and the question of strategic defaults isn’t going away for a while.

Update: Thanks to BHB, I saw this from January:

I would love to hear from any (former?) homeowners in Charlottesville who have made the decision to walk away. I can think of a couple local developments – and one in particular – where walking away makes sense, because nearly every single house was bought speculatively and the home buyers were manipulated by the machine. The houses were not homes, they were houses. And everyone in that development is paying the price.Related:

“The Subprime Problem is Contained” – January 2008

Tishmans’s ‘Strategic Default” on Stuyvesant Town – WSJ (more)

Does Morgan Stanley “Walking Away” from CRE Contribute to Strategic Defaults? (more)

Note that Morgan Stanley is current on the loan and is not in foreclosure. They are simply “walking away” because the buildings are worth less than the amount owed.

Strategic Default is a Moral Dilemma. That’s simply adorable, don’t you think?

Stuyvesant Town Owners Walk Away – Top of Market Deal Collapses

And whilst we’re talking about defaulting … (hat tip: Newsalert)

IF you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state.

Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position.

The news caused nary a ripple in the placid Washington scene. Perhaps that’s because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don’t notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie’s latest request.

But taxpayers should examine Freddie’s first-quarter numbers not only because the losses are our responsibility. Since they also include details on Freddie’s delinquent mortgages, the company’s sales of foreclosed properties and losses on those sales, the results provide a telling snapshot of the current state of the housing market.

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3 Comments

  1. michael guthrie May 10, 2010 at 14:28

    Jim,
    I watched the 60 minute show with interest. Strategic Default is becoming a huge problem and I do believe something needs to be done. That being said, I am not sure what can be done in the short term because of the way the Deed of Trust is written. FHA Commissioner David Stevens was put in a no win situation because he had to go with the party line, “buyers need to know that their credit will be damaged”. Knowing Dave, he realizes this a a very big problem and like you said, “it is not going away for awhile”.

    Reply
  2. Jim Duncan May 11, 2010 at 06:06

    The part that kills me is the double standard; homeowners are supposed to be shamed into continuing their financial spirals versus businesses that, in making the same decisions are lauded for making good financial moves and for looking out for their shareholders.

    The system has been mismanaged.

    Reply
  3. Scott May 17, 2010 at 13:41

    I agree with Jim 100% – there is just no reason whatsoever this is or should be any different from an “investor” or “business” making the same kind of decision to default on debt or a bad financial decision. I don’t think anything “needs to be done” – what is it banks, business and the Chamber of Commerce is always going on about with regards to the free market? Oh, that’s right – the creative destruction of the market is a self-correcting mechanism. So when lenders make stupid business decisions – like lending far too much to poor credit risks, they take the chance that those borrowers will default and they will not get repaid. That’s what this is all about, nothing more.

    Reply

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