The traditional American set of values includes liking things big. We like extremes. The biggest, best, fastest, record-setting specimen of anything tends to get our attention.
So, in 2006, when Tishman Speyer Properties led a group of institutional investors in purchasing the 56-building, 11,232-unit Peter Cooper Village and Stuyvesant Town apartment complex in New York City for $5.4 billion dollars (that’s not a typo — it’s billions, with a "b"), eyebrows went up, jaws dropped, and the deal was duly noted in the record books as the largest residential property purchase in the nation — ever.
You know what they say: "The bigger they are, the harder they fall." In that uncanny way those old clichés have of so often being correct, the biggest residential property purchase is on its way to being the biggest residential mortgage walkaway.
Last week, the group of investor-owners, including the California Public Employees’ Retirement System (CalPERS) strategically defaulted (read: walked away) from $4.4 billion in debt on the property, which is now estimated to be worth $1.8 billion. Figuratively speaking, the owners handed all 11,232 sets of front-door keys back to the bank, and turned over all ownership and control of the complex to their lenders.
We could spend days on end unraveling the wherefores and whys to create this situation, but that’s off-topic here. As I mentioned a couple of weeks ago, the No. 1 frequently asked question I’m currently hearing from upside-down homeowners is "Should I walk away?" from an upside-down mortgage. A close second is "Should I file bankruptcy?"
This is telling, in terms of where the mood of the market is currently and where it may be going. More telling, though, are the mental wranglings and emotional gyrations that these homeowners go through in making what some argue should really be approached as a business decision.
The mere conversation around walking away from their home both reflects and creates psychological trauma in homeowners, as well as panic, desperation, the emotional burden of overwhelming debt, and a gnawing sense of guilt and irresponsibility at going back on their word.
However, when a business — especially an investor who is accountable to shareholders — faces the same decision, it is seen as guilt-worthy and irresponsible not to avoid "throwing good money after bad," in the words of CalPERS spokesperson Clark McKinley.
Same thing with bankruptcy. I’ve had clients report they were chastised by their advisers for even asking about it, shamed and put down as "part of the problem" for inquiring about whether and how the bankruptcy laws work and whether they are an appropriate candidate for eliminating or managing their debt through bankruptcy.
In actuality, the original purpose of the bankruptcy laws was to provide people with a clean slate — a fresh start after financial trauma.
I’m not one to encourage people to walk away from their mortgages, or to file bankruptcy. We all can envision the utter financial ruin that would result if every upside-down homeowner walked away from their home.
And frankly, it’s not always the best business decision for a homeowner whose job, income and mortgage payments are still at pre-recession levels to lock in their losses and pile on top the credit consequences and exposure to deficiency judgments (in some states) that go along with walking away.
On top of that, walking away is not strictly a business decision for a homeowner: Most people simply want to keep their homes.
But neither do I think it is helpful, fair or even valid advice to take a staunch position that these financial emergency measures are always a wrong or bad decision for every homeowner.
And I think it’s borderline heinous for the governmental and corporate minds who used taxpayer money to bail out big banks and big business to guilt and shame those same taxpayers when their own personal desperate economic times cause them to consider desperate measures. …CONTINUED
Former Treasury Secretary Hank Paulson says homeowners who walk away are less than honorable. But when Morgan Stanley walked away from $2 billion dollars in office buildings, they called it a "negotiated transfer to their lenders," and no one argued with that characterization or insulted the honor or ethics underlying it.
In reality, when you obtain a mortgage you agree to pay your lender(s) back the money they’ve fronted you in a promissory note. Then, in your deed of trust, you secure that promise to pay with your home. It’s kind of like a prenuptial agreement — up front, you and your lender have an understanding that (a) you promise to be true (pay), but (b) if you get divorced (default on your loan) for any reason, the lender will take your home back.
So, isn’t any walkaway essentially a pre-negotiated transfer to the homeowner’s lender?
When Donald Trump files bankruptcy, it is seen as a smart reorganization of debt. So why, when Jane Doe files it, should we make her feel like a deadbeat?
Now, to be clear, the true definition of walking away, or strategic default, is when someone who can afford to make their mortgage payments elects to default, most often because the home is upside down. This seems to make walking away simpler to condemn until you consider the gray area inherent in the concept of what someone can afford.
Is someone who can afford their mortgage payment only if they choose not to send their children to college irresponsible if they decide to walk away?
What about the 65-year-old whose government pension is down so much he can’t retire, and now his home is hundreds of thousands of dollars upside down, too? Is that person irresponsible for walking away, even though keeping his home would literally mean working until the day he dies? Even though he might never see the day when his home is not upside down?
For the average homeowner, these are very tough, even excruciating decisions about the lesser evil or the greater good. Which alternative inflicts the least harm?
And this resonates with homeowners: the idea that walking away is to be avoided, but that there are circumstances in which it, nevertheless, might be the right choice.
In one study of homeowners, zero homeowners said they would walk away because of 10 percent or less negative equity, but 17 percent would walk away if their negative equity reached 50 percent of their home’s value.
Again, I’m not pro-walkaway, although there are increasing numbers of experts, like University of Arizona law professor Brent White, who are.
But I am in favor of homeowners making their real estate, mortgage and finance decisions based on a holistic view of what makes sense for their lives, their families and their personal code of morals and values (including, perhaps, their communities) — not based on some manufactured double-standard of shame.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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