How Strategic Default Could Help Save The Economy

One of the smartest and most well respected economists around, William Fleckenstein, recently wrote a piece for MSN.com where he reiterated something we said on the YouWalkAway.com blog about 6 weeks ago…

Strategic Defaults are giving our economy a huge boost.

Ok, well we actually said “Strategic Default could save our economy”, but who’s counting. The basic premise is the same. Banks are taking their sweet time in actually taking back the estimated 8 million homes currently in default, but yet to become bank owned. As such a large number of the owners and occupants of those 8 million homes are currently living mortgage free, which frees up thousands of dollars every month. As good materialistic Americans, of course a portion of that newly found money goes to shopping, travel, eating out, etc…

All of which is very good for the economy. That’s not to say this is a long term fix, but to quote our last report on this subject:

“The plan so far as been to give banks hundreds of billions of dollars, supposedly to stop foreclosures by lowering monthly mortgage payments, start lending to small business, etc… this is supposed to keep jobs, free up a portion of peoples’ income, and so on, all of which is supposed to have the trickle down effect of giving people more money to spend on shopping, traveling, going out to eat, etc.

The problem is, banks took the money, yet refused to lend to small businesses or help homeowners by reducing principal or even lowering interest rates in most cases. So we’re left with a huge number of homes in default, the highest unemployment in decades, and the lowest consumer confidence levels since it’s been measured.

But strategic default changes all that, by taking the power from the banks and putting it back in the hands of the people, along with thousands of dollars every month.”

And this article re-iterated our point. It goes on to give real life examples – the woman who walked away from her $525k mortgage, bought a similar place for $200k, and bought herself a nice new car. The working couple who decided it didn’t make sense to keep paying on the grossly upside down mortgage and took their newly freed up money and took a family trip to NYC. I’m sure we can find countless other stories. Feel free to share yours.

But at the end of the day, no one’s saying people should strategically default so that they can buy a new car, or take a trip. At YouWalkAway.com, we urge those who are going through strategic default to pay down other debts, or save up money for a rental once the foreclosure process is completed. But, sometimes it feels good to take that vacation you’ve been putting off for years because money was too tight. After all, you only live once. If it takes strategic default for a family to feel a little less trapped and get to enjoy their life a bit more, rather than working 2-3 jobs to pay for an upside down mortgage… AND they give the economy a much needed boost in the process, sounds like there are worse things that could be going on.

Jon Maddux

CEO

YouWalkAway.com

Renters In Foreclosure – Innocent Victims

The California based non-profit organization Tenants Together put out a very interesting report this week talking about some of the least publicized victims of the foreclosure process – tenants.

In many cases, tenants whose landlord end up in foreclosure are wrongfully harassed and sometimes even evicted, despite recent legislation passed aimed at protecting tenants.

The report talks about some of the changes that have been made to protect tenants in foreclosure (although many of them aren’t being followed), then goes on to give some frightening statistics, and some very good suggestions about what to do in order to protect tenants once the bank becomes their landlord.

Here are some of the stats & suggestions that really caught my eye:

Stats:

  • At least 37% of foreclosures in California are rental properties.
  • More than 200,000 tenants in California were affected by foreclosures in 2009 alone.
  • From 2008-2009 there was a 70% increase in foreclosures of apartment buildings with 5 units or more.

Suggestions:

  • Enforcement agencies must step up efforts to enforce tenant protection laws, and hold banks accountable for breaking those rules.
  • California Counties should notify tenants when a notice of default is filed.
  • Laws should be enacted to ensure that innocent tenants don’t harm their credit scored with involuntary evictions.

Read the full report here.

Conclusion:

Renters are innocent victims of the foreclosure process. Horror stories of banks hiring lawyers and real estate agents to harass & threaten renters who have been living in homes that are foreclosed on are heartbreaking. The thought that many of these people hurt their credit and some even end up homeless, despite the fact that they have never missed a payment and never got themselves in over their head financially is even more so. Something needs to be done to combat this problem and enforce the laws to the banks who unjustly treat these tenants unfairly.

Jon Maddux

CEO

YouWalkAway.com

The Ethics Of Loan Modification

I heard a great interview on NPR radio yesterday. It was with another financial blogger with some common sense, Barry Ritholtz. Barry also recently released the book Bailout Nation, where he offers one of the clearest looks at the financial lenders, regulators, and politicians responsible for the financial crisis of 2008. In the interview, Ritholtz talks about the government sponsored loan modification programs, essentially calling them out for doing very little to help the homeowner, and an awful lot to help the banks. (Seems like we’ve heard that somewhere before… hmmmm)

You can read and listen to the full interview here

The main point of the interview, it that by artificially propping up real estate prices, you’re hurting the economy as a whole, and even if by doing so you do help the people who either bought more home than they could afford or the people with equity in their homes who would be hurt by dropping real estate prices, at the end of the day you’re ignoring the real problem – namely that the “equity” that was created during the housing boom was largely fictional anyway. With that in mind, the only way to truly fix this problem is to let housing prices get back normal, and that will only happen through defaults, principal reductions and short sales.

By promoting all these loan modification programs the government is basically allowing the banks to do whatever they want at the homeowner and taxpayer’s expense. Even those who get modifications will many times default anyway, either due to the fact that their homes are still grossly underwater in most cases, or due to the fact that they can’t make the new payment because of a change of financial situation. Whatever the case, we can say for certain that so far any government sponsored loan modification programs have been very expensive and have far undelivered given the results promised. Unfortunately, it seems that since our government refuses to listen to the lessons of the past, we’re going to be doomed to repeat them. As Mr. Ritholtz so plainly put it…

“There are a lot more effective ways to spend $14 billion than essentially rewarding the banks that were just so reckless and irresponsible. It just doesn’t make any sense.”

Amen Barry.

Jon Maddux

CEO

www.YouWalkAway.com

Since When Are Europeans More Rebellious Than Americans?

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

-Thomas Jefferson, 3rd president of US (1743 – 1826)

One of the things that we’re taught being brought up as Americans is that the spirit of the American people was one that would never roll over for anything or anyone, one that would fight tooth & nail for what’s right, and that’s what made this country one of the most powerful & wealthiest in the history of the world. That when push came to shove, the American people would never stand for unfair taxes from an unjust government.

Isn’t that what the Revolutionary War, The Boston Tea Party, The Declaration of Independence… the defining moments in this country’s history, were all about?

If there was anything that our founding fathers, it was unfair taxation and oppression from an out of control, greedy government. Yet in the present day, as the bank controlled government taxes its own poor & middle class citizens to pay for the bad decisions of the wealthiest, the masses sit idly by and watch it happen.

Our forefathers must be rolling over in their graves right about now.

There was an article in the UK Daily Mail last week about the citizens of Greece taking very bold action against the poor financial decisions of their government and banking system. The story told of riots, stone throwing, vandalism, people smashing business windows and setting cars on fire. The reason…

‘They are trying to make workers pay the price for this crisis,’ said Yiannis Panagopoulos, leader of Greece‘s largest union, the GSEE.

The government says the tough cuts are its only way to dig Greece out of a crisis that has hammered the common European currency and alarmed international markets – inflating the loan-dependent country’s borrowing costs.

Greek Riots

Read the full article here

Sound familiar?

And while we are in no way condoning violence, vandalism, or any other sort of radical protest action, the article did bring a thought to mind… at what point did we become so freaking complacent? When did it become unacceptable to stand up against something so clearly wrong?

Many people believe it’s the fact that so many people feel that they can’t make their voice heard. But it’s not true. They say actions speak louder than words… well dollars speak louder than both! If you’re a homeowner you can make your voice heard loud & clear – with your checkbook, or more accurately, lack thereof.

Think about what would happen if every underwater homeowner (roughly 14 million according to the most recent estimates) called their lender and demanded a principal reduction, or at least an affordable payment, and stopped paying the mortgage if they didn’t get one.

Lenders would be forced to take something seriously for a change, since obviously the government can’t be counted on to impose any real regulations. Sometimes drastic times call for drastic measures. If the people make the banks stand up & take notice, then perhaps the banks could and would start doing things to benefit their communities rather than their executives. And since it seems the government only listens to big business these days, perhaps the best way to get through to government is through their biggest campaign contributors.

But what about the hit to my credit score? What about the banks suing me for a deficiency? Sure, there are always consequences to every action…. But in many cases, the consequences of inaction are far greater. If 25% of the homeowners in this country (the estimate of people who are underwater) all had a foreclosure on record, the financial industry would be forced to shift the way they look at credit. If already cash strapped banks had that many people stop paying, they would have such limited funds available to sue anyone that the number would be incredibly small.

In conclusion, we’re not saying it’s a wise move to start rioting in the streets, or for that matter even that it’s a wise move in your particular situation to stop paying your mortgage. But at some point, enough is enough and action needs to be taken. That’s what our great nation was built upon, and it feels like somewhere along the way that principal fell by the wayside. But the fact that the people should stand up and take action against a greedy and oppressive system is certainly not lost… it’s alive and well, and last seen living in Greece.

Jon Maddux

CEO

www.YouWalkAway.com

The American Dream – Life, Liberty, and the Pursuit of Leveraged Housing Debt?

In an eye opening report on Friday, economist and co-creator of the Case Schiller housing price index Robert Schiller made a very strong case for the fact that perhaps it’s time to re-think the American dream, that maybe the white picket fence could be rented rather than mortgaged in this updated version of the American Dream.

Read the full article here.

Schiller, who is unquestionably one of the foremost authorities of the housing situation in this country, makes some very interesting points in the article. One that really stuck out at me was the fact that many people bought “too much home” for the sole reason that societal pressures were so great and that they felt they needed to buy a nice home in a nice neighborhood in order to belong.

He traces this behavior back to 1899, when in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.

And, aside from low interest rates and ridiculously loose lending standards, that really is what fueled the housing bubble isn’t it? The underlying notion that even if you couldn’t afford it, you should own a home, and not just any home, the biggest home you can (or can’t) afford? Isn’t this “keeping up with the Jones’s” mentality what had people making $25,000 a year taking out half million dollar, no doc, stated income loans in the first place?

But who said you have to own a home to be an upstanding member of society? Isn’t Freedom one of the cornerstones of the American dream? Debt is a form of financial slavery, so how can putting your financial future on the line by over-leveraging yourself to buy a home “because that’s what you’re supposed to do” possibly be a part of that dream?

Rental Sweet Rental

Is putting your future, and the future of your family, in financial jeopardy part of that dream? Ask any of the 25% of homeowners in this country who are currently upside down on their home loans, and they’ll tell you they’re anything but free. Not free to move somewhere without finding a renter and/or taking a loss monthly, not free to modify their loan without jumping through hoops for their lender, not free to short sale the property, etc.

Isn’t it about time we rethought this idea that homeownership is a part of the American Dream? After all, I’ve seen lots of rental properties with white picket fences around them.

Jon Maddux

CEO

www.YouWalkAway.com

Vegas Style Investing – How To Turn A Small Loss Into A Big One – Part 2

For many, choosing to pay their upside down mortgage, hoping to regain their lost equity is akin to a desperate gambler sitting at a blackjack table, doubling down in hopes of winning back the money he’s already lost. Almost everyone will tell you that this is a sure-fire recipe for going broke fast, but time and time again you’ll see some guy who’s down on his luck betting more, and more, and more, because he KNOWS that this time his card’s coming out.

For part one click here.

And while we’re on the blackjack analogy, there could be a very strong case made right now for the fact that the odds are very much stacked against the homeowners who are desperately hanging on, hoping for “their card” to come out.

Anyone who’s ever played any blackjack will tell you that it’s only smart to double down if you’re holding a hand that, if a face card comes out (the highest odds), will be an amount higher than that of the dealer if he pulls out a face card. (i.e. when your hand amounts to a 10 and the dealer is showing a 6)

But recent evidence suggests that underwater homeowners may very well be holding a 14 to the dealer’s ace. (Read time to cut your losses).

In a three part blog post I wrote last week, pointed to the fact that we may very well be looking at the Second Great Depression, citing facts from government reports and independent analysts alike.

Richard Smith, CEO of Realogy, a national real estate company, whose brands include Coldwell Banker, Century 21 and The Corcoran Group, says the government’s mortgage modification program meant to avert foreclosures “is doing nothing more than prolonging the housing recovery. It is doing more harm than good.”

“In spite of the best intentions, this is not going to work,” says Smith.

According to recent data from the Mortgage Bankers Association, whose economist—perhaps prematurely—commented, “We are likely seeing the beginning of the end.”

Economist Charles Hugh Smith, who has predicted the housing crash to a ‘T” so far, thinks we are at the edge of a plateau, and are looking towards a huge move down from here. See the chart below – and keep in mind this was done in 2006!

Smith Chart 1

In that post in 2006, Smith compares the housing bubble and crash to that of the dot.com bubble & collapse in the late 1990’s and early 2000’s. According to Smith:

Despite the differences between housing and stocks, bubbles share some basic characteristics which can be described in a Phase 1, 2 and 3 analysis. Phase 2 begins when prices retrace to the most recent plateau, at which point buyers emerge in the mistaken belief that “this is the bottom.” This trait is clearly visible in a phase transition analysis of the Nasdaq dot-com era bubble.

Smith Chart 2

Read the full article here.

So even if a fraction of this is true, the odds are greatly stacked against underwater homeowners hoping to regain lost equity. And with those odds, any reasonably smart gambler would agree it’s time for the guy at the blackjack table to cut his losses and walk away while he still has some money left for the buffet.

If you simply purchased your home, put a lot of money down, have less than 20 years left on your amortized mortgage with a good interest rate… or still have a good amount of equity in your home, it probably makes sense to stay.  More likely than not, this example doesn’t apply to you. Find out for yourself with this Strategic Default Calculator.

Jon Maddux

CEO

www.YouWalkAway.com

No Banker Left Behind – The War On Greedism

There was a very interesting article written on Tuesday by Robert Scheer of truthdig.com called “No Banker Left Behind”. The article talks about a recent report from the New York State comptroller that stated bonuses for Wall Street financiers reached a whopping $20.3 billion in 2009, a jump of 17%.

This fact just illustrates exactly what we’ve been saying for years now… that despite the fact that record numbers of people are losing their homes, underwater on their mortgages, losing jobs and racking up debt, the Wall Street fat cats who caused this whole mess in the first place are laughing all the way to the bank.

Read the full article here

Their bonuses certainly weren’t paid because of the fact that they’ve saved the economy or helped the millions of struggling Americans to get by. In fact it’s the polar opposite. They gambled with the homes and mortgages of those on Main Street, and when things didn’t continue to balloon as they had anticipated, they had the US Treasury (read US Taxpayers) flip the bill, to the tune of 1.25 TRILLION dollars.

Once playing with the houses’ money, they bought low and essentially won their “double down” bets, making record profits for the huge financial institutions. But on Main St. things keep getting worse. 1 in 4 mortgages are upside down, millions are behind on their mortgages and/or unemployed. Consumer confidence is at a nearly 30 year low, and the FDIC’s list of “problem” banks just hit a 20 year high. Pat yourselves on the back ladies & gents in the finance industry, bang up job you’re doing over there… enjoy that trip to the Caribbean.

Civil Disobedience and The Debtors Revolt has begun. This YouTube Video has 504,963 views and growing fast with a 5 star rating.

Watch The Video

Jon Maddux

CEO

www.YouWalkAway.com

NBA or NFL?

I got a very funny email from a friend the other day, and while it’s worth sharing for amusement sake alone, there’s also a very relevant, and if true… scary message contained in these statistics… check it out…

NBA versus NFL

GUESS WHICH ONE…….

Even if you aren’t a sports fan this is very interesting!

36 have been accused of spousal abuse

7 have been arrested for fraud

19 have been accused of writing bad checks

117 have directly or indirectly bankrupted at least 2 businesses

3 have done time for assault

71… repeat, 71

cannot get a credit card due to bad credit

14 have been arrested on drug-related charges

8 have been arrested for shoplifting

21 currently are defendants in lawsuits,

84 have been arrested for drunk driving

in the last year!

Can you guess which organization this is?

NBA Or NFL?

Give up yet?

Scroll down,

Neither…


It’s the 535 members of the
United States Congress

The same group of Idiots that crank out hundreds of new laws each year designed to keep the rest of us in line.

Scary stuff huh?  These numbers illustrate what could be quite possibly the most frightening, hypocritical case of “Do as I say, not as I do” in history.  A little research showed that this originated in 1999, so it’s outdated, but I wouldn’t doubt that some or much of it may be accurate.  I’m reminded of a quote from the movie Gangs of New York, where Boss Tweed, the corrupt politician, utters a phrase shockingly reminiscent of these numbers…

“The appearance of law must be upheld, especially when it’s being broken.”

At the risk of sounding a little too revolutionary… what is wrong with these people who are supposed to be looking out for our best interests!?!?  Why is it that in order to play the game of politics in the USA these days, you have to lie, cheat & steal better than everyone else?  If our founding fathers were around to see this, there would certainly be multiple cans of whoop ass opened up in the halls of congress, and in the boardrooms of many of the huge corporations and banks that hold the strings that control the puppets we call leaders these days.

Seriously, at what point was it exactly that government went from being “for the people by the people” to being “for the super rich corporations with the best lobbyists and biggest campaign contributions, by the most crooked, corrupt people they can find.”

Some may argue that to call out one’s own government for being corrupt and greedy is being anti-patriotic, un-American even. To which I would have to argue that it’s the most patriotic duty one can perform. If someone truly loves their country and the ideas that it was built upon, how can one stand for such a blatant slap in the face to your fellow countrymen, by the very people who are supposed to be looking out for their best interests? Isn’t it possible to love your country and countrymen, but despise and distrust the people who are supposed to be looking out for their best interests, but are instead breaking the rules and lining their own pockets at every turn?

And we are in some dire times here, we need an honest government with the people’s best interests in mind, perhaps now more than ever. But it seems the worse things get, the more those in power look for opportunities to pull the wool over the eyes of Joe & Jane 6-pack, robbing the middle & lower classes to pay for the bad bets of the super rich while those who caused our economy to collapse remain living in the lap of luxury.

Meanwhile, the press keeps harping on “The recession is over” and “the worst is behind us”. This might be true for a select & privileged few, but certainly not for most. Sure, on Wall St. and in the halls of con-gress, things are looking up… bonuses will be paid, campaign contributions will be made, like nothing ever happened. But on Main St. there is a much different song being played. There are still millions of homeowners who can’t  make their mortgage payment each month, and while government and the banks play games to try and maximize their gains and limit losses, these people are worrying where their next meal is coming from, or where their kids will sleep. The unemployment rate is still a way too high 10.6% national average, and that’s just those who are collecting unemployment benefits. When you factor in those who are underemployed, those who are self employed and struggling, and those who have already exhausted their unemployment benefits, that number has to be closer to 20%-25%. Things are still very bad, and despite what the press may say, they are not showing signs of improvement for most people.

What can be done? While on a macro-economic scale it’s taken teams of the “best & brightest” economists to try to answer that question, usually unsuccessfully or to no avail. However, there is something that can be done on an individual basis… you can make your voice heard. Write your congressmen & senators, talk to your elected officials. Let the ones that are running this country into the ground, know that you won’t stand idly by as they make a mockery of the legal and financial systems of this country. There are strength in numbers, and this can once again be a country “by the people and for the people”, but only if enough of us stand up and do something about it.

Jon Maddux

CEO

www.YouWalkAway.com

More Innocent Victims Of The Foreclosure Crisis

Apparently, even if you make your payments on time and in full every month, you’re still in danger of getting thrown out of your residence. Sandra Pearson almost learned this lesson the hard way. She was featured in a story on CNN Money’s website on Thursday, because she was nearly thrown out of her rented home in Santa Maria, California after her landlord stopped making his mortgage payments and had his lender foreclose on the property.

Even though Pearson made her payments on time and in full every month, and her lease was through June 2010, in October 2009 she received a notice to vacate from the lender, and now landlord, First Franklin Bank.

Citing the Protecting Tenants at Foreclosure Act, an act signed by congress last May stating that as long as a tenant pays rent on time, the lender has to honor the remainder of the lease, Pearson was able to stay in her home. In December, First Franklin crumbled and OneWest Bank took over as her new landlord, and once again tried to muscle her out of the home. (more…)

The Foreclosure Aftershock

Experts Predict 4-5 Million New Foreclosures Due To Hit In The Coming Month

According to quite a few experts, among them Moody’s, Standard & Poors, and a number of independent financial analysts, the recent upswing in home prices and downturn in housing inventory could be nothing more than the result of banks and mortgage servicers delaying the inevitable by holding off on foreclosing on millions of loans that are currently in default.

S & P Default Chart

Currently, there are an estimated 7.7 million homes whose mortgages are in delinquency, but are not being reported as REO (Bank Owned) properties on the market yet. Depending on who you ask, an estimated 4-5 million of these will be bank owned properties for sale within the next year.The reason for the current new wave of foreclosures is largely attributed to the failure of the Government’s “Making Home Affordable” program, launched a year ago this week. According to a recent New York Times article, the program…

“has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program has raised false hopes among people who simply cannot afford their homes. As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.”

The Times is certainly not the only institution who attributes political pressure and bureaucratic procrastination to the delay in foreclosures recently, and what looks to be the inevitable aftershock to the foreclosure quake we saw starting in 2007. Accroding to a Standard & Poors report on Wednesday…

“We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market. This temporary constriction ensued because servicers have completed fewer foreclosures due to court delays, servicing backlogs, and political pressure to keep borrowers in their homes. However, there is a rapidly growing shadow inventory of properties where borrowers are delinquent but foreclosure has not been completed. Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market.”
S & P Default Chart 2

Is there anything that can be done, or for that matter should be done, to stop the coming tidal wave of new foreclosures? There are many that argue the fact that people, and for that matter banks, who gambled on risky loans, shouldn’t get special treatment, and for that matter taxpayer money, to bail them out of a bad bet. Then there are some who say to let them all fail would be catastrophic to our economy and society, that in order to hold onto the lifestyle we know & love that we have to bail them out, even if they might not deserve it.

From a sheer economic standpoint, the point can be argued both ways as well. On the one hand, a new wave of foreclosures will drive home prices down and make them a more attractive purchase for prospective homeowners and investors alike. On the other hand, perhaps another huge blow to housing prices and the balance sheets of the “Too big to fail” financial institutions of the world could be the final straw that causes the financial Armageddon that so many in government and big business warned us of from the start of the collapse. As with so many things in the past few years, we can be sure of two things… that the choice will certainly be the lesser of two evils, and that we definitely have some interesting times ahead… So stay tuned.

Jon Maddux

CEO

www.YouWalkAway.com

The McMansion Ghetto

Reverse Gentrification: The New Real Estate Frontier?fkgentrification

There was a great article written in March of 2008 for theatlantic.com by a very smart fellow named Christopher B. Leinberger, a professor of urban planning at the University of Michigan, real-estate developer, and author of “The Option of Urbanism”.

The article talks about the economic, societal, and demographic factors that were involved in the fleeing of people from urban living to the sprawling suburbs that occurred between the end of World War 2 until the downturn in housing prices a few years ago. He then goes on to talk in detail about what he predicts to be essentially a reversal in trend, where the affluent & educated flee back to more urban settings, while lower income, less educated folks start to get pushed out of the inner cities and start to occupy the McMansion riddled, car-dependent housing developments that were initially designed, built, and sold as “The American Dream”. (more…)

Strategic Hypocrisy

“We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association.”

~ Jonathan Kempner, Former President – Mortgage Bankers Association

“Mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest…. Paying off a mortgage isn’t only a matter of personal interest. Defaults hurt neighborhoods by lowering property values. What about the message they will send to their family and their kids and their friends?”

~John Courson, President – Mortgage Bankers Association

In an interesting twist of fate, as reported by The Wall St. Journal, last Friday the Mortgage Bankers Association agreed to sell their 10 story Washington D.C. building that they’ve been calling home since buying the building for $79 million near the peak of the real estate market in 2007. The selling price: $41.3 million – nearly half of the purchase price, and significantly less than the $75 million that they borrowed from PNC Financial Services Group Inc. to finance the purchase.

No one from PNC was willing to issue a statement regarding the recent sale, and the MBA is staying rather tight-lipped as well. John Courson, the MBA’s current president, declined to state whether or not the deficient balance of the loan would be paid back. The MBA did state, however, that the decision to continue ownership of the building with a $75 million mortgage would be “economically imprudent.”

Another recent story on Morgan Stanley, one of those “Too Big To Fail” financial institutions, giving 5 buildings in San Francisco, valued at hundreds of millions of dollars, back to their lenders due to negative equity, once again raises the question that been asked since the real estate market decline began nearly 3 years ago:

Is Strategic Default on an upside down real estate loan truly immoral, or is it simply a good business decision?

As the foreclosure crisis has worsened over the last few years, lenders, realtors, and of course, the Mortgage Bankers Association, have done their best to paint a picture of moral responsibility to one’s lender, sending out a message that even though it might be financially catastrophic, continuing to make payments on an upside down mortgage was simply “The right thing to do”.

But with the recent trend of large, institutional organizations, some worth billions, opting to go the strategic default route on real estate investments gone bad, many are starting to question if perhaps we’re looking at the most expensive case of “Do as I say, not as I do” in history. Sure, there is an element of moral responsibility in signing your name on a piece of paper and promising to pay, but at the same time, a mortgage is a business contract. Business contracts get broken on a daily basis because they no longer suit the needs of one of the parties involved. In fact, you’d be hard pressed to find a successful businessperson who hasn’t broken a contract (or many) for this very reason. As we’ve seen, many of the largest and most successful businesses in the world are employing this very strategy.

There are obviously a number of questions that have yet to be answered… Is this trend of strategic defaults on commercial properties going to continue and last as long as the residential foreclosure crisis has? For that matter how much will residential defaults continue to rise, and how much will this weigh on businesses and the commercial real estate market? Will the “too big to fails” of the world still be able to preach morality while in defaults of their own, or will history look back at them as irresponsible hypocrites?

On a personal level, there are far more important questions to be answered. To the question asked by Mr. Courson of the MBA not too long ago of “What about the message they will send to their family and their kids by defaulting”, I can say with confidence that it won’t be a positive one – obviously no one thinks turning your back on your word and your responsibilities sends a good message to anyone.

But with that being said, isn’t it worse to have to tell your children that they can only eat one meal a day, or that they can’t attend college, because mommy & daddy are putting all their hard earned money into a home that will never again be close to being worth what they owe on it?

This recession has definitely forced many of us to question what is right and wrong, moral and immoral, and for many has become an issue of surviving or not surviving. One thing I think we can all agree upon is that we haven’t seen the last of the ramifications of this economic downturn, and when it’s all said & done we will probably all have a very different view of the world, of ourselves, and of our own moral fiber. What are your thoughts on the matter? Have we seen the worst yet, or will things get worse? Is it wrong of a huge financial institution to cry morality while defaulting on their own debts because it is “economically imprudent.” To keep paying? And most importantly, at what point does the survival and well being of you and your family become more important than following what society defines as right or wrong? Please leave a comment below and let us know your thoughts.

Many Homeowners Paid Their Lender For The Right To Strategically Default

Homeowners unknowingly paid more in closing costs because their state laws prohibit the lender from coming after them on underwater or “negative equity” mortgages.

If you live in one of these 8 states:

Alaska, Arizona, California, Oregon, Minnesota, Montana, North Dakota and Washington.

Your lender may have charged you more closing costs because of this law.   Please consider this New York Times article:

In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an (more…)