“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.