In the old days you’d rather be in an auto accident wearing dirty underwear then default on your mortgage or file for bankruptcy. It just wasn’t something proper people did, and if so certainly not shared with anyone.
Not anymore. It seems folks of all ages are just walking away from their home if it is valued at less than the mortgage. It even has a name, ‘Strategic Default’. This sounds better than Dead Beat. Now I am not talking about folks who walk away because they have medical bills or lost their job and can’t make their mortgage payments. These are people who earn good money and bought a home five or six years ago and today, with the real estate market in the toilet, think it is perfectly okay to simply stop paying their mortgage and walk away. The rationale is that businesses do it so why can’t they. And, they don’t keep it a secret but let the world know they are deadbeats.
The one bad corporate real estate deal these people point to as an example that allows them to do what they’re doing is the New York $5.4 billion Stuyvesant Town deal that went south. The property not only lost half its value but the cash flow dried up making this the biggest real estate collapse in America’s history. The investors lost billions.
The difference between corporate America losing and walking away is corporate America has and had a significant investment in the real estate unlike many of the ‘Strategic Default-ers’, who bought their home with little or no money down and their only real investment over the years has been their mortgage, taxes and insurance payments.
I can only assume what many of these ‘smart’ Strategic Defaulters think is that by walking away they can rent a home somewhere else for about the same or less and in five or seven years they can come back and buy a similar home at a ‘cheaper’ price and be back in the money. They figure the only one that gets hurt in this deal is the bank and who cares about banks? They don’t think about their community or their future beyond the next mortgage payment.
Not only are these people getting bad advice about playing jingle keys with their banker but in five or seven years the chances are the current home market will have recovered somewhat and real estate will be substantially higher than it is today. Interest rates will certainly be substantially higher and if anyone wants to buy a home it will cost them more of a down payment then it did yesterday.. That alone will take the air out of any future value of getting a better deal years down the road.
There are businesses that have materialized to service this odd financial market and their job is more handholding then business consulting. For a fee they counsel home owners into accepting what they are doing as perfectly sound and basically do a moral intervention. I call it a moral-ectomy. It’s the homeowner equivalent of Gordon Gekko and ‘Greed is good,’ mantra.
What the rest of us need to know about this group of people is that there will be no contract sacred or one that they ever can be trusted to honor. Unfortunately credit reporting agencies clear bad events after a period of time. These people having learned that they can do this once will do it again, and again.
For some reason these people have their priorities screwed up. They think they are thinking like business people but sound business practices don’t suggest that you walk away from obligations, or reduce the value of your community, or financially damage your neighbor’s property. Successful business people live up to their liabilities not walk away from them.
The concept of Strategic Default wounds neighborhoods, reduces home values, weakens the community tax base and damages schools and public services. And people do this because they found themselves with a temporary weak home value and they do not like it.
As a business person I don’t want to be on the other side of any contract with people like this. I would not want to sell them a hot dog for fear they would eat it and then demand their money back as it failed to meet their expectations. As a homeowner I would not want to live next to such people, or have them in my neighborhood. To say these folks have a screw loose is probably the biggest understatement of 2010.
If you have questions call Paul at 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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