Another quote: Walking away is OK

by Joseph Askins on 1/7/10

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

… (University of Arizona law professor Brent) White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

- “Walk away from your mortgage!” from this weekend’s issue of The New York Times Magazine.

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{ 8 comments… read them below or add one }

Kramer January 8, 2010 at 11:05 AM

A mortgage is a business deal-the bank has no conscience when they change usurious rates on an ARM, checking account, etc. There is no “moral contract,” especially in light of TARP.

Study just completed in Orange County, CA referenced 19,000 homes for sale on the MLS, and over 100,000 homes in “shadow inventory,” which includes defaults, REO’s, pre-foreclosure, etc. These homes rarely hit the MLS, are not used for comps, but destroy the market. This crisis is far from over. Walk from an underwater mortgage, let the house sell for it’s true value, the market will bottom and recover-hopefully.

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Ken January 8, 2010 at 12:00 PM

“…the bank has no conscience when they change usurious rates on an ARM, checking account, etc…”

Rates are set, for all intents and purposes, by the Fed not the banks and when someone signs an adjustable rate mortgage they are, or should be, aware that the rate can…ADJUST!

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Joe Zekas January 8, 2010 at 12:12 PM

Kramer,

Sorry to see you back. I was hoping you’d come to some realization of how unwelcome your ill-informed and adolescent views are to our audience.

Take a hint – no one is looking for your advice or attaches any weight to it. Try CribChatter where you’ll doubtless be more welcome, or at least be among soul-mates.

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Kramer January 8, 2010 at 12:30 PM

Ken, your an idiot. Did the Fed set the 72% annual rate on credit cards, now being chrged by GMAC?

Joe, I read your tripe for entertainment only. You were an unsuccessful attorney, now shilling for developers. Of course, you have a vested interest if people abandon a mortgage-who will be building? Who will buy you lunch? Visit my new website, “Joe Zekas is an ill-informed shill,” or “yo chicago sucks”

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Joe Zekas January 8, 2010 at 12:38 PM

Kramer,

As always, your comments only enlighten people about who and what you are. Keep it up and you’ll be banned.

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Kramer January 8, 2010 at 12:57 PM

A little testy, Joe? Why the hype trying to prop up the market? Interesting prior post:
http://yochicago.com/buyers-keep-walking-from-downtown-contracts/9084/
Think Roeder is still wrong about the walk-aways? Educate yourself Joe-here is a website written for grade-school economists like yourself:
http://www.doctorhousingbubble.com/

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Joe Zekas January 8, 2010 at 1:17 PM

Kramer,

Read Roeder’s follow-on. He was flat-out wrong.

We link, on our Chicago Real Estate News page, to stories from over 100 local, regional and national sources that report extensively on the bubble. The site you refer to is more at your level (i.e., worthless) than at our readers’ level.

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Ken January 12, 2010 at 10:25 AM

Kramer,

The Fed is actually the overseer of the consumer credit market with oversite over credit cards so even though they don’t set a 72% rate (which is the exception that you’re acting like is the rule) they can do something about it. For every idiot that loves to bitch about the ruthless, faceless corporations screwing them there is a regulatory goverment body that you are paying to doing nothing about it.

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