Strategic Real Estate Defaults - Little Guy vs Big Guy

Karl Denninger of The Market Ticker penned this excellant article today...

http://market-ticker.denninger.net/archives/1749-The-Last-Word-On-Strategic-Defaults.html

The Last Word On Strategic Defaults

I'm tired of the repeated bull-crap from the media and various carny barkers about "moral obligations" to meet your payments on underwater property.

Why is it that you have a moral or ethical obligation to BANKS to do this, when THOSE VERY SAME DAMN BANKS ARE WALKING AWAY IN THE SAME FASHION I ADVOCATE?

Dec. 17 (Bloomberg) -- Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

Right.

Exactly as you do when you strategically default on your mortgage, giving the property back to the bank to get out of your loan obligation.

Why is Morgan Stanley doing this?

The Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.

As a consequence of being "upside down" they are walking away.

This isn't the first one Morgan Stanley has walked off on either:

Morgan Stanley last month agreed to hand over Crescent to Barclays, ending the firm’s obligation on a $2 billion loan after taking almost $1 billion in losses.

When Morgan Stanley acquired it, Crescent owned 54 office buildings in cities including Dallas, Houston, Denver, Miami and Las Vegas. It also owned the Canyon Ranch spa and resort, residential developments in Scottsdale, Arizona; Vail Valley, Colorado; and Lake Tahoe, California.

Got it?

BANKS - the very same BANKS that people claim you have a MORAL AND ETHICAL OBLIGATION TO PAY EVEN IF YOU ARE UPSIDE DOWN - are walking away (by "negotiation" - as in "do it or we'll default and you'll get even less!") from properties EVEN WHILE THE CARNIVAL BARKERS IN THE PRESS ARGUE IT IS IMMORAL FOR YOU TO DO SO.

In a word: BULLSHIT.

This is exactly the same thing - a "strategic default", which people define as:

"strategic default," walking away from their mortgages not out of necessity but because they believe it is in their best financial interests.

Morgan Stanley CAN pay, they are simply choosing not to, because the property has fallen in value.

This is exactly identical to you choosing not to pay because YOUR HOUSE has fallen in value.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.

Really?

I called Mr. Brenkert and spoke with him for a while this afternoon, and pointed out the above - that the asymmetry of position here is untenable and is in fact a big part of why we're in this mess.

Let's be clear: Those arguing for this from the banking and regulatory industry know how you stop people from "Strategically Defaulting" - don't give people loans that make such an option attractive!

If we had only 20% down 30 year fully-amortizing fixed-rate loans in the mortgage business nobody in their right mind would strategically default, because they would lose their 20% and even if prices declined they would likely (with amortization) be either ahead or darn close to it - that is they'd lose actual money.

But on the business side of things we allow companies to set up separate LLCs and then trade on the "parent" credit even though there is no recourse to the parent. This allows firms like Morgan (or the builder down here near me that has a bunch of these shell LLCs) to build and buy huge amounts of real estate - yet when something goes wrong they have tremendous leverage on a short sale, put-back or simple walk-off: if the lender doesn't like it they'll bankrupt the "container" LLC and the lender will get nothing.

Consumers, of course, can't do that. Try to set up a LLC and then use it as a vehicle to buy a house without a personal guarantee associated with the loan.

Forget it.

Try to get a small business loan with only the business as the collateral - no personal guarantee.

Forget it.

It is therefore my contention - and on this point Mr. Brenkert agreed - that the rules must be consistent for everyone, and if big business can strategically default on their obligations for profit (rather than for hardship) then consumers should be able to do so as well.

Therefore, until the law is changed to prohibit the use of said "Strategic" legal containers and the resulting option of business interests - including the banks that are complaining now - to practice selective default when it suits them I stand by my original view:

Strategic Default, in today's economic, legal and ethical environment, is perfectly within the rights of consumers and they should exercise that right when it makes economic sense, after consultation with both legal and accounting professionals.

*************************

We Certainly Live In Interesting Times...

 

Dear EdgeHunter,

I hope that this response will be enough.

Without an ethic code, or morale it will be a long time that you would be dead.

I am sorry to be so hard... but your life rest only on the fact that people contrary to you are able to feel that there is something bigger than themselfves in life. Follow the Golden Rules and everything will be easy.

Sorry to interrupt you... The banks never breached the law in this case. All was done trough the legal process... Oh and please don't use caplock ( you aren't on infowars.com )... Again without the rule of law, nothing. Even if tactics like to big to fail where used... the Congress had to be smarter. A good leson from the teacher... ( you know why ? because it cost so much... )

Please don't use the word Blackstone... you can't understand the level of ingeniosity that is working in this company... What ever was done freely, was done freely... We call it a mistake. It's hard, it hurts, it costs but then you never do the same again... At least that's how competitive business is done.

Could you listen... yeah closer to the ground... yeah listen... it's the drum of war. I don't want it. We are smarter ! So don't use word that you don't understand : Strategically...
It's not your playing field... the way your write... what you want... don't play there, it's global.

As you like big word... you are speaking bullshit. If you want the total destruction of the Us forever, the total annilation of any trade agrement that you had with the world, the removing of all market making activites and all capacities ( creativity, knowledge, industries and co ) do it... the way to the stone age ! Ohhh and the constitution... you know will sit in a museum. And when your land will be taken, you will not laugh anymore... Do you understand the risks that you are putting people into with your stupidity ? The world waits for that. The case where US lies about is market commitment.

So do I need to explain you the very famous : "the strategic taking back of my asset" ? It's not funny. Not something that a guy like you could understand...

Don't you understand, the bank did it with the law. Don't try to jump on the railroad to stop a train... only you will be hurt...

LoL they are guy stupid enough to listen to a guy in business ethics in a university... And then to put the world strategically in the same text... Mouuarrfff... I am amazed by the noob attitude of so many people... hey ho... america was discovered 400 years ago ( in theory )ahahah ...

People took loans... it not a gift but a trap... BUT they took it freely... They are human or not ? That the final choice that you have do to... where do you stand. Was there a scam, like mentally handicaped people that were grudged ? Or where they normal familly who didN't took the necessary care before buying their new lovely place ? In the MM speculation aera it's called doing your homework...

that's what you can call acting strategically... no the stupid crime that you are incitating. If you don't like it ask your congressman to change it...

What are this fucking rights of the consumers ? The right to kill millions of beef in the world to later trash it because it's outdated... Don't you understand ? Your faith is at stake... The future of your children... With right it always come OBLIGATIONS.

You have it if you... the IF is the biggest part. And when you say yes, it's yes.

If you want to live as slave... go have your "strategic default"... and you will be treated as slave... Strategic action requiere strategic reaction...

You are a man, take your responsability, learn to your children to trust no one, restart America on firm strong morale ground Golden Rules and become a nation that the other nation will want to listen... Or dump everything that you trusted in, say to your kids that they can be stupid and nothing will happen to them...

I will quote the Agenda :

"One government to rule them all, using the Informants to find them. One surveillance society to bring them all in, and in their ignorance bind them."
You accept PEACE for yourself and correct yours errors...or you become an ignorant... You know your destiny now... and no one will say that I didn't prevent you...

At least we are in full agrement about this last sentence...



However I know that everyone here think that if something illegal or contrary to the Goldend Rules was done it has to be corrected. If not...

Read the fine print... and maybe the next time you will start to listen to people who knows... and then try to work on your own to educate yourself. And not act like a big candybear dreaming for free honey. Learning about Central banking system, Us political system, World agenda, Oppression and suffering worldwide from all living being...

Wake Up America ! You are smart enough to change the world...

If you want to become stupid donkeys... no worries the world love donkeys ( because in reality a donkey can't be stupid... it's naturally a smart individual )... they are good transporter in a world without oil...

 

It is great you sort of agreed to disagree.

 

My Dearest Sweet Misguided SNBthefalse...

When you are sober... after fully going thru the 12 step program (especially the part where you make amends)... please reply again and maybe this time it will make some kind of sense... instead of just writing pages of mind numbing nonsense...

Just a web bit of a little hint here bubba...

This is an ARTICLE that was written on a blog by another author - IT WAS NOT WRITTEN BY ME (LOVE THE CAPS BABY)- and i am JUST quoting it...

 

I mean by the people who commited the Errors... So the one who tricked the public have to correct their errors...

And I don't see how paying an overpriced home is the fault of a bank or the fault of the seller...

I see only someone stupid in this case : the buyer.

And you know he could have as much leverage as you want, it will not change the fact that he took the ask and get the deal done. Now that the deal turns bad for him, he wants to walk away ?

ahaha if it's that the american way of doing business, I don't want to trade anymore here... you know maybe some one along the chain will say it's easier to default...

At the end it's really a question of value... the value of the voice of the American People... In my mind it was really high. It was full hope, and ready to take any challenge... even going to the moon...

That's crazy how mtv can make a country weak in less than 25years...