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Strategic Default (banks do it, why can't you?)

Zebo

Elite Member
Jul 29, 2001
39,386
2
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I have a childhood friend who is doing a 'strategic default, e.g. what I normally call deadbeatism - I posted about in OT, he hasn't paid in a year still lives there - at first I was kinda pissed at him but now with graft foisted on tax payer while bankers make billions and with their example shown below not so much anymore. Thoughts

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From Market ticker

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.
 
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ElFenix

Elite Member
Super Moderator
Mar 20, 2000
101,429
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other than dave ramsay who is saying its immoral to default?
 

Zebo

Elite Member
Jul 29, 2001
39,386
2
81
other than dave ramsay who is saying its immoral to default?
Author cites talking heads and I think it is too.

Look at it this way:

If one sold house for a gain would they give bank 50% of profit? No, of course not. So why should they share in your loss?


But I'm coming around.... How can you be honorable with a system so dishonorable?
 

ElFenix

Elite Member
Super Moderator
Mar 20, 2000
101,429
5,506
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Author cites talking heads and I think it is too.

Look at it this way:

If one sold house for a gain would they give bank 50% of profit? No, of course not. So why should they share in your loss?


But I'm coming around.... How can you be honorable with a system so dishonorable?
author seems to cite 1 business school prof s/he had to contact (hardly carnival barker) who seems to be of the opinion that if everyone who were upside down walked away it would be disastrous for the economy, and that the rules should also be the same for everyone. i'll bet the guy feels the same way about the banks, that they should be paying for their mistakes as long as they weren't deceived as well (i can guarantee that dave ramsay feels the same way). but the story doesn't mention that, now does it?

of course, the way the OP is laid out i can't tell who is saying what as a lot of it sounds like Zebo's editorializing.
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,907
173
106
I have a childhood friend who is doing a 'strategic default, e.g. what I normally call deadbeatism - I posted about in OT, he hasn't paid in a year still lives there - at first I was kinda pissed at him but now with graft foisted on tax payer while bankers make billions and with their example shown below not so much anymore. Thoughts
=snip-
After reading that the banks are walking away from properties, I feel the same as you.

IMO, if they can do it to others, then people can do it to them. What goes around comes around.

Fern
 

u3laptoper

Member
Oct 25, 2009
63
0
0
This is how I see the situation.

In terms of legality, a society based on democratic principles holds no obligation when a breach of contract occurs. It's clearly not a loophole that Morgan Stanley is exploiting.

Morally speaking, yes, a bigger player in the capitalist system should have certain ethical standards at all times. Even during this crisis, a bigger player is sinking. Would you not save it if all other smaller players have already fallen?

In case you question, I do not work in banking sector. Nor do I have interest in politics.
 

bfdd

Lifer
Feb 3, 2007
13,312
1
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After reading that the banks are walking away from properties, I feel the same as you.

IMO, if they can do it to others, then people can do it to them. What goes around comes around.

Fern
Agreed. Don't preach "morality" if you yourself aren't going to be "moral."
 

rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
There is nothing immoral about consumer with strategic default. You enter a contract with the bank when you take out a mortgage with the house being the collateral. If you decided not to pay, the bank foreclose the house, it's simple as that. Whether the house value is greater or less than the mortgage does not matter, unless the something about that is clearly stated in the mortgage contract.

Of course banks is gonna say oh strategic default is immoral blah blah blah, bank will do or say anything to make money. Mortgage is a simple business transaction backed by a contract both party agreed on. The only thing you are obligated to do is what on the contract you signed, nothing else.
 

Modelworks

Lifer
Feb 22, 2007
16,240
5
76
I would like to strategically stop paying my credit card bill. Any way I can swing that? It's Citibank so there is no moral issue.
You can stop paying unsecured debt anytime you like and there is nothing they can do but try to get the money. But if you do not have stocks or lots of money in the bank they can't get it what you don't have.

1. take all cash out of banks
2. stop paying the bills

Now if this was Saudi Arabia, they throw you in jail there, even if it is $20.
 

halik

Lifer
Oct 10, 2000
25,696
1
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Many people, and certainly many idiots would agree that a contractual obligation is a moral obligation.
What libertarian-types are talking about? There's is absolutely nothing morals involved in a financial decisions and the only people that push that bullshit are people worried about their yields.
 
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werepossum

Elite Member
Jul 10, 2006
29,873
460
126
Unless I don't properly understand what is going on, I don't think this is the same thing as you just walking away from your mortgage. I think what these firms are doing is negotiating with the lendor and usually a third party who is willing to take over the property and its loan, so that the lendor isn't actually out anything or agrees to accept the loss.

If I'm correct, you actually can do the same thing with a home mortgage. In fact, I know a guy who years and years ago simply handed back two duplexes and a BMW. There were no foreclosures because a foreclosure is a legal proceeding to force you to return the property against your will.

In either case, I agree that it's immoral to stop paying a mortgage simply because the property is upside down, whether for a person or for a bank.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
What libertarian-types are talking about? There's is absolutely nothing morals involved in a financial decisions and the only people that push that bullshit are people worried about their yields.
So you're saying that the costs foisted upon society for one's own inability (or unwillingness) to pay one's own debt isn't a moral decision? Furthermore, are you saying that breaking *A CONTRACT* because you don't *WANT* to pay isn't a moral decision?

Byzantine borrowers who merely trade their word for cash results in an overall decline in society.
 
Oct 16, 1999
10,490
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You can stop paying unsecured debt anytime you like and there is nothing they can do but try to get the money. But if you do not have stocks or lots of money in the bank they can't get it what you don't have.

1. take all cash out of banks
2. stop paying the bills

Now if this was Saudi Arabia, they throw you in jail there, even if it is $20.
I have some stocks, at least until I sell them off next month to get out from under Citi.
 

Veramocor

Senior member
Mar 2, 2004
389
1
0
So you're saying that the costs foisted upon society for one's own inability (or unwillingness) to pay one's own debt isn't a moral decision? Furthermore, are you saying that breaking *A CONTRACT* because you don't *WANT* to pay isn't a moral decision?

Byzantine borrowers who merely trade their word for cash results in an overall decline in society.
But when you strategically default did you break the contract?

The contract says the bank will lend you money and you pay it at a certain interval or the bank will get the house which is collateral.

By strategically defaulting you are picking option b that is in the contract.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
But when you strategically default did you break the contract?

The contract says the bank will lend you money and you pay it at a certain interval or the bank will get the house which is collateral.

By strategically defaulting you are picking option b that is in the contract.
Option B is nothing more than recourse back to an asset IN CASE you default, not because you want to.

Personally, I find it very reprehensible and is an indication of how far this country has fallen.

I wish every state in the union had recourse mortgages.
 
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Ronstang

Lifer
Jul 8, 2000
12,427
10
81
Option B is nothing more than recourse back to an asset IN CASE you default, not because you want to.

Personally, I find it very reprehensible and is an indication of how far this country has fallen.

I wish every state in the union had recourse mortgages.
I agree with you, but how can you hold the average person to a standard that the BANKERS AREN"T HOLDING THEMSELVES TOO? This is hypocrisy at it's finest and just underscores why most people hate bankers.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
I agree with you, but how can you hold the average person to a standard that the BANKERS AREN"T HOLDING THEMSELVES TOO? This is hypocrisy at it's finest and just underscores why most people hate bankers.
You think this is about bankers, do you?

Who funds the bankers? Who funds the mortgages?

Why do you pay interest over the risk-free rate? Statistics, that's why.
 

rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
Option B is nothing more than recourse back to an asset IN CASE you default, not because you want to.

Personally, I find it very reprehensible and is an indication of how far this country has fallen.

I wish every state in the union had recourse mortgages.
what for? banks are free to and have already taken risks into non-recourse mortgage calculation with things like lower loan-to-value ratio.

The only thing is house value in some places drop much more than expected and banks are losing money with formula based on old house value, but that's part of the risk in the banking business and that's why banks have tons of risk managment team to deal with that risk. So now they are using this "moral" BS trying to shift the cost of their own business risk to consumers. and that's totally unacceptable.

Show me one bank does business based on moral obligation and not contractual obligation, if not, stop this BS about people and their moral when dealing with banks.
 

Ronstang

Lifer
Jul 8, 2000
12,427
10
81
You think this is about bankers, do you?

Who funds the bankers? Who funds the mortgages?

Why do you pay interest over the risk-free rate? Statistics, that's why.
Are you a lawyer too? You completely avoided the issue in this article.

Like I already said, I think it is morally reprehensible for people to walk away from a mortgage for a house "they had to have" because they were stupid and bought at the wrong time in the market....but why is it OK for the banks to do it then? Double standard much?
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
what for? banks are free to and have already taken risks into non-recourse mortgage calculation with things like lower loan-to-value ratio.

The only thing is house value in some places drop much more than expected and banks are losing money with formula based on old house value, but that's part of the risk in the banking business and that's why banks have tons of risk managment team to deal with that risk. So now they are using this "moral" BS trying to shift the cost of their own business risk to consumers. and that's totally unacceptable.

Show me one bank does business based on moral obligation and not contractual obligation, if not, stop this BS about people and their moral when dealing with banks.
Is a contractual obligation not a moral obligation? Do you really just break your word whenever you want to? If you do, aren't you considered higher risk? If you are higher risk, don't you cause everybody to be higher risk, since lenders cannot tell the difference?

Is a loan not actually, in many cases, called a "promissory note", because you make a promise to pay.

I do love how "banks" keep being bandied about, yet not a single person has mentioned evil pension, bond, mutual, or 401k funds.

All you fucking bastards who invested in anything, how dare you not accept a loss on your investment.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Are you a lawyer too? You completely avoided the issue in this article.

Like I already said, I think it is morally reprehensible for people to walk away from a mortgage for a house "they had to have" because they were stupid and bought at the wrong time in the market....but why is it OK for the banks to do it then? Double standard much?
No, I am not a lawyer, although I do negotiate with them continually, as well as legal docs quite a bit.

When did I ever defend Morgan Stanley in this case?
 

rchiu

Diamond Member
Jun 8, 2002
3,846
0
0
Is a contractual obligation not a moral obligation? Do you really just break your word whenever you want to? If you do, aren't you considered higher risk? If you are higher risk, don't you cause everybody to be higher risk, since lenders cannot tell the difference?

Is a loan not actually, in many cases, called a "promissory note", because you make a promise to pay.

I do love how "banks" keep being bandied about, yet not a single person has mentioned evil pension, bond, mutual, or 401k funds.

All you fucking bastards who invested in anything, how dare you not accept a loss on your investment.
Did I say anything about violating a contractual obligation? In fact I suggest consumers to do what's on the contract, no more, no less. If the mortgage contract is a non-recourse one, consumer is free to walk away from the house and the bank is bound by the contract to take only the house (or whatever collateral).

Banks are the one saying now it is "immoral" to walk away from the house even tho the contract never stated that consumer cannot.

Seems like if anyone wanna change a binding contract, a contract agreed by both the bank and the borrower, is the bank.
 

Zebo

Elite Member
Jul 29, 2001
39,386
2
81
I do love how "banks" keep being bandied about, yet not a single person has mentioned evil pension, bond, mutual, or 401k funds.

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This is BS. I love how you pretend to be worried about some old lady on a pension ignoring place like Goldman or Morgan Stanly typically bonuses out roughly half of their gross profits, with only a minuscule piece being paid in dividends to shareholders. Not to mention their ridiculous cost of doing business e.g. private jets, $300K country club memberships, parties etc.
 

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