I’m in San Francisco for the third ReBarCamp. As a result I got to hang out this weekend with my friend and partner  Ginger Wilcox, and spend time with her children and my friends Todd Carpenter and Andy Kaufman.

While we were having breakfast this morning Ginger asked me to read the latest post on her awesome “Blog by the Bay“. The title was “Is It wrong to Walk Away from an Underwater Mortgage”, written by George Crowe. The topic of the post was strategic default. The topic is interesting enough and struck a strong enough chord within me to require a response here ( for me, even if not for you )

If you don’t know what a strategic default is, it is a term used by people to apologize for their failure to live up to an obligation they created contractually. In other words, it describes people who are walking away from mortgage loans that they are capable of repaying.The key here is that the borrower has the ability to make the payments required by the loan, but they choose not to.

I am not a fan of strategic defaults. I can understand that people are stressed financially, but the mortgage documents don’t say that you can don’t have to pay if you get upset. I understand that the banks are being seen as the bad guys in the current economic climate, but the documents don’t say you don’t have to pay if you don’t like the actions of the lender. You borrowed the money, you bought something with it, and you’re supposed to pay back the loan.  George quotes a New York Times article:

Back in January Roger Lowenstein argued the case for strategic default in The New York Times Magazine, and he made some pretty good points:

“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.”

I am not as familiar with mortgage lending in California or New York as I am in Pennsylvania where we sign a mortgage and a note. The mortgage document is the pledge of real property for the repayment of  debt, and the note is our personal pledge to repay the loan. Under the terms of those documents, the borrower might be liable for a deficiency judgment to return to the bank the funds that they do not recover through the foreclosure process.  But in any case, that is not a discussion of what is right or wrong, only what might be financially expedient.

Then there is the idea that “its only business” which seems to me to be another excuse. When people tell me something is business, not personal, it’s always because they are about to do something unpleasant, and they want to distance themselves from the moral responsibility for their actions. In this case, the term is being used to indicate that the decision here is a financial one, not a moral or legal one. And that’s just not the case. You can’t be moral only when its easy, or you have no real sense of right or wrong.

I don’t pretend to be able to stand in judgement of others or their actions. And I can understand the temptation to walk away from a loan because of the pressures of the economy, but your reaction to that temptation is what determines who you are.
When my late wife’s father passed away, her mom was left with debts from his business. She didn’t own a house, and was not responsible for his debts, but she worked for years to pay off each debtor. Tillie Rosen is an stand up human being. As a widow with limited resources, having only recently returned to the work force in a low paying clerical job, she made good on the obligations of her late husband (only one of e reasons I love and respect her). She could have chosen strategic default to benefit her family but she chose to scrimp and save to pay off the obligations of her late husband because she knew that was the right thing to do .

In a market like that in Marin County where Ginger works and lives, people are struggling to pay mortgages that are currently in excess of the value of their property. That’s a really tough problem, but the property was worth more when they bought it, and will probably be worth more again some time in the future.  Obviously, there is a financial benefit to the borrower if they walk away from the property and then buy another property back at the new lower value and wait for the recovery of the marketplace. But that is a financial decision, not a moral decision.  I wouldn’t blame a homeowner who was underwater and unable to make the payments for defaulting, or for “giving the keys” back to the bank through a deed in lieu of foreclosure. Those are cases of bowing to the inevitable. But for a member of the privileged class, who has a loan that they don’t want to pay, because the thing they bought went down in value? That’s just not right, at least in my opinion. Its not fun, but living up to the promises you make in life is always the right thing to do .

In closing his post George says:

If you buy into the argument that it was the irresponsible and greedy behavior of the banks that brought about the housing bubble and corresponding bust, then maybe it’s fair that they’re left holding the bag. It’s a tough question with no easy answer. What do you think?

Since the banks were not  partners in profit when  properties went up in value during the boom they should not be expected to be partners in the loss of value today. They are lenders, and they lent money to willing borrowers, who in these cases were and are able to make the payments under the terms they agreed to – even if it isn’t the most expedient thing to do, it is the right thing to do.

Related articles by Zemanta

• Fannie Mae Intensifies Penalties for Strategic Defaulters (faarforum.com)
• Most Mortgages in Default Held by the Wealthy (news.firedoglake.com)
• Study: Nearly One in Five Mortgage Defaults Are ‘Strategic’ (blogs.wsj.com)
• Richest homeowners making most defaults (commercialappeal.com)

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Maybe I’ve been around the real estate industry for too long.Or maybe I’m just not bright enough to get the economics “du jour” – in any case, when I saw an Inman News article entitled “A new set of real estate fundamentals” I was annoyed.

When I look at the current market, I see the same fundamentals that were in place when I started to sell real estate in 1971 – to wit;

• Housing is still a basic need.
• Real Estate is not a liquid asset, and should be bought understanding that it is a long term investment
• Everybody with a periodic housing expense is probably paying a mortgage for someone, and would usually benefit more if they pad one for themselves.
• When you buy real estate that is affordable and fits your housing needs, over the long term, you will create additional financial stability for yourself and your family.

These to me are fundamentals – and have been the bedrock of our industry, and it bothers me when people assume that there are “new fundamentals” – which are actually variations on these themes – some of which have short term validity, and many of which do not.

So I started reading the article with a chip on my shoulder – but after reading it through, I felt a lot better. The article actually was looking at the statements and assumptions made at a 2003 Inman conference on the “Housing Bubble” which generated some theories and suppositions about what was fueling that real estate market among which were growing Immigration, Unlimited Market Liquidity, and Consumer Confidence. In my opinion these are not fundamentals of the real estate market, but are moderating influences, as we have seen them play out.

Immigration for example was (and still is a powerful) force impacting demographics, but is impacted by both the economy here and abroad, as well as the political climate here and in other countries. As a result, this is not fundamental to real estate as a commodity, though it might positively or negatively impact demand in the market. The limits which we have seen placed on the “unlimited” liquidity of the mortgage market  also impacts the ability of consumers to act on their desire for housing, again acting as a moderating influence on the market (though certainly not fundamental to real estate) and finally, the lack of consumer confidence has been an important factor in limiting demand for real property as people find alternative investments, diminishing the “serendipitous” buyer, though the impact of those issues was important to that market, and changes in those sectors of the market are among the reasons for our current real estate market

My niece and nephew called today to talk about whether they should buy a house i- they moved to California form the East Coast, and the price of housing , even in today’s market is pretty high.  There is a house on the street where they live that has just come on the market. They like the street and the neighbors, its close to libraries, playgrounds, schools, and highways.  And they plan to be in the area for the next several years. So based upon their needs and wants, and their desire to build some financial stability for their family through their monthly housing expense, they are going to make an offer to purchase. The offer will be aggressively low (so they feel protected if the market continues to go down rather than up) but since they have good credit, a substantial down payment, and good employment, the terms of the offer are pretty good. Since the seller has a need to sell the property (and since she has lived in it for many years and has no debt) hopefully they will be able to reach an agreement. But whether they reach an agreement or not, at least both parties are motivated by what are truly the fundamentals of real estate and as a result will hopefully make decisions that benefit them -