The traditional American set of values includes liking things big. We like extremes. The biggest, best, fastest, record-setting specimen of anything tends to get our attention.
So, in 2006, when Tishman Speyer Properties led a group of institutional investors in purchasing the 56-building, 11,232-unit Peter Cooper Village and Stuyvesant Town apartment complex in New York City for $5.4 billion dollars (that’s not a typo — it’s billions, with a "b"), eyebrows went up, jaws dropped, and the deal was duly noted in the record books as the largest residential property purchase in the nation — ever.
You know what they say: "The bigger they are, the harder they fall." In that uncanny way those old clichés have of so often being correct, the biggest residential property purchase is on its way to being the biggest residential mortgage walkaway.
Last week, the group of investor-owners, including the California Public Employees’ Retirement System (CalPERS) strategically defaulted (read: walked away) from $4.4 billion in debt on the property, which is now estimated to be worth $1.8 billion. Figuratively speaking, the owners handed all 11,232 sets of front-door keys back to the bank, and turned over all ownership and control of the complex to their lenders.
We could spend days on end unraveling the wherefores and whys to create this situation, but that’s off-topic here. As I mentioned a couple of weeks ago, the No. 1 frequently asked question I’m currently hearing from upside-down homeowners is "Should I walk away?" from an upside-down mortgage. A close second is "Should I file bankruptcy?"
This is telling, in terms of where the mood of the market is currently and where it may be going. More telling, though, are the mental wranglings and emotional gyrations that these homeowners go through in making what some argue should really be approached as a business decision.
The mere conversation around walking away from their home both reflects and creates psychological trauma in homeowners, as well as panic, desperation, the emotional burden of overwhelming debt, and a gnawing sense of guilt and irresponsibility at going back on their word.
However, when a business — especially an investor who is accountable to shareholders — faces the same decision, it is seen as guilt-worthy and irresponsible not to avoid "throwing good money after bad," in the words of CalPERS spokesperson Clark McKinley.
Same thing with bankruptcy. I’ve had clients report they were chastised by their advisers for even asking about it, shamed and put down as "part of the problem" for inquiring about whether and how the bankruptcy laws work and whether they are an appropriate candidate for eliminating or managing their debt through bankruptcy.
In actuality, the original purpose of the bankruptcy laws was to provide people with a clean slate — a fresh start after financial trauma.
I’m not one to encourage people to walk away from their mortgages, or to file bankruptcy. We all can envision the utter financial ruin that would result if every upside-down homeowner walked away from their home.
And frankly, it’s not always the best business decision for a homeowner whose job, income and mortgage payments are still at pre-recession levels to lock in their losses and pile on top the credit consequences and exposure to deficiency judgments (in some states) that go along with walking away.
On top of that, walking away is not strictly a business decision for a homeowner: Most people simply want to keep their homes.
But neither do I think it is helpful, fair or even valid advice to take a staunch position that these financial emergency measures are always a wrong or bad decision for every homeowner.
And I think it’s borderline heinous for the governmental and corporate minds who used taxpayer money to bail out big banks and big business to guilt and shame those same taxpayers when their own personal desperate economic times cause them to consider desperate measures. …CONTINUED