Wednesday, February 3, 2010

Who Shall Bear the Cost of Strategic Default? A Recent Point of View from NY Times & The Bostson Globe

The New York Times recently posted an article titled No Help in Sight, More Homeowners Walk Away.

The article continues a general trend. It seems that the media is very sympathetic to the reasons why homeowners strategically default, especially when some of the largest real estate companies strategically default. The biggest strategic default in history occurred when Tishman Speyer handed the "keys" back to the 110 New York City building complex known as Stuyvesant Town. The article tells the story of a homeowner. "In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid". The homeowner says "People like me are beginning to feel like suckers...Why not let it go in default and rent a better place for less?”

A recent piece in the Boston Globe takes a different perspective. In an essay posted by writer Scott Van Voorhis : The Hysteria Driving Strategic Defaulters
, he essentially argues that the "shrewdness of the strategic defaulter" is questionable. In his opinion most people who strategically default are "an example of someone who blindly followed the housing bubble up and now is panicking when the chips are down." While there is some truth to his analysis, there is no denying the fact that a strategic default is an effective tool (when properly utilized). Furthermore, people, governments, and businesses blindly followed the credit bubble and now all are certainly panicking. AND ALL HAVE STRATEGICALLY DEFAULTED SOMEWAY OR ANOTHER.

So what should be done?

Articles on strategic default continue to describe the issues rather accurately but offer few solutions. I have discovered three certainties regarding the growing trend of strategic defaults. First, homeowners are fast becoming comfortable with the idea of strategical default despite the negative repercussions. Thus, we will see more strategic defaults. Second, banks are indignant and believe homeowners must honor their mortgage loan contracts at all costs. As the NY Times writer points out, banks believe "a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation...The banks are damned if they will help.” Third, it is very likely the federal government will be seen as the rescuer, the Bailout Knight.

To quote the NY Times writer: "using government money to [bailout banks from strategic defaulters and to bailout homeowners from underwater properties] would be seen as unfair by many taxpayers...on the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy."

Therein lies the real question. Who shall bear the cost?

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