Strategic Default Monitor – How To Strategically Default

Wednesday, August 25, 2010

Strategic Default Monitor - Recent News Updates

There has been some interesting news as of late. Our current updates point to changing attitudes about strategic default. It reinforces Why Strategic Default Makes Sense For Individuals and it lets us know that strategic default will be considered by many more people as time goes on. Please read on... 


The Wall Street Journal recently reported that Commercial Property Owners Choose To Default.



The best part of this article is that it completely speaks for itself. It requires no commentary. I have put the relevant points of the article in italics and quotations.

"Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans"

"Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away...[t]hese companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense."

"These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about "strategic defaults...Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default." 

"But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments."

Watch this video to learn more:


Enough said... 

In an article entitled The Ethics of Strategic Default by Mark Miller, the writer refers to a "moral outrage" regarding strategic default. While acknowledging a strategic default can be a good business decision, he points to individual anger about strategic defaulters. The article is a review of past research papers on the strategic default phenomenon.  The writer asked an executive vice president of the American Bankers Association if a strategic default constitutes a moral or ethical breach. The answer:

"He argued that banks want to help homeowners find alternatives to default, and stressed the importance of talking to lenders first, citing the all-but-certain hit to credit ratings, and the possibility that a bank will come after a defaulting borrower's other assets. But he stopped short of calling a mortgage a moral obligation. 'It's a strategic decision to back out of an obligation, but the world has changed. Would they like someone else to take on the paper loss that they have? Do people do things like that? Obviously they do."

It is not clear what was meant by "would they like someone else to take on the paper loss that they have", especially since the American Banking Associations represented large lenders that were all to happy to allow TAXPAYERS TO TAKE ON THE PAPER LOSS OF BIG BANKS THROUGH BAILOUTS, TARP, AND OTHER TAXPAYER FUNDED HANDOUTS. 

At the end of the day, even the executive vice president of American Banking Association admitted that there is no moral or ethical obligation regarding a strategic default. In his own words a strategic default is "a strategic decision to back out of an obligation."

Anyway...Enough said... 

The blog, Naked Capitalism, recently published it's Strategic Default Awareness Check. Essentially the author went to Google Trends and put in the search term strategic default. It was concluded that the search term strategic default is a "new subject of interest". 

So...we took a look at Google Trends. After typing in the search term strategic default, it appears (based on the data) that significant interest in the topic began around December 2009 and it has continued to remain an important search term. Prior to December 2009, the only time strategic default showed up on the charts was in September 2009. All other times the strategic default search term was non existent.

What does this mean? It means that strategic default has become an important research topic this year. We predict that it will continue to grow in importance as time goes on.




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