| Is there any "moral" obligation in Real Estate? | | | | purchase, he would be losing that amount right off the |
| I have been hearing a lot of speculation regarding one's | | | | top, but depending on the purchase amount, the |
| "moral obligation" to continue making payments on | | | | strategic default might look pretty good. |
| mortgages involving "underwater" valued homes. This | | | | Let us suppose Joe bought for $600,000, taking out a |
| appears a bit odd given what I have seen on television | | | | loan for $480,000 at 6% with an associated payment |
| business channels lately. Less than two weeks ago, | | | | of approximately $2,900. The house would only be |
| Morgan Stanley announced they would be giving back | | | | worth $300,000 today so he is behind by $180,000, not |
| several of the commercial building properties they | | | | to mention the interest accruing on that amount of |
| acquired in downtown San Francisco in 2007. These | | | | roughly $900 per month. Provided that Joe has already |
| purchases were made at the peak of the commercial | | | | purchased new vehicles (courtesy of the recent cash |
| real estate pricing boom, and values have fallen by as | | | | for clunkers program) as well as any other items he |
| much as 50% since that time. Many homeowners | | | | might need help financing over the next 3 to 5 years, |
| reading this must be thinking something along the lines | | | | and continues to make timely payments on those |
| of "welcome to the party." | | | | obligations, it starts to look like it might be worth the hit |
| A Morgan Stanley representative stated that this was | | | | to his credit. When Joe stops making the payments on |
| not a "default or foreclosure situation" because they | | | | his home, he will begin saving almost $3,000 per month. |
| were simply giving the properties back to their lender in | | | | He will not even get a notice of foreclosure until he |
| order to get out of the loan obligation. I am sorry, but if | | | | has skipped at least 3 of those payments, and more |
| the average homeowner takes that course of action it | | | | likely 4. The actual foreclosure process will likely take |
| is considered default or foreclosure, so why is it | | | | another 3 to 6 months to play out, and even then he |
| different when one of the "too big to fail" companies | | | | will be given an additional 45 days to remove himself, |
| does so? To the best of my knowledge, Morgan | | | | and his belongings from the residence so we are |
| Stanley has not recently become unemployed, and I | | | | looking at the better part of a year without a |
| believe they have more than enough reserve assets | | | | mortgage payment saving him over $30,000. The bank |
| to continue to make good on their payment, so why is | | | | may even offer him "cash for keys" once the |
| it that they are not obligated to continue in the same | | | | foreclosure is completed worth another $3,000 to |
| manner as Joe Homeowner? | | | | $5,000, putting him around $40,000 ahead. Add this to |
| The decision by Morgan Stanley is known as a | | | | the $180,000 he is walking away from, and he is now |
| "strategic default." This is where a debtor has the | | | | $220,000 better off than he was a year ago. |
| means to make the monthly payment, but chooses not | | | | While it will drop Joe's credit score from 740 to 580, |
| to based on their belief that it is in their best financial | | | | the foreclosure will only stop him from buying a home |
| interests. This is far easier to get away with for a | | | | for 3 years. If he makes all his other payments, |
| company such as Morgan Stanley than it is for an | | | | (remember the cash for clunkers cars) during that time |
| individual or family because of the cost to one's credit. | | | | his credit will improve to somewhere in the high 600's |
| After all, a foreclosure will stay on your credit for 7 | | | | which will allow him to buy a home once again. The |
| years, and will drop your credit score by as much as | | | | home he walked away from at $300,000 has |
| 20%. Depending on what state the property | | | | bottomed out, and appreciated at 4% a year during |
| foreclosure takes place, there may also be laws | | | | the three years he was exiled, so now it is worth no |
| available to the creditor to seek restitution by seizing | | | | more than $340,000. Assuming Joe kept the $40,000 |
| personal assets of those who default on their | | | | he saved by not making payments during the |
| mortgage. None of this will matter to an entity like | | | | foreclosure, he will have over 10% down on the home |
| Morgan Stanley as their assets are well insulated | | | | this time around, and will be able to own it with a |
| behind the walls of an LLC that Joe cannot obtain | | | | mortgage balance of $300,000. The interest rate on |
| without a personal guarantee. However, if Joe | | | | the loan may be higher, but he will own the same |
| Homeowner bought a new primary residence in 2007 | | | | house and owe $150,000 less, which will more than |
| at the height of the market just as Morgan Stanley did | | | | offset that difference, as well as ease the pain of |
| with the San Francisco properties, it is in all likelihood | | | | losing his initial down payment. Those people at |
| that Joe's home would only be worth half of the | | | | Morgan Stanley may just be on to something. |
| purchase value. If Joe had put 20% down on the | | | | |