I think this article is a great example of why individuals need to view their real estate transactions as investments. Does it make sense to hold on to a house that you purchased at the top of the market boom and hold on to it for 15 years just to break even? This is not a question of ethics, morals, and/or religious convictions. A college professor advises underwater homeowners to walk away from mortgages. Quite frankly I agree with him and the arguments he makes. This is a real estate contract and nothing more. Don’t let the government trick you into thinking there is some obligation beyond the contract, while it continues to be completely hypocritical demonstrated by the trillion dollar budget deficits and trillion dollar bailouts.
In the article below we see Morgan Stanley, who is not in default or delinquent on its loans, simply just giving the buildings back to the lender because it improves its bottom line. Too many people do the opposite of what this company does by maxing out their credit cards, draining their retirement funds, and selling all their possessions to save a declining asset that eventually gets foreclosed on. Would we have less homeless people if they simply recognized that they are in a losing proposition early on and cut their losses immediately by giving back the collateral to the lender?
So we’ve discussed the ethics of individual borrowers walking away from their mortgages. (Some say we’ve over-discussed it.) If it’s immoral, as some would say, for a borrower to walk away their mortgage, is it any different for a bank?
Morgan Stanley is doing just that. News reports on Thursday said the bank plans to give back five San Francisco office buildings to its lender–just two years after buying them at the top of the market.
“This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation.”
Morgan Stanley bought the buildings, along with five others, in San Francisco’s financial district as part of a $2.5 billion purchase from Blackstone Group in May 2007. The buildings were formerly owned by billionaire investor Sam Zell’s Equity Office Properties and acquired by Blackstone in its $39 billion buyout of the real estate firm earlier that year, Bloomberg reports. One analyst estimates that the buildings are now worth half of what Morgan Stanley paid.
The buildings Morgan Stanley is giving up are One Post, 201 California St., Foundry Square I, 60 Spear St. and 188 Embarcadero. The bank will continue to own the five other office buildings it acquired in the deal.
Some proponents of strategic default argue that since the lender gets the collateral back, walking away is simply the termination of a business arrangement between consenting adults. Certainly, it seems as though that’s what’s happening here.
Calculated Risk hastens to point out that Morgan Stanley is current on the loan–thus this is essentially a “strategic default.” If banks can walk away from commercial buildings, does that weaken the social pressure on homeowners to stay in their home when they’re underwater on their mortgages?