Tuesday, January 26, 2010

Walking Away Getting More Ink

By way of Calculated Risk, Diana Olick's latest article on Strategic Defaults:

The lead story in commercial real estate today is the dynamic duo of Tishman Speyer and BlackRock walking away from Stuyvesant Town and Peter Cooper Village in Manhattan. The two have been trying to refi $4.4 billion in debt on the 11,200-apartment property, to no avail. So now they're handing over the keys to the lenders.

The joint venture bought the property at the height of the market for $5.4 billion. Now, thanks to falling values in commercial and residential real estate, it's worth about $2 billion.

Here's the quote from the venture: "The only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives." [That's a nice way of saying: WALK THE HELL AWAY]

This news comes on the heels of Morgan Stanley walking away from its commercial mortgage commitments on five buildings out in San Francisco.

Apparently it's just good business.

So why is it not just good business for homeowners to walk away from their mortgages? Borrowers are looking at the same negative equity and loss on investment, simply on a smaller scale. At least that's the running argument. Somehow it's fine for commercial investors, but not for individuals?


Some folks argue that home mortgage walkaways are destroying the housing market by pushing up the number of foreclosures, which in turn drive down the value of the homes around them. I'm sure the same argument can be made in the commercial real estate market. Massive defaults only push commercial values down further and in turn make it even harder for the next investor to get credit.

Oh, but that's just a company and a building, not a person, right?

Well, think about the other investors in that commercial property. One of the big investors in Stuyvesant Town and Peter Cooper Village is the California Public Employees Retirement System.

They, I believe, hold an awful lot of regular folks' retirements.

Actual people.


  1. From a business standpoint, it makes a lot of sense for many people to "walk away". You have to run the numbers, and expect your credit to be horrible for 3 to 5 years, but with the economy still headind downward in CA.(despite all the "happy talk"), it is a logical conclusion to reach.

  2. Agreed, and I would add: TALK TO AN ATTORNEY FIRST!

  3. Better yet...talk to an attorney, and then quit paying. Hearing all kinds of anecdotes where people are not paying and NOTHING is happening for many, many months. Even heard cases where it's been well over a year with no action by the servicer. Life can be good with no mortgage, yes? Your results may vary.

  4. SR,


    Stop paying and you are guaranteed six months (but more likely 12+ months) of mortgage-free living. Assuming a $400,000 loan with 10% down, we're talking about $2,500 in your pocket every month. Even if your credit gets trashed, you'll have at least $15,000 to start your new life. Rent a similar place for $1,500 and in another six months you're sitting on a war chest of $21,000!

    That math took me 18 seconds--why are more people not figuring this out?

    To hear about these people running through their 401ks and begging family members for loans--good Lord! What are you doing?! Run the hell away!

    With the government intervention, bank understaffing, and the reluctance of lenders to foreclose, there's never been a better time to walk away. Once they get off their collective asses and FCs become more streamlined, this incredible opportunity to save a stockpile of cash will vanish.

    I still don't understand why people aren't taking advantage of this temporary gift.

  5. You want to know the sad thing?

    CA took it up the shoot on this StuyTown deal.

    CalPERS was in for $500M, CalSTRS in for $250M

    that's you and me, baby. no vaseline.


  6. OldTimer,

    My apologies...I accidentally deleted your comment (stupid iPhone). Here it is:

    There are some significant differences between consumer and business credit that you should consider, IMO.

    The buyers of Stuy-Town and Peter Cooper Village were The Florida Retirement System, the Church of England, Calpers ($500M), and Calsters ($100M). They collectively put up $1 billion (Tishman and Blackrock equity was nominal), and lenders lent $4.4 billion for the acquisition, non-recourse. The lenders didn't lend to the buyers because they thought it was a good or bad loan. They lent because they could sell the loans - the old securitization model.

    With securitization now dead or severely curtailed, Calpers and the rest of those investors will have to convince future lenders that their loans are safe. Lenders may ask for more conservative LTVs (i.e. 50% instead of 80%), or they may ask Calpers for a guaranty or letter of credit from a top rated institution. In any case, Calpers with $200 billion to invest, will still have access to willing lenders falling all over themselves, albeit at more conservative terms.

    Mr. former homeowner will be in a different place. Most can't do 50% down. And a guaranty from a consumer that already welched on a home loan won't give any lender comfort. If they do make you a loan, it will likely be at a higher rate.

    If a family member of mine owed $600K on a $300K house, I'd try to find a way to get him into a $300K mortgage. If he owed $400K on a $350K house, I'd try to find a way to help him pay his mortgage. Life is too short to spend your time running from your obligations. Just my opinion.

  7. OldTimer,

    You make a good point about life being too short to run from your obligations, but in your example of someone owing $600,000 on a $300,000 house--that's no longer an obligation. That's a liability. If a family is struggling to make that monstrous mortgage to the point where their financial future is at risk, it is now an enormous risk to their financial well-being.

    If they're having trouble making the nut, that family will be scraping by for DECADES to make that payment, only to break even at the end of it. Forget investing in education, forget an emergency fund, forget vacations and trips to see family, and forget retirement savings.

    Now, owing $400,000 on a $350,000 house might be a different story--as long as he can still afford it. If he straight up can't make the nut each month without going into the hole or sacrificing everything else in life, there's really not much point in him putting his future at risk. I'd argue in that case, life is too short to be a debt slave.

    If I bought an Audi R8 and five months later realized I couldn't afford it, would I rack up credit cards, drain my 401k, and borrow from family to keep it? Of course not. I'd return it to the dealer, take a financial loss and credit hit, and the contract--which says I promised to pay for that car--is rendered moot because I CAN'T pay for that car.

    My bigger point is, my family would laugh in my face for begging for help in keeping a material possession that I overpaid for and clearly could never afford.

    People have forgotten (or maybe never knew in the first place) that a house, just like a car, is a material possession. The only reason walking away hasn't completely taken over is people fail to see that houses are luxury consumables first, and an "investment" second.

    I'm glad you're a commenter here. I really appreciate your views and insight.

  8. EL Bee,

    Of course you know that the taxpayer guarantees the solvency of CALPERS. So yes they lost the money on the investment but great news -- the taxpayers of California are backstopping it!

    Google: CALPERS pension guarantee

  9. ocbear,

    There's no way I could say it any better than FreedomCM:

    "that's you and me, baby. no vaseline."