San Diego Housing Market: Strategic Default, Foreclosures, and Ethics

Writer’s note: I am not a homeowner, nor am I a banker, lawyer, or real estate agent.

There’s a new buzz coming to light in the housing market. It’s called strategic default. It suggests that homeowners would be wise, in certain situations, to walk away from their overpriced homes, and send them back to the banks that enticed the homeowners to take on additional debt with exotic mortgages to start with. All while encouraging this behavior, the bankers paid themselves huge bonuses and received TARP bailout funds – essentially making them whole – even though they did not practice proper lending procedues of ensuring the home was truly worth more than the mortgage being taken out on it.

What’s interesting to me is the amount of guilt that the mortgage industry tries to slap on the heads of homeowners, while they themselves have no ethical boundaries. In fact, banks default on their loans all the time. Morgan Stanley justdefaulted on five office buildings in San Francisco, and no one said a
word about the ethical side of it. The bank simply made a business decision to walk away from an underperforming asset. Why wouldn’t homeowners be wise to make the same sort of calculation? Right now, in Salinas, CA, a family who bought a home in 2006 will need to wait 60 YEARS to recoup their investment. What do you think JP Morgan would do in this situation?

Obviously, they have a vested interest in making sure they keep the American public feeling scared to default. Here is a quote from a New York Times article:

John Courson, president and C.E.O. of the Mortgage Bankers Association,
recently told The Wall Street Journal that homeowners who default on
their mortgages should think about the “message” they will send to
“their family and their kids and their friends.” Courson was implying
that homeowners — record numbers of whom continue to default — have a
responsibility to make good.

The argument is made by Dylan Ratigan in the video below that the mortgage contract is not one of ethics, but simply business. The borrower agrees to pay the mortgage. The lender agrees to take the asset back if the borrower does not make the payments. In this business transaction, the onus is on the lender to ensure that the value of the asset is secured by proper downpayment and equity. What has happened is they got greedy, and in an effort to compete with one another for gigantic payouts, they broke their own code. Rather than to admit it, they are now working to place blame upon the homeowner.

Looking at this objectively, I understand the bank’s strategy. They have a duty to make profit any way they can, and if homeowners extend their rights to strategically default, it would cost them profit. Thus, the best way to protect profit is the guilt the homeowner into doing what the banks want them to do.

What I do find troubling, however, is that most banks took billions of dollars from the taxpayers to shore up their own balance sheet, while now trying to emotionally beat up the taxpayers who, in effect, bailed them out to begin with.

To me, seems that banks are asking homeowners to play by a different set of rules than what businesses play by. I have several friends in the San Diego commercial real estate market, and they tell me that many companies are simply walking away from their commercial property or long-term leases. How is this any different from the owner-occupied homeowner? Why is it acceptable for a business to give up an underperforming asset, but not for the comsumer? Something doesn’t add up…