Homeowners, like corporations, chose Strategic Defaults

She has a sales job with a six-figure salary. He owns a successful tech company. And they are in foreclosure.

But unlike countless other Americans faced with losing their homes, this couple could make the $5,200 monthly mortgage on the waterfront property in Pompano Beach that they bought for $585,000 in 2004. Foreclosure was their decision – not the bank’s.

They crunched the numbers: $525,000 outstanding on their first mortgage and a $245,000 second mortgage on a home now worth about $319,000. His business was way down, her company was laying off workers and other investments had tanked. It made no sense to hang on to their underwater home. So they stopped paying their mortgage and waited for the foreclosure notice. It came in October.

It is called strategic default – borrowers who have enough money to make their mortgage payments but do not. They owe so much on a home that is now worth so little, that they decide to walk away.

It is not an easy decision. But it is not the inevitable blow to their credit score that troubles some strategic defaulters. It is the ethical dilemma of refusing to repay a loan when they are able to and worrying about what the neighbors will think.

“It felt like such an awful thing to do,” the woman said, who spoke on the condition of anonymity. “I got a car loan at 14 and paid $35 a week until I paid it off when I was 16. ”

Ethicist OK with decision

How prevalent are strategic defaults?

Although the exact number is unknown, half the homeowners in a study conducted by the Federal Reserve Board walked away when they owed twice what their home was worth. A Palm Beach Post analysis of foreclosed homes purchased since 2006 found 72 percent – about 4,124 homes – are worth less than half of the original loan.

In the business world, strategic default is a common tactic – considered a savvy move for financially troubled companies. However, “consumers have been browbeaten and trained to believe that it’s not honorable to not pay your debts,” said Margery Golant, a Boca Raton attorney who represents the Pompano Beach couple in default. “Why should it be any different for consumers?”

Last year, Morgan Stanley walked away from a $1.5 billion mortgage on five buildings in San Francisco despite record-breaking profits in 2009. Real estate giant Tishman Speyer Properties strategically defaulted on $4.4 billion in loans on two housing developments in New York after the properties lost $2.2 billion in value. The company had billions of dollars in assets, including Rockefeller Center and the Chrysler Building, which it could have leveraged to meet its loan obligations.

Even the Mortgage Bankers Association, whose president chastised homeowners who strategically default for the “message” it would send to their “family, kids and friends,” dumped its Washington headquarters in a short sale. After working out a deal with its lender, the MBA sold the building for $41.3 million last year. In 2007, the group purchased it for $79 million .

Full STory at [Palm Beach Post]

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