Democratic Diva

03 Feb 2010 03:48 pm
Posted by: Donna

From today’s NYT Business Section:

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Oh yeah, Wall Street wants to continue to act as though moral hazard is strictly the province of the plebes. Wall Street wants people like Benjamin Koellmann to feel morally obligated to pay an inflated underwater mortgage. If people have lost their jobs, they want them to empty their savings and IRAs to pay their mortgages and end up losing their homes and trashing their credit anyway.

But the Klutznick Company, developers of City North, are showing plain good business sense by walking away from a bad debt, right Mr. Rosenberg? People like David Rosenberg don’t want us little people to think of our debts the way that big businesses think of theirs. Commercial real estate developers have no compunction about walking away from a failing contract and submitting to the penalty under the terms of the contract – which is forfeiture of the property. They’ll do it without hesitation, while holding themselves utterly blameless.

The Capmark bankruptcy and subsequent foreclosures are due to challenges nationally in the commercial real estate industry. Capmark provided the construction loan for High Street, Phase I of CityNorth, and it is their only involvement in the project. The foreclosure will result in a restructuring of equity interests in the High Street portion of the project to enable fresh capital to be injected. Day-to-day operations will continue as usual and Klutznick Company remains committed to the success of High Street.

For more than 25 years we have been working to create Desert Ridge and CityNorth, and our commitment to deliver a sustainable, urban core to Northeast Phoenix has not wavered. We have weathered economic downturns in the past, and we are confident in CityNorth’s long-term success.

Believe that Klutznick Co. and their financiers will not lose a wink of sleep feeling ashamed of themselves if they can’t restructure the loan and end up dumping CityNorth. They don’t have to worry about their credit scores either because credit scores, like personal responsibility and shame, are for little people too.

There are tangible risks for the person considering walking away from his or her home, but those risks should be weighed rationally and the decision should be made with the homeowner’s financial self-interest at the forefront. This requires overcoming intensive conditioning as Americans to believe we should always pay our bills no matter what. You have to keep reminding yourself that Donald Trump and Thomas Klutznick do not share those convictions. But the average person has internalized them thoroughly. Psychological studies have shown that endogenous shame is a powerful behavior motivator. The banksters are counting on you being unable to get beyond it and continue paying them, even if it is not economically rational for you to do so.

For the record, I’m not advocating walking away from your mortgage just because your home is underwater. I’m saying look at your whole situation – home value, job stability, income, other debts, mortgage vs. rent in your area, impact to credit, potential emotional impact of losing your home – to determine whether or not you should continue to service the mortgage. Think like a business. You are not your house and you are not your debt. And as long as it’s okay for CityNorth or these guys to walk away from their obligations, I don’t want to hear about “moral hazard”, ‘kay?

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