Get strategic Renee...

The real estate crisis has been in the national news for a long time - years now – however, last night on NBC News with Brian Williams they did a report on owners seeing walking away as the best option. Implicit in that strategy and explicitly reported by Williams is the failure of any of the Federal programs to provide much real help in the face of such large value loses by homeowners.

Also reported was the use of so-called “strategic defaults” by some large banks in the face of value losses on building that they bought with mortgages. Somehow they are able to see their own strategic defaults as being different than the defaults of their borrowers. The rationale seemed to be that it happens all the time in business transactions and is an expected part of the business. Not so, apparently with the loans to their homebuyer clients.

That sort of double-think (sort of like double talk, only impacting the thought process) – the do as I say, not as I do mentality – is a part of the problem keeping banks from embracing the Federal loan modification programs. They really see their defaulting homeowners as deadbeats and themselves as savvy businessmen. As long as that is their attitude, none of the Federal programs that have been released is likely to work.

The news report claimed that fully 25% of all mortgages are under water. Perhaps a figure that is too optimistic and it went on to speculate about the impact if all of those people decided to just walk away. In truth, that is the logical thing for all of those people to do. The only thing keeping this boat afloat right now is the lingering sense or right and wrong that most of those homeowner had instilled in them as they were growing up – the ethic that says, “I borrowed the money, I should do everything that I can to pay it back.”

Every financial advisor that I’ve talked to says they are counseling their clients very hard against crippling themselves financially by trying to keep up with a losing proposition. They advise that it is much better to abandon this ship now than to strip all of your retirement and college fund savings to try to keep up with ARMs that have reset and put homeowners behind the eight ball. They are honest with clients about the damage of walking away, but the damage of staying too long can be worse.

So, unlike an earlier post that have here titled “Just walk away Renee” I must now advise Renee to consider a strategic default. If it’s good enough for Morgan Stanley and Tishman Speyer (one of the largest real estate companies in New York) it’s good enough for Renee. This way Renee can avoid the ethical stigma that she might otherwise pin on herself by saying, “it’s not personal, it’s just business.” Where have I heard that line before?