Public attitude toward commercial borrowers who strategically default is much different than it is toward commercial borrowers. Today, we explore this difference.
Irvine Home Address … 29 BURLINGAME Irvine, CA 92602
Resale Home Price …… $579,000
Do you live, do you die, do you bleed
For the fantasy
In your mind, through your eyes, do you see
It's the fantasy
30 Seconds to Mars — The Fantasy
Home debtor fantasies
The endless parade of Bailouts and False Hopes serve to give hope to the hopeless and keep them paying their mortgages rather than strategically default. Those who are underwater and making payments in excess of rent have two real alternatives and two fantasy alternatives. The real alternatives are (1) continuing to pay until they implode or (2) strategic default. Neither option is very satisfying as both generally lead to bankruptcy later on.
The fantasy alternatives are (1) the re-inflation of the housing bubble giving debtors equity again and (2) government mandated principal reduction to give debtors equity again. Neither one is going to happen. The overhead supply of distressed housing units will eventually need to be sold, and in the process, the best case is for prices to hold steady with super-low interest rates. Principal reduction is the ultimate debtor fantasy, and it will not happen because it would require massive theft by the government with a direct transfer of money from the State to individual debtors with the commensurate moral hazard. That's the kind of thing that sends rioters into the streets besides costing trillions of dollars.
Since the real options are bad, most will cling to the fantasy, and in the process, they will continue paying their mortgages until they implode or get pissed off enough to default.
Some have expressed a concern that I have gone soft on HELOC abusers and those who strategically default. I have made it clear that I believe Foreclosure Is a Superior Form of Principal Reduction because it has consequences for the borrower. I have no desire to see those who over-borrowed be given a free pass. My endorsement of strategic default is a recognition of the lesser of two evils. Strategic default is the better of two bad alternatives; when faced between a life of servitude and a walking away from a huge debt, walking away is the better choice. Both alternatives have negative consequences — as they should.
It irritates me the lengths lenders are willing to go to manipulate people to keep paying for the lender's mistake. Lenders Are More Culpable than Borrowers, and their consequences should be more severe. The fact that lenders would sentence families to a lifetime of servitude to pad their bottom line is wrong, and I will continue to speak out against it.
Why aren't commercial defaulters labeled as evil?
Borrowers who strategically default on commercial real estate aren't immoral thieves or hysterical fools as their residential counterparts are made out to be. When commercial borrowers strategically default, they are "extinguishing debt" to produce "positive results." The contrast between the attitude between commercial borrowers and residential borrowers is remarkable.
LOS ANGELES, May 26, 2010 (BUSINESS WIRE) — MPG Office Trust, Inc., a Southern California-focused real estate investment trust, today announced that the company has extinguished the $26.4 million construction loan obligation secured by 17885 Von Karman in Irvine, California. The Company contributed approximately $2.0 million in reduction of the loan, turned the property over to the lender pursuant to a deed-in-lieu transaction, and was relieved of the $26.4 million obligation and a $6.7 million repayment guaranty. The loan was scheduled to mature on June 30, 2010.
They strategically defaulted. They took a look at the numbers and determined it was not in their best interest to keep paying, so they didn't. When residential borrowers make the same calculation, they are decried as immoral or stupid and they are blamed for the collapse of the US banking system; however, when commercial borrowers do it, they are lionized as great financial thinkers who are looking out for the best interests of their companies.
MPG Office Trust President and Chief Executive Officer Nelson C. Rising commented, "Our efforts that started two years ago to reduce debt, eliminate repayment and debt service guarantees and extend debt maturities continue to produce positive results. In addition to the transaction announced today, earlier this month, we made a principal payment of $9.7 million on the 207 Goode construction loan and in exchange, the lender agreed to substantially reduce our repayment guaranty on this loan. We are currently marketing the property for sale. As a result of meeting the prescribed debt service coverage ratio for five consecutive quarters, the Company eliminated a debt service guaranty on a $109.0 million mortgage secured by Brea Corporate Place and Brea Financial Commons in Orange County, California. The Company also extended the maturity of this loan to May 1, 2011."
These guys are cramming down lenders on every deal. Lenders are going to lose a fortune on the actions of commercial borrowers just like these guys, yet when they do it, the strategic default is considered positive.
May 11, 2010: By Roger Vincent, Los Angeles Times
The Los Angeles real estate investment trust reports first-quarter net income of $18.6 million, largely on the forgiveness of a $49.1-million debt.
Long-suffering office landlord Maguire Properties Inc. on Monday reported a first-quarter profit linked largely to the forgiveness of a $49.1-million debt it was unable to pay.
The Los Angeles real estate investment trust, which owns some of the region's best-known skyscrapers including the US Bank Tower in downtown Los Angeles, finished the quarter with $18.6 million in net income attributable to common shareholders, a dramatic contrast from the $53.9-million loss reported a year earlier.
Finances in both quarters were influenced by significant one-time events, however.
This year, Maguire was forgiven $49.1 million in debt on Griffin Towers, a Santa Ana office complex it sold in March as part of a long campaign to reduce its liabilities. It also recorded a $16.6-million deferred gain on the 2006 sale of a parking garage in downtown Los Angeles. The first quarter in 2009 was affected by a $23.5-million write-down of the value of an Irvine office building and other charges.
Maguire reported a profit of 38 cents a share in the quarter, compared with a loss of $1.13 in the same quarter of 2009. Revenue was down 2% to $111.5 million.
"Revenues are flattening and their leasing seems to be going at a stable pace," said analyst Craig Silvers, president of Bricks & Mortar Capital. "They seem to have stabilized their operations."
Just like any debtor, when they quit paying their debts, their cashflow situation improves. Not exactly a news flash.
She couldn't afford it
- The previous owner purchased this property on 6/13/2005 for $665,000. She used a $498,750 first mortgage and a $166,250 down payment.
- When she purchased, she got a HELOC for $99,750, but it doesn't appear she used it.
- On 12/29/2005 she obtained a $200,000 HELOC which I don't think she used.
- On 12/13/2007 Bank of America refinanced her first mortgage for $417,000 and gave her a second mortgage for $168,000.
- Total property debt is $585,000.
- Total mortgage equity withdrawal is $86,250 which doesn't recover her down payment.
- Total squatting was only about 9 months. B of A did not waste much time in foreclosure.
Recording Date: 12/23/2009
Document Type: Notice of Sale
Recording Date: 09/22/2009
Document Type: Notice of Default
This house was purchased for $463,000 at auction on 2/16/2010. Most trustee sales go off about 15%-20% under comps. This seller is hoping to get an extra 5%. It is not a bad pricing strategy as it gives them some room to negotiate back down to comps. This is typical of what happens when the lenders finally let one go through the system. Our current backlog is enormous.
Irvine Home Address … 29 BURLINGAME Irvine, CA 92602
Resale Home Price … $579,000
Home Purchase Price … $463,000
Home Purchase Date …. 2/16/2010
Net Gain (Loss) ………. $81,260
Percent Change ………. 25.1%
Annual Appreciation … 69.0%
Cost of Ownership
$579,000 ………. Asking Price
$115,800 ………. 20% Down Conventional
4.87% …………… Mortgage Interest Rate
$463,200 ………. 30-Year Mortgage
$118,120 ………. Income Requirement
$2,450 ………. Monthly Mortgage Payment
$502 ………. Property Tax
$125 ………. Special Taxes and Levies (Mello Roos)
$48 ………. Homeowners Insurance
$348 ………. Homeowners Association Fees
$3,473 ………. Monthly Cash Outlays
-$417 ………. Tax Savings (% of Interest and Property Tax)
-$570 ………. Equity Hidden in Payment
$217 ………. Lost Income to Down Payment (net of taxes)
$72 ………. Maintenance and Replacement Reserves
$2,775 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,790 ………. Furnishing and Move In @1%
$5,790 ………. Closing Costs @1%
$4,632 ………… Interest Points @1% of Loan
$115,800 ………. Down Payment
$132,012 ………. Total Cash Costs
$42,500 ………… Emergency Cash Reserves
$174,512 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 1,782 sq ft
($325 / sq ft)
Lot Size: n/a
Year Built: 2000
Days on Market: 63
Listing Updated: 40276
MLS Number: S610651
Property Type: Condominium, Residential
This property is in backup or contingent offer status.
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