Monday, January 25, 2010

CRE and Moral and Social Constraints to Strategic Defaults

by Bill McBride on 1/25/2010 03:03:00 PM

On Tishman Speyer and Blackrock's strategic default on Peter Cooper Village and Stuyvesant Town ...

From the WSJ:

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals.
Yes, it was a highly leveraged deal with little money at risk. And the debt was secured based on fantasy proforma statements (not unlike many stated income borrowers).

Tishman and Blackrock tried for a loan modification, but when they couldn't obtain one on acceptable terms, they choose to walk away because the property is worth far less than they owe even though they could afford to continue to make the payments.

In research paper last year on homeowners with negative equity walking away: Moral and Social Constraints to Strategic Default on Mortgages by Guiso, Sapienza and Zingales, the authors wrote:

"[P]eople who know someone who defaulted are 82% more likely to declare their intention to do so." And "as defaults become more common", there is a "contagion effect that reduces the social stigma associated with default".

Imagine a homeowner who bought at the top, "took advantage of easy credit", put little or money down, and now finds themselves owing far more than the property is worth. And now imagine they hear of large landlords (or Morgan Stanley last year) just walking away from CRE loans. Does that reduce the social stigma and contribute to residential strategic defaults?

Update: Diana Olick at CNBC asks a similar question: Strategic Defaults

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