The Double Standard Of Stategic Defaults - OK For Businesses, Unethical For Homeowners, Say Financial Industry Apologists

A recent story in The Palm Beach Post on the use of strategic defaults by homeowners who are underwater on their homes (where the money owed on their mortgage loan exceeds their home value) had this excerpt highlighting the apparent hypocrisy by those whose arguments against the manuever are limited to the context involving homeowners, and not businesses:

• 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 .

• "No, it's not wrong," said Randy Cohen, author of the weekly Ethicist column in The New York Times. Although homeowners are emotionally attached to their property, a house is still an investment. "I don't understand why you would be asked to make a decision on this investment any differently than you would on any other," Cohen said. "Why should homeowners be held to a higher ethical standard?"

For the story, see Some homeowners, who can afford the mortgage, still default as a strategy.