Should I Stay or Should I Go?

From As Values Slide, More Walking Away from Mortgages, The New York Times 2 Feb 10:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying . . . The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance . . . With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages. “We’re now at the point of maximum vulnerability . . . People’s emotional attachment to their property is melting into the air.”

The article mentions a study of defaulting homeowners that estimated “about 17 percent of owners defaulting in 2008, or 588,000 people, chose [walking away from their mortgage] as a strategic calculation.”  This strategy, known as  deed-in-lieu of foreclosure, is not limited to residential homeowners.  In 2006 Tishman Speyer and BlackRock purchased Manhattan’s 56-building 11,000-unit Peter Cooper Village and Stuyvesant Town apartments for $5.4 billion, which was then “the most expensive [sale] in residential real-estate history.”  (The NYTimes reports debt service reserves and capital improvements made the total project cost $6.3 billion.)  The owners borrowed over $4.4 billion to finance the purchase.

Now the complex is estimated to be worth only $1.8 billion, and  [in January] the owners began defaulting on debt payments. “It has become clear to us through this process that the only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives,” the owners told the [Wall Street] Journal.

The Journal reports the project’s equity investors include CALPERS and the Church of England.  Its debtholders include the Government of Singapore Investment Corp. and Hartford Financial Services Group.  They will, as workout folks say, “take a haircut.”  According to the New York Times CALPERS has written off its $500 million investment.  Don’t weep for Tishman Speyer and BlackRock.  Each had about $112 million, 2% of the purchase price, of  their own money in the deal.  $112 million is real money.  Two percent equity is a walking-away down payment.

It almost makes me miss being in the workout business.