The August 25th edition of the Wall Street Journal Digital Network contained an article entitled Commercial Property Owners Choose to Default.
The article reported that several large commercial property owners with high-profile names such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.
The article further reports that analyists and investors are cheering on these property owners for making pragmatic decisions to walk away from commercial mortgages. Indeed, Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt.
However, residential property owners who make the same pragmatic decisions to walk away from homes that are valued far less than the underlying debt attached to them aren’t getting the same pats on the back that commercial property owners seem to get. Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.
Wait a minute..isn’t the concept the same? The corporation and the individual made the same promise to pay, right? And isn’t the analysis regarding the wisdom of continuing to service the debt for a lousy investment the same?
So, why the hue and cry that the individual homeowner has a “moral obligation” to pay while the corporate property owner gets a free pass?? Really, what’s the difference?
What do you think?
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