We normally say that a company “went bankrupt,” implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.
American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.
These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.
Part of the answer is practical. Defaulting (even in so-called non-recourse states) is still a lot of trouble, and to most people it’s scary. In addition, homeowners are slow to recognize how much the value of their homes has dropped, and have inflated expectations of how much it will rise in the future. The biggest hurdle, though, is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”
Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.
Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. ♦
ILLUSTRATION: Christoph Niemann
Wednesday, December 21, 2011
American Airlines, Bankruptcy, and the Housing Bubble : The New Yorker>>> It's different in America!
London calls for Irish estate agents - The Irish Times
FRAN O'ROURKE
WANTED: Irish estate agents. No, it’s not Irish property buyers out seeking revenge, but a recruitment agency which is holding a roadshow in Dublin in January aimed at finding agents to work in the London property market.
Property recruitment specialist Deverell Smith Recruitment has found jobs for more than 30 Irish agents in 2011 alone, including placing “a dozen into top-tier brands in Mayfair, Chelsea, Kensington, earning five to six times what they could in Dublin”, says managing director Andrew Deverell Smith.
The agency is, apparently, the first port of call for international firms such as Knight Frank, Savills and Hamptons when they’re looking for property employees.
So on the weekend of January 14th and 15th, two consultants from the agency will come to Dublin to interview prospective candidates, who should make contact now to get an appointment.
Why London? “It’s where the demand is, where money can be made,” says Deverell Smith.
What they’re looking for, he says, is all kinds of agents “who’ve been successful, have great CVs, references and commitment”. He adds, “Irish charm goes a long way.”
Having qualifications is good “and we’ve placed a lot of graduates, but when push comes to shove, experience and character and charisma is what counts. We’re looking for people with experience, credibility, drive and a commitment to relocating.”
If on top of having the above, an agent can speak (in this order) Russian, Chinese, Hindi, Italian or Greek, it could give them an edge.
The rewards can be high: agents typically charge vendors 2 per cent of the sale price. “If you sell a property worth £5 million , that’s £100,000 ,” says Deverell Smith.
Interviews in January will be “an informal half-hour chat”.
BoI takes control of properties as it pursues O'Donnells - Independent.ie
Friday December 16 2011
BANK of Ireland has taken control of three prestigious buildings in Dublin's Merrion Square owned by a Celtic Tiger couple who amassed a €1bn global property empire.
Solicitor Brian O'Donnell and his wife Mary Pat own 61 and 62 Merrion Square, two five-storey period buildings, and an adjoining property at Fitzwilliam Lane. The three properties, which are interconnected and are rented out as offices, are up for sale.
The O'Donnells put them on the market as part of their efforts to repay Bank of Ireland €71.5m, which the High Court has ruled that they owe. The properties were valued at €30m in 2005.
Speaking to the Irish Independent this week, Mr O'Donnell said he was "stunned" by the bank's lack of communication with him and his wife.
Aggressive
He said the couple were "seeking a solution" to their massive financial challenges but the bank was aggressively pursuing the debt.
This newspaper has learned that the bank appointed Tom Kavanagh of Kavanagh Fennell as receiver to the three Dublin offices recently. Mr O'Donnell is said to have learned of his appointment from the couple's tenants after Mr Kavanagh had arrived to tell them that the complex was in receivership.
Mr Kavanagh did not return calls last night.
The O'Donnells also own 84 Ailesbury Road, another prestigious property that is expected to be put up for sale by the bank.
The O'Donnells believe that Bank of Ireland's relentless pursuit of them is designed to scare other lawyers, doctors and professionals who owe it money.
The bank is expected to move to repossess their luxury home, now that it has secured judgments for €71.5m. Under an agreement that the bank says has been breached, it can move to take their palatial Killiney home, 'Gorse Hill' on the Vico Road, in the coming months.
The 9,000sq.ft property overlooks the sea and has a swimming pool, tennis court, stables, gym and sauna. The couple purchased the 1.25 acre site in 1997 and extensively developed it.
- Siobhan Creaton
Quango costs us €4m before even starting its work - Independent.ie
Sunday December 18 2011
A GOVERNMENT quango set up to investigate rogue estate agents has not carried out a single investigation despite costing the taxpayer more than €4m, not including lavish new offices.
The National Property Services (Regulation) Authority (NPSRA), which has nine staff including a chief executive designate, was set up in 2006 and was a child of the Celtic Tiger.
Its job is to investigate and punish errant estate agents, property management companies and auctioneers who break the rules, but legislation granting it those powers was not passed by the Dail until last month.
The authority's first job will be preparation of a property register, giving all details of residential sales in 2010 and 2011. But the delay in passing the legislation means millions of euro has already been wasted.
The NPSRA's budget for this year totalled €738,000, which does not include the cost of accommodation -- rent, service charges, maintenance -- which is paid for by the OPW, which is locked into a controversial upward-only rent review agreement on the building.
The agency has been headquartered at the Abbey Mall premises in Navan rented to the OPW.
A number of other state bodies are housed in the building on a 20-year, upward-only rent agreement which began in January 2008 -- on which a further €9,781,120 will be paid out by the time the lease is up.
A spokeswoman at the Department of Justice told the Sunday Independent: "The functions of the authority will include the investigation of complaints against licensees (ie auctioneers, estate agents and property management agents) and the imposition of sanctions in respect of improper conduct. It will also carry out investigations on its own volition."
The spokeswoman said that in advance of it becoming a statutory body, the authority has been "very active in putting in place a solid foundation for the organisation".
"This is to enable the authority to hit the ground running when the bill becomes law," she said.
The NPSRA website says that it will have the power to issue sanctions against estate agents, auctioneers etc, up to and including the revocation of a licence, and may also impose fines of up to €250,000.
A director designate was appointed in June 2006 and nine staff appointed.
The office was allocated a budget of €700,000 for 2007, €930,000 for 2008, €657,000 for 2009, €738,000 for 2010 and €738,000 for this year.
- JEROME REILLY
Wednesday, December 14, 2011
Landmark town centre site for sale in Clonmel. Final expressions of interest before 20th Dec.
We are currently offering a site at Queen St, Clonmel. It is a Landmark Town Centre site, formerly a Chadwicks store and yard which was sold for development in 2004. We are guiding €750,000 with final expressions of interest by 20th Dec next. The property comprises 0.67HA(1.66acres) with c.2,800sq m (30,000sq ft) covered space. It is Zoned objective C “to provide for commercial development and related uses.”