Sunday, June 7, 2009

Why do the "right" thing

when corporations and our government don't?

This article describes a corporation walking away from it's mortgage obligations because it feels like it.

To quote from the article:

Since Sunstone feels the W [Hotel] San Diego is now worth much less than what it owes, the company would rather turn it over to the bank than have hefty interest payments continue to drain cash from its balance sheet.

"While the company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders," Chief Financial Officer Ken Cruse, said in a statement.

So, why should underwater residential mortgage holders not walk away from their mortgages instead of having "hefty interest payments" continue to drain cash from their balance sheets even if they do have "adequate liquidity" to repay their mortgage?

If they can get away with it (depending on the laws in their state and their situation), such people should walk away if it fits with their financial needs and they won't lose sleep over the decision. Businesses do this all the time. How many times has Donald Trump declared bankruptcy? How many times will banks take pity on on a retail customer when his or her health fails or he or she loses a job?

In the state of California, where residential lending laws generally favor the borrower, this is exactly what's starting to happen in big numbers. People are waking up one day after stressing about making their mortgage payments month after month and then finally saying "screw it." This is an important psychological turn in the residential real estate markets that hasn't been seen at all since the early 1990s. This, along with further increases in unemployment and the Option ARM and Alt-A mortgage explosions that have just begun, will cause housing to plunge further and longer than most can fathom right now.

The government's response to all this is to bail out the bankers who are suffering losses and take on an irresponsible debt level since its citizens are now trying to get out from under debt. God forbid we have a country that wasn't constantly striving to get further and further into debt. After all, bankers can't live the good life without riding on the backs of debt slaves!

The fabric of our society will start to tear during the next vicious leg down in the secular bear market for stocks that is not close to being over. Trust will evaporate another notch. Get some Gold.

Wikinvest Wire