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Friday, March 11, 2011

What Do You Think of Defaulting to Reduce Debt encouraging headline from the Wall Street Journal: Debt Levels Lowest in Years! Then I read the accompanying article, whose first sentence attributes the happy news to a combination of defaulting on debt and saving more. Strange bedfellows? Or am I missing something?

Here's the vignette that most caught my eye:

Morari Shah, a 59-year-old Miami entrepreneur and real-estate investor, is among those taking a radical approach to reducing debts.

Since late 2008, he and his wife have slashed their total debt from nearly $1 million to zero by walking away from the mortgages on four rental properties and paying off two others, all of which lost about half their value in the housing bust. He's no longer taking up to $4,000 from his monthly income to pay mortgage interest that the rental income didn't cover.

Instead, he and his wife are fulfilling their goal of building a new $350,000, four-bedroom home in the Dallas suburb of Lewisville, where they plan to retire. "It's a big relief," said Mr. Shah. "We went through some rough times, but now I'm comfortable and don't have to worry about my retirement."

What a role model! I still worry about my retirement, so I seem to be doing something wrong.

Am I being too puritanical in my response?


Shelley said...

Well, if you are then I need to get out my Pilgrim suit! I think that's disgusting. I wouldn't like to see debtors prisons return but I don't see why you can default on that level of debt and walk away so wealthy. It makes the rest of us look almost stupid in some ways, but it's not a model I'd like to emulate all the same. Surely the reporter hasn't told the whole story?

I am the working poor. said...

I've heard of people walking away from one home, but four? And then they turn around and build a $350,000.00 home? Doesn't seem right, or fair to me.

Funny about Money said...

It's a business decision, not a moral one. Property that's costing more than it returns and will likely continue to cost more than it will ever return is a bad investment.

The very banks that helped us into this mess commonly default on bad investments, not because they're morally lax (uhm, well...hmmm...) but because they have a fiduciary responsibility to their shareholders to keep losses to a minimum. It would be irresponsible for such an entity not to default.

So why should individuals be any different?

To whom do we as individuals have a fiduciary responsibility? Well: to our fellow taxpayers, who will have to pick up the tab for our care in old age after we lose our retirement savings in hopeless investments. Further, all the time we're taking a loss, we're not paying taxes; get rid of the loss, put the books back in the black, and we begin to pay into the commonweal again.

To our children, who also will have to support and care for us if we lose our shirts and have no way to eat and shelter ourselves in our old age. To our children, who will have no inheritance if our savings go down a black hole.

And if you manage to salvage some assets in this nightmare economy, why not reinvest the money? This is the time to buy real estate, if you're lucky enough to have the means to buy. That $350,000 palace (in the large scheme of things, not an excessive amount to spend on a new house) likely will be worth twice that much by the time he's ready to shuffle off to the nursing home. The proceeds from selling it could keep him in nursing care for quite a while, or support his widow in a townhouse or condo after he's gone, or put his grandchildren through college.

Now, I will say, it would be a great deal less tacky of Mr. Shah to keep his mouth shut about these transactions. This interview makes him sound like he's crowing (which he may not be: he may simply be explaining a business transaction and its outcome). Given that so many Americans are being screwed and have no such out, he does sound pretty arrogant.

see you there! said...

People defaulting on their home? Maybe. People defaulting on investment property? No.

People made poor decisions and somebody has to pay for it. I'm afraid it is the rest of us. It seems unfair that those who didn't make poor decisions (because they thought they were going to cash in) are STILL left holding the bag for the people who did.

Pearl said...

No, this man is a symptom of the problems America finds itself in. Apparently "walking away" doesn't make anyone come after you... or we wouldn't know where he was. And he's happily retiring?