Thursday, January 13, 2011

Foreclosure for Fun and Profit

There is a lovely new residential-shopping complex in Myrtle Beach called "The Market Common".  We haven't been there yet this year, but last year we walked around it a few times.  In my wildest dreams I couldn't afford anything in their shops, but honestly?  I never saw anything I would be willing to give up my entire SS check to buy.  Still, I kind of took a liking to the place, faux as it was.

But this morning I saw an article in the paper titled "Familiar Face buys Market" and was surprised to see that Market Common had been in some trouble last year.  They weren't paying their bills.  Imagine that.  Now bear in mind that I know literally nothing about high finance or luxury real estate or anything, in fact, that has to do with money in the six figures, but something about this story stinks to high heaven.

Let's see if I got this right:  Company A takes out a construction loan for $105,000,000 in order to build the place, but after a couple of years prices drop and the place isn't worth that much so somebody makes the decision to stop making payments.  The entire complex goes into default and is foreclosed.  Then the parent company of Company A goes to the same bank that brought about the foreclosure and says how about we buy it back from you for. . .oh, I don't know--$19,000,000?

The bank (JP Morgan-Chase) says okay and everybody, including the Myrtle Beach city manager, is happy.  No pain--much gain.  The Sun-News says, "The owners of the Market Common probably would have been able to continue to make payments on the loan, but chose to default because the property is no longer worth what it would cost to build, said Dan McCaffery, president of McCaffery Interests in May."

The loan, it turns out, is what's called a "non-recourse loan", which means that in case of default the bank can't come back and claim either the company's or any company employee's assets. Handy.

McCaffery said the property's value has dropped, and there were better investments than continuing to pay on the loan, despite nothing being wrong with the project.

Tom Leath, the MB city manager is thrilled:  "We are pleased that the purchaser is tied to Leucadia [the defaulter] because we think obviously they know exactly what the issue is, and they understand the market having been here a few years.  There is no learning curve with them."

Leath also told the Sun News that companies throughout the country are choosing to walk away from properties that have substantially lost value and are no longer sound investments, so this situation is not unique.

"If you look at the foreclosure as a calculated business decision," he said, "then I don't think it's odd that they got back in line to buy it back."

So. . .you know where I'm going with this, don't you?  Say I'm Joe Blow and I took out a mortgage on a house a few years ago, but now it's worth far less than I still owe on it, and I want to get out from under it but nobody in their right mind is going to pay me what I think they should.  Not in this economy.  I decide I don't want to make payments on a losing investment anymore so I go to my bank and tell them,  "I owe you a whole bunch of money but I don't see any future in paying any more on that losing proposition of a house, so how about this?  We let it go into default, but you hold it for me and I'll pay you about a tenth of what I owed on it before."

What do you think they would say?

(Cross-posted at Dagblog here.)

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