Image: Stuyvesant Town
Mary Altaffer  /  AP
The Peter Cooper Village and Stuyvesant Town apartment complex is seen in New York in this Oct. 17, 2006 file photo.
By National Business Columnist
updated 1/31/2010 12:46:36 PM ET 2010-01-31T17:46:36

Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can't.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000.

"I have 12 years of money put into this property that I will never get out," said the 50-year-old Gilson, from Rapid City, S.D. "But I am still paying because this is what I have been told to do. That's what I think is right."

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country — Florida, Nevada, Michigan, California and Arizona — the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they're deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They'll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York's trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan's east side, it's the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city's middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market's peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

"They made assumptions that things would grow to the moon, and things certainly did not," said Len Blum, a managing partner at investment bank Westwood Capital.

Tishman said last week that it was turning the property back over to creditors to avoid filing for bankruptcy protection. In recent weeks, Tishman failed to restructure $4.4 billion in debt, and couldn't find another buyer, according to a statement from the company.

Tishman exits the deal with a ding to its reputation, but it will be fine. It still has Rockefeller Center and the Chrysler Center in New York, and dozens of properties in cities worldwide. The company has about $33 billion in assets.

Residential homeowners wouldn't get off so easy.

For most underwater homeowners, the thought of walking away from their commitment is impossible to fathom. After all, it's part of the culture. Pay your bills. Uphold contracts.

University of Arizona law professor Brent White, who has written about mortgage walkaways, says societal pressures often trump what's actually legal. He thinks individual borrowers believe they are obliged to repay their loans even when it isn't in their financial interest.

"The problem is that we have a structure whereby corporations can walk away with impunity but individuals can't," White said.

Gilson reads what's happening 1,700 miles away in Manhattan and gets angry.

His mobile home started depreciating the minute he moved in 12 years ago, much as a car loses value as soon as you drive it out of the dealer's lot.

Three years ago, he bought a new home that he lives in with his wife. Since he can't sell the mobile home for anything near what he paid for it, he rents it out in order to make the $300.36 mortgage payment every month.

"I get so stressed over this," Gilson said. "It's like the elephant in the room and there is nothing you can do about it."

Gilson is frustrated that real-estate tycoons can default on a $4.4 billion mortgage, but he's not supposed to do the same on his $31,000 loan.

How can you blame him?

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Is it wise to walk away?

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    >>> country.

    >>> but up next, the pros and cons of walking away from your mortgage. what you need to consider before making the tough call, right after this. * our house in the middle of our street *

    >>> this morning on "today's real estate ," walking away from your mortgage. millions of homeowners are in financial trouble these days, and many owe more on their home than it's worth, and some are now turning to a drastic solution. barbara corcoran, "today's real estate " contributor, is here to explain that. barba barbara , good morning to you.

    >> good morning, matt.

    >> analyze these numbers, if you will. december, 16.7% fewer home deals, but home prices were up 1.5% and home inventory fell 3.29 million units. that sounds like a mixed bag to me.

    >> it's exactly a mixed bag . the bad news is there are far fewer homes being sold in december. it was a weak finish to the year. but the good news is, the homes that were sold were sold for a little bit more, and the inventory we've been carrying around for a year on our back has been being absorbed.

    >> i want to say this next statistic slowly, because this is a dark cloud on the horizon. one in four homeowners in this country right now is under water on the mortgage. explain what that means.

    >> under water simply means you owe more to the bank than your home is actually worth. and one in four is a staggering statistic right now.

    >> and so, a million, estimated 1 million people last year simply got up and walked away from their mortgages. they left the home behind, and on the surface, it's this -- i don't want to make these payments anymore, my mortgage is more than my house is worth, let's move down the street to a less expensive home and take some of the pressure off my shoulders. is that basically it?

    >> that's exactly it. it's the sentiment that too many people are feeling today, because they're thinking, why am i killing myself meeting this mortgage when my house isn't worth it and i can get the same place down the block for a lot cheaper?

    >> all right, but there is a moral dilemma here.

    >> there is.

    >> take us through that.

    >> the moral dilemma is you have, first of all, legal obligation to the bank. you certainly do, and there's no quiv indicating on that. but the moral dilemma is, is it right? large banks are defaulting on their loans every day. the big guys, the rich guys are doing it. so, the sentiment now is changing. people are thinking, hey, what am i, a sucker paying this mortgage every month? why don't i just walk away ?

    >> it goes to core values, and i'm not trying to be negative to anyone who's found themselves in a position where they have to do this, but you have to decide -- i made a commitment, do i stick with that commitcommitment?

    >> and beyond that, you have an obligation to your neighborhood. if you increase the foreclosures, you're hurting the value of the guy next door. it's complicated.

    >> so, when you give advice to people in this situation, do you give that advice based on the financial input or the moral input?

    >> you can't tell people about morals. that's their business. but what i can say is there are real down sides to walking away from your house.

    >> what are they?

    >> you ruin your credit rating for five to seven years. you keep your credit cards and people think that's great, but the credit companies also increase your interest rate and lower your limits on your credit card . there are tremendous down sides, and if the bank catches up with you and gets a judgment, they have the legal right to garnish your wages. people don't think that through.

    >> you don't think that happens all that often -- not that i'm telling people to do this. i'm not giving advice here, but the bank often times will not do that.

    >> rarely does, but they have that legal right and they've been getting tougher lately because they're seeing so much of this.

    >> we'll see more of this in the coming months.

    >> afraid so.

    >> barbara corcoran, thank you so much.

    >>> coming up, does jay leno

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.65%
$30K home equity loan FICO 4.97%
$75K home equity loan FICO 4.33%
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Low Interest Cards 11.09%
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