When homeowners just walk away...

Commenter Take Five points out an ominous little item over at Calculated Risk today: Wachovia reports that some homeowners who can afford to pay their mortgages are now opting instead to walk away from their homes and their debts:

"From the Wachovia conference call: 'Part of one of the challenges is, and we've mentioned this before, a lot of this current losses have been coming out of California and it's -- they've been from people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties, and so in a way, we may have -- it's hard to know right now, but we may have seen somewhat of an acceleration problem loans as people have reached that conclusion and we're just going to have to see how the patterns unfold here.' "

CR points out that this is a growing worry among lenders -- that it will become socially acceptable for homeowners to walk away from their mortgages.  Against that backdrop, the Bush administration's push for a rate freeze for some sub-prime homeowners takes on a slightly different tint: it's a subtle reminder from the government that home ownership is worth fighting for.

While we're on the topic: Today's DataQuick report on California foreclosures also contains an ominous  "below the headline"  observation: "Of the homeowners in default, an estimated 41% emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 71%."  If you do the math, that means homeowners going into default now are more than twice as likely to lose their homes as homeowners who went into default a year ago.

Hat tip: Take Five
Comments? Insights?

Comments

[RichW]

Just imagine if there was no such thing as declaring bankruptcy and the mortgage lender could ask a court to seize future income or assets.

Guess I'll keep dreaming. After all, who in their right mind would want our laws to encourage an honest and responsible society ?

[KosherKrab]

Don't people care about their credit scores anymore? Or are these the sub-prime folks who shouldn't have qualified for a loan in the first place?

[Fredke]

"Just imagine if there was no such thing as declaring bankruptcy and the mortgage lender could ask a court to seize future income or assets."

Interesting idea. Just don't limit it to homeowners. Let's make every shareholder in a corporation personally liable for all obligations (debt, pension promises, etc.) that the corporation undertook.

As RichW says, it would be nice to have an honest and responsible society where retired workers could seize assets and future earnings from every shareholder in Bethlehem Steel, United Airlines, and so forth, to meet the retirement benefits they were promised but lost when their former employers declared bankruptcy.

Sauce for the gander and whatnot...

[l.a.guy]

I kind of find it hard to believe this would become an epidemic. First of all why wouldn't the lenders go after these people if they still have assets? It's breech of contract plan and simple. If they have assets substantial enough that they could have continued to pay the loan how would they be eligible for bankruptcy protection? I must be missing something.

But, even if you were able to just walk away without the bank in hot pursuit, you're still going to screw your credit up for years to come. I don't think the consequences are as benign as it may sound at first.

[Condoblue]

I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.

I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions.

I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal.

[Bobc]

Many of these loans should never have been made, and many buyers were too uneducated to know what they were getting into..I've also read many didn't understand English, and didn't know what was going on!!!
By the way, if they walk away, where are they going?
How could they find a rental with a background check, to show they defaulted on their home loan?
Common sense better return to California, and our Country soon!

[rickety split]

Fredke,
I get your point, but corporate shareholders have imperfect control (next to none in all but the most extreme cases) over the actions of their corporation, while homeowners had direct control over the obligations they assumed.

[pugtv]

Just curious ... when people walked away from their home loan obligations, did the bank go after the former homeowner's assets (besides repossessing the house)? eg. Roth accounts, savings / investment accounts etc ...

[RGB]

I ask again - how many of these people are "walking away" from 2nd, 3rd, etc homes that they using for rentals? Take a deep look at these to see if the real problem is that mortgage companies gave loans with residency requirements to people who had no intention of living in them. My old landlord had 72 homes in Riverside and Orange county - 5 in my subdivision alone. And she lied about living in them to get the loans!

[Mike Barker]

Not the shareholders. The officers and board should be held personally responsible for their actions on behalf of the shareholders. Companies incorporate for just what Fredke states. They want personal protection from their actions toward their customers.

[Bill]

I'm not surprised by this at all. According to housing tracker, houses in the 75th percentile have droppped from $1M to $720k. Who wouldn't just walk after losing (after you pay 6% to sell) over $330k.

Once the banks start to realize that no one care to hold onto their house unless it makes them money, we'll be back to at least 10% down to 20% down payments. Plus home equity rates will skyrocket.

Just part of the brave new world!

[anon1137]

This has been known for awhile. One of the Fed banks back east did a study that found that the amount of equity was the primary factor in foreclosures, not ability to pay. I think that some of these borrowers are making a wise financial decision to let the house go.

For a homeowner in the central valley who bought at the top of the market, say for $500K, and their house is now valued at $350K and dropping by the month, it could take 10 years or more before that house is worth $500K again. Why not walk now, rent until the market recovers, save your money for a downpayment, and then buy again when the market bottoms in 5 years or so?

Some economists think there will be some accomodation, vis-a-vis credit reports and scores, for borrowers who get foreclosed during this crisis, simply because it would otherwise delay the housing recovery for too long.

[blimp66]

I've been following the situation very closely for a while now, and was inspired to write a song:

http://www.youtube.com/watch?v=Ivp4YqGCI-s

[tealeaf]

There seems to be a recognition that, in the future, foreclosures from this time period are going to be so common that they won't be viewed with so much disdain.

It's the perfect corollary to homeownership: it used to be a prized state of one's financials and place in this world. Now, due to the "fog a mirror" test one needed to pass to get a loan, it is almost shameful to admit that you bought during this boom.

The banks wanted tighter BK laws, and they got 'em. Not they have to pay the piper with higher foreclosures, and I don't think the consumer will be damaged like they once were.

[Aaron Kramer]

This process was made easier by the passing of the Mortgage Relief Act of 2007. Now homeowners don't have to pay taxes on the shortfall between the homes current value or price and the loan amount. Remember the road to hell was paved with good intentions.

[Maggie Knowles]

RichW - it would be good if we had honest and responsible lenders to begin with. This situation proves we need regulation because buyers, sellers, lenders, politicians, we have no control or self discipline. Our society, we as a group, we are not wise, mature enough to make the responsible choices. EVERYONE plays a part in this.

[Hula Girl]

This changes a home loan from a secured to unsecured asset which must be making lenders very insecure. My question: How will loans be structured in the future to prevent this very problem? If we think credit's tight now, look out.

By now, everyone involved now realizes that a "contract" is worth only as much the people signing it. Good luck collecting on those "secured" debts.

[J]

I know several people who recently walked away and gave the keys back to the bank. From what I understand, these people were not subprime borrowers, nor were they first time homeowners. They got caught up in the equity cycle, cashed out, increased their mortgage, wasted money thinking the equity would never end. In the cycle of refinancing for cash, they would do exotic mortgages straying from their 30 year fixed because they would either sell in a couple years, or just be refinancing once again to take out more money. Most of these people could afford their original mortgage, but they simply got caught up in the trend of refinancing to buy cars, pools and trips and pay off credit cards. When they did they ended up with a loan amount they could not afford without the exotic mortgage, and continued increase in equity. The people I know in this situation are not there because of the lenders, brokers, or even the decrease in equity. They are there because of their own stupidity.

[Maggie Knowles]

Kosher Krab - It's not the sub-prime folks the Wachovia folks were speaking of:

"...a lot of this current losses have been coming out of California and it's -- they've been from people that have otherwise had the capacity to pay..."

It's the folks who can afford to pay who are walking away because they don't want to pay top dollar for a property that has decreased in value.

[Tombstone Realty]

Well, if the banks can just write off their 'bad loans' and walk away, why can't the consumer. People consider houses 'investments', not 'obligations'. So if the investment isn't making money, oops, let it go, and put your cash elsewhere.

I'm getting that feeling from the street, and I'm not even involved in the industry. Sure, their score takes a hit, but for the longest time credit card companies were desperate for clientele - even a bankruptcy, you'd get offers.

Once there's a big enough backlog, sometime in 2011, it won't matter if people had bankruptcies, because the banks will be desperate to get rid of the houses. Just like you see with car dealerships. I guarantee you 40% of the people who are losing their houses now will be in another in a few years - especially the "above-water walkaways" mentioned above.

The only sad thing is that people like me, who carry no debt, and save money - are the ones getting shafted right now. Well, that and our future generations, but that's another blog...

[mike]

if you have good credit you will probably become golden

[JonM]

why pay a premium every month for something that's worth nothing to the owner. That's like paying rent at twice the cost. I too would walk, no brainer. Credit can be rebuilt.

[tew]

This supports the assertion that we should avoid applying the term "home owner" to each person who has a mortgage on a residence. Somebody that puts zero down and then pays IO is NOT A HOMEOWNER for the residence any more than someone walking on the sidewalk in front of it is. Yes, they have LEGAL rights to live there if they make payments and they can fight foreclosure, but conceptually these people are no different from those who rent.

Now we are seeing this play out - some of these people don't consider themselves true owners. Some were speculators that know they have a "put" and that the banks relied on old fashioned cultural norms that no longer apply to an increasing number of Americans.

[sheila]

RichW, i couldn't agree more. let's start with the government. bush and cheney, who lied on at least 935 public occasions to trick the US into going to war, should have to pay the entire cost of the war out of their own slush funds (KBR, Chevron, Blackwater and others will contribute no doubt), then pay back the entire budget deficit (and dollar devaluation) of the past 7 years derived from appointing corrupt, incompetent cronies to key positions then bloating the government beyond recognition and giving corporate welfare out to Their Base.

once they balance THEIR budget and pay for their grotesquely irresponsible and corrupt behavior, we can hold individuals to the same standards. i think it would be GREAT!! i'd love to get all my wasted taxes (including the huge looming burden these jerks have been deferring by not making anyone pay for the war in real time, and by lying about it "paying for itself") back so i could pay my own bills that much easier.

hurrah for personal responsibility!

[Roger Moore]

"This changes a home loan from a secured to unsecured asset which must be making lenders very insecure." --Hula Girl

Not at all. A secured loan is one in which the borrower puts up assets to act as collateral. A mortgage is still secured because the house is still used as collateral. It's just that housing as now lost enough value that the lenders can't make themselves whole by foreclosing and selling the house. That's their tough luck; if they had required a reasonable down payment, they wouldn't be in this mess.