Analyst: 5 to 6 million could "walk away" from homes

The New York Times tonight covers a story familiar to readers here: increasing numbers of homeowners are choosing to walk away from their mortgages and their houses.

The Wall Street Journal also tackles the story tonight, under the headline "Borrowers Abandon Mortgages as Prices Drop."

Behind the trend: If you didn't put much of your own money down when you bought the house, it's a lot easier to walk away. And a large number of recent buyers put very little down.

From the NYTimes: “Will everyone walk out?” asked Christian Menegatti, a real estate analys. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away."

Bloviation: You may feel you've read this story before, but the NYTimes account goes well beyond the anecdotal and explores the cultural and financial changes driving this trend. It's well-reported and worth reading.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com
Photo Credit: LATimes
Hat tip: PJ via email.

Comments

[Mousebender]

Welcome to Deadbeat Nation.

It's no surprise that mortgage rates have risen, because there is more risk for the lender. It's no surprise, either, that Wells Fargo has designated the LA area as a "severely distressed" market, and apparently will loan for no more than 75% LTV (as mentioned earlier today in LA Land). Neither economic stimulus nor GSE loan repurchasing will prop home prices up if the overall mortgage credit market tightens up.

Deadbeat Nation will get the interest rates it deserves, and drag the rest of us along. Higher interest rates cause lower home prices, and there's no telling when these rates (and prices) will reach equilibrium. Ultimately, this is another source of uncertainty that makes today's home buying decision even more of a gamble than before; this will serve to keep home buyers out of the market longer.

[Cal]

Christian Menegatti works for RGE Monitor, that's Roubinis outfit. Roubini is a perma-bear and you can count on him for the worst case scenario for everything. If someone that had a history of showing more flexibility of thought presented the analysis, it could be compelling. But in context of where it comes from I don't think it means much.

That being said I think homeowners who are underwater and walk away, Especially those in the severe bubble markets, are showing very rational behavior. It will be a decade or more before prices get back anywhere near the level they were at at the peak. They are overleveraged in a depreciating asset. The sooner they fix that issue the better it is for their long term financial health. If they walk away smartly (pay off debts instead of paying mortgage until they get kicked out) they will be much better off in the long run, imho.

But 5-6 million borrowers having enough money to pay the mortgage and choosing to walk away. I think that is quite a stretch.

[Brian]

Pete, love the blog it has risen to the top of my list of daily reads (there is a lot out there). Keep up the work.

[bode]

We've heard this story plenty before, and these articles add no new data. I don't want to sound like a broken record, but CalculatedRisk is spot-on here:

http://calculatedrisk.blogspot.com/2008/02/
ruthless-defaults-in-msm.html

This is all anecdote and no data. There are SEC filings that mention this, but no one has asked the actually useful questions (this blog included!).

My suggestion is that Peter take the above suggestions from Tanta to an actual business reporter, and ask them to write the article Tanta is suggesting could be written. If the Tribune company thinks LA Land is good enough for the gaudy electronic billboards, it should have enough pull to get the right article written! Worth a try at least -- I saw the billboard tonight, and think Peter should be very proud.

[John T Watts]

Where do 5 to 6 million people go when they walk away? Do they evaporate? Or does it create demand in some other segment of the shelter market?

[blackbox]

You don't reward this kind of irresponsibility by allowing bankruptsy judges to change the size and terms of the mortgage. You change by putting such a large scarllet letter on them that they will not be able to qualify for another mortgage for at least 10 years. If you read the wallstreet journal article, fannie mae is looking to do just that.
Good for them.

[El Guapo]

Where do 5 to 6 million people go when they walk away? Do they evaporate? Or does it create demand in some other segment of the shelter market?

They rent. And should be debt free by the time they get foreclosed.

[ray]

5 or 6 million walking way?

Show me the data!!!

Where's the data??!!!

[mbob]

Permabear?
How about Whip Inflation Now?
Nattering Nabobs of Negativism?
Etc. Etc.

Every time some kid blurts out that the emperor is naked, out come the pejorative labels to dismiss said exclaimer as deranged.

The New Yorker did a hilarious, grim piece about "optimists" earlier last year. It is a must-read along w/that other Yale balloon piercer Harry Frankfurt who wrote "On Bullsh*t."

There, Cal, Bode, are a couple of places where you will find others who aren't so easy to classify as cranks.

When Marc Faber, Comstock Partners, etc. manage to handily beat predictions from permabulls like Abbey Joseph Cohen and her ilk, insisting that everything is NOT THAT BAD at least makes use of an elephant analogy, like the Republicans.

Where's the "Mission Accomplished" button?

[TakeFive]

I think in most cases, walking away is only a figurative term. These people are more likely converting to Free Renters with an eventual departure.

Kind of like the sound of that: I’m currently Freerenting at 123 Fake St.

Or perhaps we can envision this nomadic herd of 5-6 million Freerenters.

Sounds like something from a Dune novel.

[LAKLO]

"5 or 6 million walking way? Show me the data!!!"

I agree, it would be great to see the data behind a comment like that.

The WSJ article quotes Goldman Sachs as saying that 30% of the country's mortgages are underwater, amounting to $3 trillion in mortgage value. If that's true, 5-6 million people walking away in the next couple of years does not seam unreasonable.

[msprompt]

I've always thought that foreclosures/reposessions result in an almost permanent hit to one's credit report. Is that not true? The NYT story quotes the You Walk Away customer as saying that he will have good credit in a few years. Can that be?

Are any of the rules I've believed all along to be true really true? Did I fall down a rabbit hole? Is there anybody out there? This mess is getting crazier by the day.

[CB]

He says that if prices fall another 10% that 20 million people will be underwater and that 5-6m will walk away. So then what if prices drop another 20% which is likely - will that be 10m people walking away? Can anyone just make up these numbers? Okay, I predict 14 million people will walk away and that there will be an earthquake on November 13, 2009.

There are what, 100 million homeowners in the US, if that? That means that 5-6% of people will walk away from their homes. If that happens we will have much bigger problems than housing prices. I'm no economist, but that would be a total collapse of the financial institutions in this country.

I'm 100% against some sort of foreclosure bailout from the government, but there should be much stricter penalties against someone who walks away from a mortgage agreement - more than just a mark on their credit that goes away after a couple of years. Why not a lifetime mark on their credit to prevent these morons from ever buying a house again.

[ajax]

I quote cnbc,

"We are BUMPING ALONG THE BOTTOM" ha ha ha .....

my question is where does the bottom end ????

[amir]

If five to six million walk away from their homes, about a million to two million will be here in California. Many will just leave the state. Los Angeles will be hit the hardest because it has no manufacturing and the media business is not growing - some might say even shrinking.

[CD]

To me it is bigger than just the " cultural shift ". Words have lost their meaning , lost their value and their power.
Spin control, greed , the constant buying machine, the throw away generation, constant change, newer, better ,we are bombarded by words and a vocabulary that has been twisted to fit the money machine. I welcome this downfall, maybe we will have to find our values again and the meaning of words like "home, family, long term commitment ,saving for a rainy day, and also: it's too expensive I cannot afford it " and " I have too many shoes already"
A time when a wise decision was applauded, a word without granit counter and travertine floor and dramatic staircase from "gone with the wind". I spoke to a RE agents who told me "Divorce is my bread and butter.Family splits, need 2 homes instead of one, good for business." That is where we are, whatever is good for business is good for you....

[mike]

WHY DO WE INSIST ON CALLING SOMEONE WHO PUT NO MONEY UP OR DOWN AN OWNER!!!????

[Christopher]

Wow, this quote from the "walker" in the NYT article says it all:

"“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”"

[Laker]

John T Watts: "Where do 5 to 6 million people go when they walk away?"

Half would go rent, the other half would simply by next door house for half the price...

[BottomFisher]

lets just call em 'Buh-Buyers'

[sfvrealestate]

For once I agree with Cal. Five to six million is quite a stretch...

[arroyogrande]

"but there should be much stricter penalties against someone who walks away from a mortgage agreement"

There is...they get their house taken away.

It's like this. The bank agrees to loan you a crazy amount of money (say $600,000!). That is a crazy amount of money to loan out to people like you and me. How can they do this? Well, they need some sort of insurance...kind of like a pawn shop, where they loan you money, but you let them hold something valuable of yours in return. If you pay the pawn shop back, they return the valuable item. If you don't pay them back, they keep the item, and sell it in order to make the money back they lent you.

The same works for houses. The bank agrees to lend you a crazy amount of money so that you can buy a house. Then you agree to let the bank "hold" the house until you pay the loan back. If you don't pay the loan back, the bank gets to keep the house, and sell it to make back the money it lent you.

The trick is for the pawn shop or the bank not to lend out more money than the item is worth. Otherwise the little scheme outlined above doesn't work. If what you give the pawn shop or the bank is worth less than the money you borrowed, you have no real incentive to ever pay them back.

But it would be silly for a pawn shop or a bank to loan out more money than the item (the 'collateral') is worth, right? Or for them to loan out too much money on collateral that may decrease in 'value' at a future date, right? Right?

If you want to blame someone, blame the banks and MBS investors who were willing to give such generous loan terms (including 100%, no money down, cash back at closing), hoping that "real estate *always* goes up".

- arroyogrande

[Tom]

I agree with mike- People who put nothing down and got an interest only loan are NOT home owners, they have a landlord which just happens to be the bank.

[mbob]

Amir is on to something.

Yes, the media biz is shrinking. Muy pronto. Muy rapido.

A recent Caltech/MIT Entretech panel on social networks served up this wisdom to eager developers: it's now assumed that the hardware is free; creative is everything.

As the recent WGAW strike so neatly proved, talent rarely strikes anywhere. The strike zone web attempts at humor were skin-crawlingly bad. Even with now-withering TV running full tilt, the whole industry is serviced by one or two thousand writers. Period. All the other "voting members" sold a script here or there once or twice and do something else to live on.

So, LA will remain a media employment center, just not for very many people, proportionally.

Everyone else? Dunno. Guess they won't be selling one another granite countertops for a while.

FWIW, 6 million salsi puedes could be on the light side o' estimates.....

[Cal]

sfvrealestate : "For once I agree with Cal. Five to six million is quite a stretch..."

I said 5-6 million who are able to pay and underwater walking away is a stretch.

I think there are many people aren't able to fundamentally afford the homes they are in (or purchased as investments).. getting foreclosed on or walking away or doing a short sale..

Now could all those plus the people who can afford their mortgage total that many?

Now that is much less of a stretch.