'Walking away': A real trend or suburban myth?

Both the New York Times and the Los Angeles Times are out today with lengthy stories questioning whether the much-discussed "walking away" trend -- you might also call it voluntary foreclosure -- is a real event or a suburban myth. Both stories conclude that there is no good evidence to support the notion that more and more homeowners are making an economic decision to give up on their homes without a fight.

The L.A. Times' Michael Hiltzik: "At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing 'folklore' about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or 'owner-occupants.' ... 'The vast majority of borrowers we find have been acting in good faith,' she said. 'If they get behind, they are interested in working with their lender.' "

The New York Times' Vikas Bajaj: "The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet 'jingle mail,' the term for those tinkling packages of keys, appears to be far rarer than many seem to think. Freddie Mac, the big government-sponsored mortgage company, estimates that just 0.14 percent of the defaulted mortgages in its portfolio involved properties that were abandoned by borrowers."

Analysis: Agreed, there are no good data indicating that walking away is a real trend. But: Banks and lenders have established that they are clueless when it comes to understanding the people they lent money to, the true economic condition of those borrowers and the real reasons some of them stop paying their mortgages. In many cases, borrowers go into foreclosure without ever having a conversation with their lender. In those cases, the borrower's financial condition, and calculations, are a mystery. In short, it's not clear that lenders are a particularly reliable source on the issue of why some homeowners go into foreclosure.

Your thoughts? Is "jingle mail" real, or is it a suburban myth? E-mail story tips to peter.viles@latimes.com.

Comments

[exOC]

I owned a home in an OC neighborhood built in 2006, sold last November due to a job transfer to LA.

My neighbor "friends" were royally angered when we sold for the same $ as we purchased.

We put 10% down, scraped to make payments on a $750k place on a $150k salary, and wondered how these folks who made less than us could be driving BMW, M-B, and gas guzzling SUVs.

It was clear when I began to have conversations: every single one (there were a couple dozen homes in the tract) had IO and ARM financing, zero down. I was shouted down by one such friend in his garage when I suggested that the IO loan is a dangerous thing and it's akin to roulette with your family's home. "Don't you know this is OC? We have coastal breezes, jobs, and the best schools. Watch these places go for a mil in the next year."

While it was a tough decision at the time, ripping my family out of our dream home for a job in SFV, the job is fantastic and we can finally breathe financially since we sold 7 months ago.

Many of the aforementioned loans reset in the next 24 months. I suspect when the dust settles, either the banks will dramatically reduce principal (the shouter was paying $1k less than going rent for his IO and can barely swing that), extend terms, or the neighborhood we miss so much will be littered with distressed sales.

Anecdotally, 3 of the 12 people in my department at work are strongly considering ruthless default. This is a matter of time, and it is real. We are just early in the process.

[Anonymous]

shockg --

The game is up. Everyone now knows it was a bubble. It was an enormous bubble, absolutely gigantic, juiced by lending practices heretofore unknown to humankind. Laker may be cherry-picking facts, but you sir are the pathetic ostrich. Deal with reality and move on.

It's interesting that you have no inclination to dispute the ridiculously anecdotal "facts" in Steve's post above. Too bad Steve hasn't yet actually looked at the real statistics to determine that stocks have FAR outperformed real estate in long run. Operating businesses have always had the advantage over passive investments, and the data show that this advantage has been massive over the long term. But, hey, good luck to you both. Keep your money in passive investments and let the investment bankers in NYC continue to lap you.

[househunting]

No one is walking away, eh? According to who???

"Mortgage servicers say their biggest problem is that they can't get in touch with delinquent borrowers. In about half of foreclosures, the borrower never communicates with the lender, despite the mortgage company's efforts."

http://www.bankrate.com/brm/news/mortgages/
20080214_project_lifeline_a2.asp

In fact, the lack of effort on the part of homeowners to try to stay in their upside-down properties is so rampant that they had to make a whole government program called "Project Lifeline" to TRY to get people to call their lender before ... dare I say it --- WALKING AWAY from their homes.

If the lenders are sending notice after notice BEGGING for a call from the borrower but can't even talk to so many of their borrowers before foreclosure, how can they say that "walking away" is a "myth"???

Hmm, sounds like someone needs to sell their now junk-rated mortgage backed securities to investors pretty badly. Nice try.

Don't buy the BS. Remember to use the good sense God gave you and that everyone has their own agenda. Think and research the facts for yourself.

Common sense would tell you that 1) people aren't going to be all that motivated to keep making payments, even at reduced interest rates, on a home that is depreciating rapidly. Why pay a $1M loan for a property only worth $750K if you don't have to??? (You don't even have to pay income tax on the forgiven amount anymore -- another brilliant move by the government); 2) shortsales are not an attractive option because the homeowner nets nothing, where is thehave no incentive to go through all the work of selling their home? ( If you've ever sold a home, you KNOW what I mean); 3) foreclosures are taking a long time and you could live in the home for up to a year or more without making any payments before a foreclosure is finalized. At $3500/month for instance, you stand to gain $42K. Compare that to a shortsale or modification where in one scenario you PAY MORE than your property is worth, losing money, or in the case of a shortsale you end up doing alot of work for nothing, have to show the lender all sorts of financial data to prove "hardship" and even then they will try to get you to kick in some money. Hmmm... a gain of $42K vs. a loss of $250K (if you keep the home)... I wonder which peoplke will choose??

I'm not advocating that people walk away, but I am realistic. People are motivated by self interest almost EVERY TIME. The number of foreclosures is evidence of this fact.

[John T Watts]

tew and Tokyo Temp. Check out the cost of homes on Realtor.com for Paris Texas. You really can get a lot for your money there. But it would be best to arrive there with an income such as a retirement check. You might not be able to find work.

[Ace]

househunting 'people aren't going to be all that motivated to keep making payments, even at reduced interest rates, on a home that is depreciating rapidly.'

Way off base. You are thinking of speculators. Your typical family will do everything they can do fight off a foreclosure. They don't care that they owe 20 percent more than it is worth... they care that their kids live their and their friends and schools are nearby.

[carter]

The banks are screwed. People like me are what they are afraid of. I can afford to make payments (although stretching thin) on my 800k loan. But my house is 200k underwater and I think it will be 400k by next year. I would be stupid to keep the house and keep on making payments on it since it will never reach that price level when i bought it. And screw all those moralist that think it's bad to walk away and how they weathered the storm in the previous housing downturn. Back then the level of negative equity was in the 10's of thousands, nowdays we are talking about 100's of thousands.

[Laker]

shockg,
If what you're saying is true and all the "cherry picked" properties i listed on my blog are a fraud case and/or mortgage fraud with straw buyers...then it is very bad news.
You know why?
Simply because i could choose ANY (probably 99%) sale in 2005, 2006 in SFV and it will match my cherry picking. When I "cherry pick" 99% of properties available, it is no longer cherry pick, but reality.
I'm sure it would be a lot worse in IE or high desert, similar in many parts of OC, and little less in west side or LA. But since I'm looking into SFV and specific parts of it, i just find properties in abundance that fit to my "cherry picking" criteria. I just can list them all because: I don't have the time for it, not space for it, and cluttering the blog will make it impossible to read.
The 60% i mentioned was a typo. What i meant is that you can find today houses that are listed/sold for 60% of their last sales price (2006 price). And i can document that! While all your fact are basically STATED FACTS ala stated income...

Your agenda, shockg, is like an OPTION ARM that increase the principal, it keeps accumulating garbage and false facts up until it reaches some cap as in 115% for OPTION ARM, then it explodes....

[Rich]

I've been suspicious of the "jingle mail" myth since the WSJ published their article with NO interviews with real people who did it--just a handful of bankers speculating that people might be be doing it. If it's really happening out there, you'll find people to talk about it, and if bankers are talking about it, you're hearing the voice those most disconnected from market realities...

[househunting]

Posted by: Ace | May 12, 2008 at 10:12 AM

RE: househunting 'people aren't going to be all that motivated to keep making payments, even at reduced interest rates, on a home that is depreciating rapidly.'

Ace said: "Way off base. You are thinking of speculators. Your typical family will do everything they can do fight off a foreclosure. They don't care that they owe 20 percent more than it is worth... they care that their kids live their and their friends and schools are nearby."

Ace, if the families are doing "everything they can" to keep the home, why are mortgage servicers having so much trouble getting owners to respond? Who then, are all these people who let their homes go into foreclosure without so much as a phone call to their lender? This is not some isolated phenomenon, apparently it is so prevalent that they had to MAKE ANOTHER gov't program to try to deal with it.

As for the emotional comittment, yes, some owners will have that to their home. I certainly do. But remember that RECENT buyers, the ones who bought at the top of the market and are most likely to be the most upside down, have only been in those homes 1-2 years, which is a short period of time to develop very strong ties to the community and friends. In addition, they could probably rent the same type home in the same community for much less than their mortgage, leaving ALOT more money every month to spend on their kids/families, etc.

[marina]

It's sad to see people loosing their dream home to foreclosure. Whatever may be the reason for this, but you just can't sit back & give up your home. When you are behind your mortgage payment say for 1 or 2 months it's better to do your homework about options available to prevent foreclosure & the best that may suit you to avoid it.
Time is definitely not your friend in this situation. Each day that passes makes it that much harder to get a work out agreement with your lender that you can live with. The home foreclosure process can take anywhere from a few weeks to many months, depending on the state law and the method of foreclosure the lender chooses to use.
Below is a link to FAQs about foreclosure
http://www.mortgagebuyerbasics.com/
foreclosure-faqs-about-foreclosure-assistance-companies

[sfvrealestate]

I agree with Shockg. And right now, there are almost as many Bubble blogs as there are foreclosures.

[Jingle_All_The_Way]

If I were 150k upside down on my condo, I'd walk. I wouldn't be able to buy a place again for a few years, but who would want to anyway in this market?? If I had to rent an apartment and pay cash for everything for 3 yrs it would be well worth it - Jingle Mail would essentially pay me 50k per year!

I'm not upside down on my condo, though, because I bought many years ago and refrained from "trading up" into the bubble madness. But, still...I know I'd walk if I were underwater more than six figures on my home.

[Laker]

sfvrealestate,
you agree with shockg since both of you are in the RE industry (i bet!)
Also i think that there are as many unemployed RE agents today as thenumber of foreclosures....

[baruza]

shockg, the point of the myth is not that foreclosures are a myth. Foreclosures are an extremely well documented occurence. Only someone in complete denial could ignore their existence. The point of the myth is that borroweres aren't deciding to voluntarily walk away; they are being foreclosed on because they could never afford to pay their mortgages in the first place--a fact that would have been discovered if the banks did their due diligence, as they were supposed to, in the first place.

And sfvrealestate, you might be the non-anonymous internet troll I've ever encountered. I guess it takes guts (or something) to put your name out there behind completely wrong factual assertions. But there you are.

Here's realtytrac's graph of current households per foreclosure auctions. Los Angeles has between 10-999 households for each foreclosure. A wide range, but even at the bottom, 1 foreclosure in every 1,000 households is a lot.

http://www.realtytrac.com/blog/photos/
foreclosurepulse_photos/images/15949/original.aspx

[Mousebender]

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