Walking Away

December 8, 2009 by  
Filed under Walking Away

Is walking away smart if your home is underwater?

That’s the base message from a University of Arizona law professor, whose new paper is hitting a nerve as the nation’s housing crisis figures its fourth year.

Brent White denies urging walking away from a mortgage that is bigger than the value of a home. Nonetheless, he lays out a case of how it can be done, and his suggestions have gone viral, starting up online, in newspapers and on television.

 

White is hardly first to talk about the idea of walking away from a mortgage that is bigger than the rate of a home. Nonetheless, his suggestions have gone viral and are popping up online, in newspapers and on television.

It’s a move that can save some people money, but at the expense of wrecking their credit.

 

The issue is important to what’s crippling the housing market: About one in four homeowners, or 10.7 million Americans, are considered underwater, meaning their mortgage exceeds their home rate, according to real-estate Information Company

Housing Assist of America

In the markets hardest hit by the nation’s housing bust — Florida, Arizona, California, Michigan and Nevada — the share of homeowners who are underwater is 40 percent.

“Millions of Americans would be better off financially if they did walk away,” says White, who authored the paper “Underwater and Not Walking Away: Pity, Fear and the Social Management of the Housing Crisis.”

 

What White is saying goes against everything that we’ve been taught about contracts. If you make a mortgage commitment, most people think you have a responsibility to pay.

On top of that, White suggests those who decide walk away should consider getting a new car or house before they default on their mortgage, which will constrain their credit.

Personal financial risks


Imagine if everyone who is underwater walked away. It could cause economic havoc. Home prices would plunge even more. Banks would have even more bad loans on their books, which would lead them to make fewer loans to consumers and businesses.

There are personal financial risks, too.

People who go into foreclosure but otherwise have good credit might escape in less time if they continue to pay their other bills on time. There is no magic number for how long that could deal. Mortgage lender Fannie won’t back another loan for five years for someone who was involved in a foreclosure, except when the default occurred because of an bad circumstance like a medical issue or unemployment.

“Walking away undermines the basic tenets of mortgage lending,” said Brian Faith, a spokesman for the government-controlled Fannie Mae.

Some see a double standard

Despite all that, White’s views resonate because he highlights a double standard in the home lending industry. Banks and other lenders doled out mortgages during the boom, often without demanding down payments or checking to see if borrowers had enough income. After the housing crash, many of these same loaners took billions in taxpayer money, even now are easy to change troubled mortgages.

 

The government’s attempts to fix this deal haven’t worked. The Obama administration acknowledged on Monday that it has fought to get loaners to permanently modify interest values on home loans. The government’s plan now is to shame loaners into to modify mortgages. The current strategy: Publish a list of those companies participating in the government $75 billion effort to stem foreclosures that are lagging on the modifications. “Wall Street gets to maximize profits and minimize losses irrespective of concerns about morality, while Main Street is told to keep their promises,” White says.

Housing Sector Recovery Could Take Years


White knows what he’s talking about. He is a scholar of behavioral economics and the law — two areas at the heart of the housing crisis. He believes homeowners worry about the shame involved with foreclosure and have an exaggerated anxiety over what a foreclosure will mean for a person going through it.

 

For those living in the most distressed markets, it could take years for home rates to rebound to peak levels — if they ever do. Those who bought high and put relatively low cash down might be able to keep money by walking away and renting, White says.

White judges that someone who purchased a home in Miami for $355,400 at the market’s peak may now have a home worth $198,000. If the homeowner put 5 percent down at the time of buy, he currently owes $132,000 more to the lender than his home is worth.

 

If that homeowner walks away, he wouldn’t realize to pay mortgage interest, mortgage insurance, taxes or homeowners’ insurance. White estimates that homeowner would save $116,000 by giving up on his mortgage and renting a comparable home.

Easing the terms of an existing mortgage can hold a borrower in his home, but the banks have little incentive to do so. Now the government is trying to shame banks into action, but that’s hardly enough. Congress considered a bill that would have let bankruptcy judges rewrite mortgages, but that legislation died last bound.

When abandoning a home sounds attractive, it’s time for greater choices.

Housing Assist Coldwellbanker