Monday, May 12, 2008

The Truth About Walking Away

There was a good article about walking away from the Los Angeles Times called In mortgage market, "walkaway" homeowners maybe urban myth. The first thing cleared up is that walking away means that one can afford (regardless of resets or recasts) to keep their home and have decided to view an underwater home as an investment. There is some discussions pondering if the myth is being propagated by the lending industry to make people more cynical of homeowners while giving sympathy to the bankers. Lets take a look some if the key parts of the article -

Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: Homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.
These are wiggle words - many of the stories about people leaving their homes are ones that can not afford their mortgages after the reset or recast. They also can not afford to refinance the loan due to either being underwater or having to pay the prepayment penalties. For example if a current mortgage of $800 but know next month when it resets to $1400 they will be unable to pay.

It's a way of saying that Americans are beginning to apply a cold financial calculation to home ownership: When a home's value has fallen below what is owed on its mortgage, they feel it makes no sense to keep up the payments.
This may be true but that does not mean they are abandoning their properties to buy or rent a cheaper one. Though this is also the trickle down of "it's just business" that so many of us deal with in our everyday life.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.
Just because someone says it does not make it true. Banks and lenders claim walking away is occurring in significant numbers, but not one can offer proof. No hard numbers, no names, no addresses, but it does take the blame off of the lenders mistakes.

But [Bank of America spokesman Terry Francisco] said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages
This is the key word - unnecessarily default - can pay and can continue to pay at current and future rates. If they can not they are not walking away even if they are allowing the foreclosure process earlier than it inevitably would.

"How would you know what someone's true ability to pay would be?" asked Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. "I'm not sure you could even come up with a definition."
This is where the water gets very murky. Underwaters can not refinance. Underwaters can only sell for a loss - either to them or to the lender. Owner-occupants who took 100% financing would likely have little or no savings. Almost everywhere in the U.S. those who put little or nothing down are currently underwater. These owners would most likely be one or two paychecks away from being in financial devastation. With skyrocketing food and gas prices choices are being made, people are making cuts right and left.

... Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis.

"So many of the loans made were irresponsible -- for the borrowers and for the lenders," said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County. "Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers."

It is generally agreed that the real culprit in the meltdown is the proliferation of exotic mortgages that hit borrowers -- many with paltry down payments and therefore almost no equity in the home -- with huge payment shocks in the early years of the loan. The new payments are often raised to levels that the borrowers could never have afforded but expected to escape via a refinancing or a sale of the house into a rising market.
These cases are not walking away in the sense that they could ever afford their homes. The lenders were greedy thinking that the assets would continue to rise so even if they were stuck with a property it would be worth more than the original loan. They were acting as the flip-side of the speculators. Both parties were in a position where they felt they could not lose - home values only go up, it is a solid investment, by the time the ink is dry the properties value would be more than the purchase price. Why else would a lender allow 110-120% of the properties equity be borrowed if they did not expect to have at least that as a return.

"Who do you see walking? They're people whose rate is about to reset and they see no way out," Marks said. "People who have a fixed-rate mortgage that was initially affordable and continues to be affordable don't walk away from their home, even when it's underwater. They are always willing to withstand the ups and downs of the housing market if their payments remain affordable."
The fixed mortgages owners are the cases that would be significant if they walked away. Another question - How people will ever know if one can or can not afford the mortgage? There are many cases of fixed mortgages to face foreclosures. Due to divorce, job loss, illness and death there will always be financially stable people who will face foreclosure.

On another note, even if someone claims to walkaway that does not mean they really did. There are other financial obligations people have - it is hard to know the real situation people are in. Unless they have to show all of their financials to a bankruptcy judge or other third party one will really never know if anyone leaving a property actually has the means to pay.

Also, do not forget all of the cash-out refinances and HELOCs that were being taken out to pay the first mortgage. There are people who are using the Ponzi scheme to get by and the do not even realize it yet. There is a whole group of people that may not be recent buyers but can not afford their properties in their current financial conditions.

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