Walking Away From More Than Just A House

Some people who are walking away from an upside mortgage and resetting ARMs are walking away from more than just a property. They can be walking away from good credit. And possibly the future that they had wanted for themselves.


Some people walk away because they can not afford the situation you are in, struggling monthly to pay the bills and have no real choice to change an impending foreclosure that is heading their way. Other people feel that they are throwing good money after bad and are under water so much that financially the hits they may take are worth it.


Just like with foreclosure, there is baggage with walking away. In the case of one Detroit Councilman it means national news and possibly throwing away his future plans. In this article titled Detroit councilman walks away from mortgage from MSNBC we see some of the issues people face. Let's take a look -

[O]ne day in December, City Councilman Kwame Kenyatta and his wife packed up their belongings, locked the doors, mailed in the keys and walked away — adding another vacant house to the thousands in a city hard hit by the nation's mortgage crisis.

...

It could damage his bid for mayor of Detroit this summer, particularly since he has been one of the city's most vocal supporters of measures to improve neighborhoods and clean up blight.

"If I'm going to follow you, you need to be a leader," said Patricia Dixon, a former neighbor of Kenyatta's. "You don't show leadership by walking away from your home in the city of Detroit. You have vandalism where they find out the houses are vacant. You have people stealing fireplaces."

...

Bought for $225,000, the home nose-dived in value to $100,000, according to Kenyatta. Its manageable $2,600-a-month mortgage soon was about to soar about $1,000.

About five months ago, the Kenyattas moved to a rented condo on the city's east side. It has three bedrooms, four baths, a whirlpool bath, finished basement and garage. The rent is less than their old mortgage. (In Detroit, City Council members are elected from the city at large, not from districts, so leaving the neighborhood does not affect Kenyatta's eligibility to serve.)

...

"If voters view being an excellent financial manager as an essential quality for the mayor, then it may cause him problems," said Lyke Thompson, director of the Center for Urban Studies at Wayne State University in Detroit. "If on the other hand, they sympathize with him because so many voters have had similar troubles, it may be less of a problem."

From the article Detroit sounds worse than we realized. In the past, we have seen houses selling for dollars in Detroit. The article mentions that unemployment is 20% there. Definitely a regional depression happening there.

Will walking away cost Kenyatta his political future? We though it would until reading the final quote by Lyke Thompson - he does have the first had knowledge of what many people in the community are facing. Tough choices. Putting his long-term future ahead of his short-term future. We will have to revisit this story this summer and see if walking away helped or hurt Kenyatta's political future. If it helps, expect to see this become more and more common.

Lenders Walking Away

When a property is worth less than the costs of foreclosure there is little incentive for foreclosure on a property. We have seen in parts of the country where properties are almost worthless. If a second-hand beat up car is worth more than a property why would a lender foreclose on them. Why would the lender want to foreclose and deal with the property taxes on a deteriorating property.

The funny part of lenders walking away is they are using the same excuses as the mortgagees who fight foreclosures use - who actually owns the loans. Since many of the foreclosures were bundled, sliced and diced it is hard to know who the actual owner is. While the servicer may trigger foreclosures when the payments are not made, the actual note holder is the one who will own the property when all is said and done. And not being able to track down the owner is the latest excuse not to take back virtually worthless properties. Sad but true according to this New York Times article titled Banks Starting To Walk Away On Foreclosures. Lets take a look -

City officials and housing advocates here [in South Bend] and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

...
In Buffalo, where officials said the problem had reached “epidemic” proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.

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“Oftentimes when the foreclosure starts out, it’s a viable property,” [Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country] said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure.

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“The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can,” [Guy Cecala, publisher of Inside Mortgage Finance] said. “It’s just a sign of the times that things are so bad no one wants to take possession of the property.”

Another huge problem on the landscape of the housing bubble! Hopefully this will not be happening in a city near us.

The article notes in some cases the houses become so worthless that they are scheduled to be demolished by the city - and the "owner" or mortgagee that was never foreclosed is stuck with the bill. Sad, sad stories. Sad, sad state of the housing situation.

Suing Lenders to Foreclose

We have heard it all now. Some lawyers representing those who walked away in California are contemplating having to sue the lenders and mortgage holders to finally foreclose on the property. But in the Silicon Valley Mercury News article titled Silicon Valley 'underwater' homeowners ask: Should I stay or should I go? a lawyer with the clients keys on their desk is considering this! Wow this housing crisis really is FUBAR! Jingle mail with a twist! Lets take a look -

"There's no question that in my 40 years of real estate law practice, people are more prone to walk away from property now than ever before," said San Jose real estate lawyer Ron Rossi, who said he probably gets 50 calls a week from underwater homeowners wanting to know if they can sell their home for less than they owe (called a short sale), attempt a loan modification, or default, walk away and face foreclosure.

Even some who aren't feeling the pinch financially are contemplating walking away from their mortgage, said Skip Houston, a mortgage broker in Campbell. He said their reasoning is, "Why should I make my $4,500 house payment? I could let my house go, and rent this exact same house for $2,000."

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Fredman said that many people who contact him have "pretty much realized they don't want to keep the house under any circumstances. They just want some help through that process in terms of personal liability issues, tax issues, just sort of basic hand holding, often."

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But even for a lawyer, reaching a lender to discuss a walkaway client or a deed in lieu can be tough, Fredman said.

On his desk are keys to the house of some clients who walked out on their mortgage (and home) last fall. Fredman said he wants to return the keys to the lender, but it's been months, and the lender has not yet told him where to mail them. Nor have they foreclosed on the homeowners.

"It may come to the point of having to sue them to get them to take the house back," he said.

OK - just ignore the lady who does not want to pay her mortgage, can not sell her house, but does not want to damage her credit score. She is renting the property just not bringing in enough to cover all the expenses. We will cry for her another time. Lets get to the real story buried in the article - the possibility of lawsuits against lenders making them foreclose on the property.

We have often heard stories about lenders reluctant to foreclose on properties - and this article seems to validate at least a few cases of that happening. There is a new STFU now - Suing To Foreclose on Underwaters. The foreclosure crisis seems to getting worse everyday.

Foreclosure and Short Sales Impact on the FICO Score

Here are the FICO issues regarding walking away, foreclosures, and short sales in New Jersey. The FICO results are not as straight forward as you may think. The lenders have alot of latitude about what they report and how they classify it. Short sales may harm your credit score as bad as a foreclosure. With all the other burdens of a short sale, this just adds to the arduous aspect of such a deal. Why bother negotiating if your credit will get hit just the same? Well lets take a look at the FICO side of Sundays Real Estate section with an article titled When you can't go home again -

The biggest problem with walking away from your home and hastening foreclosure is that foreclosure is a huge blight on your credit score: a drop of perhaps 200 or more points on your FICO credit score. (A strong FICO score is around 700 and above.)

Still, if you have already missed a half-dozen or more mortgage payments as Bob and Sharon have, your credit score has probably already taken a big hit.

"Anybody that I talk to who even contemplates walking away from his home, I lay out a number of reasons they shouldn't," said Re/Max real estate agent Sal Poliandro. "A short sale is a way to get you out of your predicament with dignity. It helps the bank get rid of an asset before they come and collect it. When we talk about foreclosure, it's not just a financial thing. As far as credit goes, nothing will ever cost you the same. You're going to have to pay $600 a month for a car, rather than $300 a month. And, with a foreclosure, your name will be in the paper."

And foreclosure can be postponed, Poliandro said, while short sale negotiations are under way.

However, short sales may show up on credit reports as "pre-foreclosure in redemption status," which can seriously hurt the seller's credit score as well.

Craig Watts, public relations director for Fair Isaac Corporation, which created the FICO scoring system, said in an e-mail: "The effect on a FICO score is likely to be very similar for both actions [foreclosure and short sale]. The impact depends on how the lender chooses to report the foreclosure or the short sale to the credit bureaus."

A foreclosure remains on a mortgage-holder's credit report for seven years. But the FICO Web site says, "While a foreclosure is considered a very negative event by your FICO score, it's a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as two years."

Funny that the Re/Max real estate agent is giving foreclosure and financial advice??? And that the FICO guy basically contradicts everything the Re/Max agent says. First thing to note - do not take any financial from a real estate agent, ever. To become a realtor in New Jersey you just need 75 class hours and passing an exam. No college required either - and yet dispensing some of the most important financial advice one may face in their lives. This ought to be illegal!


From the State of New Jersey website -

What are the qualifications for a Real Estate Salespersons license?
To qualify for a Real Estate Salespersons license you must be at least 18 years old, have a high school education or equivalency, complete a 75 hour pre-licensure course at a licensed school and pass the New Jersey examination. After passing the examination, you must apply for a license through a sponsoring Employing Broker within 1 year from the expiration of the school certificate or you must again complete all requirements.

So what have we learned from today -

1. Don't take financial advice from a realtor! You may as well be taking financial advice from the guy next to you at a bar or the woman next to you at the salon. Or maybe the cashier in the grocery store - they are in sales too! And they deal with money all day!!!
   
2. Your credit score may be harmed the same either through foreclosure or short sale.
3. If you choose foreclosure rather than a short sale your name will appear in the paper (in an obscure section that no one will read other than people looking to get a good deal) and this could be devastating!
4. Talk to a lawyer or a financial planner to help with your decision and issues - not a realtor!
5. We need a state-wide push to make realtor's giving financial advice to their clients illegal!
   

Walking Away in New Jersey

Other than the hit to one's credit score walking away sounds so easy. Unfortunately it does not appear to be as easy in New Jersey as it is in other states. Their is a push that a short sale is better than foreclosure, but the process is cumbersome and may have just as big of a negative impact on your credit score. For those underwater their is no solution that is not going to be painful.

Sometimes just getting out heals enough pain to help the owner, soon to be former owner, able to keep getting by. That appears to be the feature story in this Sundays Real Estate section with an article titled When you can't go home again. We were pleasantly surprised to read a positive story regarding someones decision to leave their property. The article has lots of important information for those that New Jerseys' foreclosure mediation program can not or will not help. Lets take a look at the article -

[Sharon] loved the [Oakland] house where she had lived for 30 years and raised her children. But when she and her second husband, Bob, refinanced the house in 2005 to pay college tuitions and buy out Sharon's ex-husband's stake in the home, they unwittingly set off a chain of circumstances that would lead them to abandon their home and move into a rental little more than three years later. It was a $350,000 adjustable-rate, interest-only loan they had applied for over the phone.

"We started getting letters that our mortgage payment was going to increase by $600 a month come January of 2008," said Bob, who along with Sharon asked that their last name not be used. "And that payment was going to keep going up and up and up. I tried to refinance, but there wasn't enough equity to refinance."

...
Bob and Sharon's decision to abandon their home is not so extreme as those who walk away from houses worth less than the mortgage and mail the lender the keys. The couple hasn't made a mortgage payment in eight months or so, but the house is listed for sale, and Bob pays to keep the utilities on. He visits once a week to check on things and shovel snow from the drive and walkways.

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There are few statistics on how many people abandon homes when they can no longer afford the mortgage payment and the house is worth less — often significantly less — than the mortgage. There are now a number of Web sites offering advice — for a fee — to help struggling mortgage-holders "walk away" from homes that are no longer worth the investment, sites such as youwalkaway.com, walkawayplan.com and mortgagedefaultlegaltrack.com.

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"People try to talk about the homeowner's ethical decision and moral responsibility [to pay what he owes]," said [Jon Maddux, the CEO of the California-based Web site YouWalkAway.com]. "But banks look at it as a business decision. You have to do what's best for the survival of your family."

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Bob and Sharon are relieved to be in their new home. They are paying their bills on time, and working to rebuild their credit. Sharon treasures a birdhouse, made by a friend's father, that is a replica of the home where she lived for three decades. Bob worries that there could still be financial repercussions, that someone might come and garnishee part of his paycheck to pay down the unpaid mortgage.

Relieved to be out from under the economic pressures of an ever changing ARM. Happy to have left a home that become a huge burden. Leaving the home and rebuilding the life is a fresh start that can help ease the pain and burden of the foreclosure. We are glad an article featuring people landing on their feet after foreclosure. Note that the morality is only imposed on the borrower side of the transaction. As the morality issue changes, and it will as the numbers of foreclosures rise, there will be little negative impact aside from hurt credit for those leaving an underwater property.

Finally, since the article was so long and involved different aspects of the walking away, foreclosures in the next post we will look at the credit score issue.

Walking Away in NJ? Not as Likely

There are states that have non-recourse loans which makes it very easy to walk away from the property. New Jersey is not one. Therefore we will probably never experience the walking away phenomena the way some states are. The Washington Post has an article titled Walkaways high in 'non-recourse' states that explores the whys and the whats of walking away. Lets take a look -

Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.

"These anti-deficiency laws make a huge impact on foreclosure rates because they are basically 'get out of jail free' cards," said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who's writing a book on consumer bankruptcy and consumer credit.

This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways.

The full list: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.

One thing to note - there are three super bubble states on the non-recourse list - Arizona, California and Florida.

Underwater News

While we may get snowed in today, but it is better than being underwater. Once a homeowner is underwater there are a new set of questions to ask "Should I stay or should I go?" As The Clash noted - "If I stay there will be trouble, and if I go there will be double." The song may not have been written about post-bubble issues, but it applies perfectly. Staying is trouble, walking away may be worse - or maybe the other way around depending on your financial situation.

This bring us to another article on the walking away phenomena that the housing bubble brought us. Along with NINJA loans and 100% financing we get walking away and jingle mail. This is explored in an article from the Associated Press titled Falling house prices spur jump in mortgage walking. Lets take a look -

Walking away from a mortgage has always been a homeowner's last resort — it flies in the face of the American dream. And experts say it should remain a worst-case scenario.

But with the deepening economic crisis fast adding to the 12 million mortgages already "underwater" — the term for when a home's debt exceeds its market value — it's an option more are likely to consider as home prices continue to fall.

Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations.

"You have to make the best decision for yourself, business-wise, which could be walking away from the house," said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.

Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices.

The housing bubble is having many foreseen and unforeseen consequences. However, people will always do what is in their best interest. If it will take less time to repair your credit history than to pay down exorbitant debt then that will be the choice many will make. In state's with non-recourse loans and big property value declines this will probably become quite common as the unemployment rises.

The Foreclosure Avalanche

Foreclosures on taking an avalanche affect - the more foreclosures happening are forcing more people underwater, which in turn is causing more foreclosures. Add in the ever-increasing unemployment levels and some areas are getting decimated. Taxes are not getting payed, so even once stable government jobs are being eliminated. A example of this avalanche affect is discussed in an article from CBS news titled A New Foreclosure Wave Hits the Jobless. First lets take a look at the video portion -



(Ignore the $ typo at 52 seconds in the video - $2 million in loans would be only 3-4 houses in the middle class areas in NJ - should read 2,043,600 loans.)

Now lets take a look at the accompanying article -

More than 2 million prime mortgages, traditional loans for people with good credit, are now delinquent. That's 624,000 more than this time last year, according to the mortgage bankers foundation, Tracy reports.

...
It used to be if you couldn't afford your mortgage you could always try to refinance or sell your home and pay off your loan. But these days, for a lot of people, those options no longer exist.

That's because 12 million households now owe more than their homes are worth, according to Moody's.

Homeowners with risky adjustable rate mortgages are getting help from banks, but there are no programs to aid those who already have good loans but no jobs.

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"If they don't, I'm not going to drain my savings, I am not going to drain my 401k, I am going to walk away," [recently unemployed, Judy] Jones says.

We have predicted before that walking away will gain popularity. As the huge number of foreclosures increases the stigma is fading. It is not looked on as an individual issue - it is now viewed as a systemic issue. Additionally, rational people will not just throw their savings away. Why drain your retirement or savings to pay off that an extra $200,000 on a mortgage than your house is worth? Why lose everything just to lose your home? For many people walking away is the best financial and personal choice they can make. It may be in their best, individual, interest.

The Economics of Walking Away

We are always hearing about people who walk away. There seem to be two groups in the walking away stories. The first group are jumping ship early since they know they will not be able to the resets and recasts. The other group, and the real "walk away" are those that can afford the house payments but are choosing foreclosure.

Usually the latter group is looking at the choice as a financial one for their own best interests. The few real examples of this group are people who are extremely underwater - 40%, 50% even 70% percent - and have calculated that the time to restore their credit will be sooner than the time it will take to have any equity.

In an article form the BBC titled America's Price Time Bomb we are given an example of someone who is 40% underwater and has decided that her choice involved her house versus her retirement funds. She chose her long-term future (retirement) over her immediate future (foreclosure).

The article also discusses the changing social stigma from walking away. But we noted back in April (here), with plummeting house values there will be little stigma left with foreclosure in parts of the country.

Some of the most powerful parts of the article come at the end. Let's take a look -

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."

Losses of even a fraction of that magnitude would be huge. One trillion dollars in write-off? A wipe-out of the US banking system? These predictions coming true could make The Depression look like the good old days. In the next coming weeks and months there will probably be more moral discussions surrounding walkaways. There has already a bit of scolding regarding walking away as speculators. We expect this rhetoric will be ratcheted up a few notches to try to make the stigma and the economic scars worse than ever.

Housing Swap

The big story today is from the Wall Street Journal's article on buying a new home to bail on the old one. It is a step up from the walking away phenomenon - the houses are so underwater that the homeowners finds a new affordable property and abandons the old one. Here are some snippets -

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

Homeowners are able to pull off this gambit -- which some lenders and real-estate agents call mortgage fraud -- by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

To be sure, walking away from a mortgage, even if legal, has plenty of drawbacks: Borrowers lose the ability to take out unsecured loans, since foreclosures can stay on a credit report for seven years. In some states, lenders can sue for assets, including a new house.

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The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn't have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

Is this another case of blaming the borrower? Over at Calculated Risk they note that lenders have been pushing the numbers for home buyer fraud - making walking away seem widespread but no one can produce numbers. This story sounds similar - anecdotal reports and no data.

In the article there are several examples of people "buying and bailing" but it sounds like most of them can not afford the properties. Two of the examples relocated and are unable to sell the properties without incurring a loss. The featured example sounds as if the owner will not be able to afford her house when her ARM resets - and she can not refinance since the home is worth half of the value she bought it at 2 years ago. It sounds more like the owners want to purchase new homes just prior to foreclosure hitting the old properties. Is this really "bailing" - in most of the cases the buying is done after the bailing but just before foreclosure. This sounds like another case of lenders trying to get sympathy by blaming the ruthless borrowers.

Lender Troubles

Quick post -

This article in the LA Times discusses that there is much less walking away then previously reported - In mortgage meltdown, 'walkaway' homeowners may be suburban myth. Here are the two key paragraphs -

"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.

In summary - the lender philosophy was blame the borrow and house value keep rising.

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.

The Politics of Foreclosure

In today's Wall Street Journal there is an article called Keeping Families Above Water. The article starts of with a discussion about a possible show-down between President Bush with the Treasury on one side against the Congressional Democrats with the Federal Reserve on the other side. However the article then leaves the political fight to look at the numbers behind the issues. Here are some interesting nuggets -

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes.

Lenders, we're told repeatedly, prefer to avoid foreclosure if possible. Better to cut a deal than end up with an empty, decaying house. "If a foreclosure is preventable...the economic case for trying to avoid foreclosure is strong," Mr. Bernanke said this week. And not just for borrower and lender: "Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes and lower municipal tax revenues," he said. And that could depress housing prices, which could hurt the economy and the stability of the financial system, he added. On that much, Mr. Frank and Treasury Secretary Henry Paulson agree.

This is the foreclosure spiral that is occurring. As more people go into foreclosure house prices in the surrounding area lose value. This produces more people underwater, who then can not refinance or broker a deal with their lenders. Those people then have few options but to have a short sale, walk away before foreclosure or wait for the foreclosure.

... As the Treasury argued in a recent PowerPoint presentation: "Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators." (It's a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices -- "a relatively novel phenomenon," Mr. Bernanke labels it -- and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn't be underwater.

The quote is incorrect, Many people are so underwater that it will take them less time to repair their credit than get ahead. Many people who are forced to make this choice are doing it because it is in the best interest for themselves and their families. They are tied to a house they can not sell, they can not refinance, and is worth substantially less than what they paid. These people thought they were buying into the American Dream and ended up in an American Nightmare. Lenders who will not negotiate but will hound them for money and a government that scolds them like they are five-year-olds. Maybe this public anger and condemnation should be directed at the lenders who thought it was a brilliant strategy to lend people more than the value of their homes, that thought it was a good idea to pool many loans together and sell them as a sound financial investment, that make possible buyers and sellers (short sales) wait for weeks while the paperwork goes through the red tape only to come back declined. But how our we treating the lenders ...

Despite the restrictions, the plan could allow some homeowners to get a deal they don't deserve; that's the unfortunate byproduct of any rescue. But the Treasury and Fed surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses.

Currently our tax dollars are helping only one of the parties in trouble. Granted their are millions more borrowers than lenders to the fix is much simpler - but this does not erase the parity of the situation. Scolding one party while favoring the other when both parties bear responsibility for the troubles is just bad policy and bad politics.

Mortgage Crisis now Mainstream

Wow - you know things are bad when the mortgage crisis makes the cover of parade magazine. The article is titled What Your Home Is Worth. While the article has some interesting quotes from alot of the usual suspects, more interesting are the five features on Where America Lives and the issuing facing them. The real stories from real people are more compelling than the quotes from the experts. Here are some of the featured stories -

Retiree Daniel Gavagan, [of Zeeland, Mich.] 57, paid $145,000 for a house in 2002 with money he earned from working 31 years in a GM plant. He sank an additional $50,000 into improvements. Happily, the appraised value ballooned to $210,000 in 2005, so Gavagan decided to sell the house.

But at the same time, Michigan real-estate prices crashed. Gavagan lowered his price to $198,500. Today, he’s asking $169,500—just enough to cover his note and pay the Realtor. The improvements he made amount to a gift to the next owner. “If people haven’t got the cash, it doesn’t matter what you do to the house. I thought I would make $12,000 on it,” he says. “But that’s gone. I’m way upside-down.”

Couple points - now upside-down on the mortgage is a mainstream term. Also, the article states that he was the house because the house appreciated so much - even though the house was $145,000 - plus the $50,000 improvements and during the peak of the bubble he was going to sell for only a $12,000 profit. It does not explain why he is still trying to sell the house even with the loss. Very interesting and alot more to the story. This would appear to be a perfect candidate for waiting it out.

Here is a story of a family on the brink-

To accommodate their growing family, Joe and Suzanne In June Dinmore [of Franklin, Mass.] converted their fixed-rate, 30-year mortgage to an adjustable loan to pay for a badly needed expansion. Then the monthly interest rate jumped beyond what Joe could pay on a teacher's salary. The bank refused to modify the loan, and the house was scheduled for auction. At the last minute, a national homeowners' advocacy group helped secure a new, fixed-rate laon. But the deal collapsed when the lender piled on back payments and penalties. "We thought we were saved," said Joe, "but now we might still lose everything.”

The family has six children and may still end up in foreclosure. But there still is a chance they could work things out. Unlike like the following called We had to walk away -

Keith and Debbie Parker [of Merced, Calif.] turned their house over to the bank when their adjustable-rate mortgage soared well beyond their means. “The house is worth $170,000 less than the loan, so we couldn’t sell,” Keith says. “My two kids were devastated, and my wife lost more than half of her daycare business, which she ran from the house.”

The family rented a nearby house. While Keith may be out of debt, his credit is ruined. “It’l l take me years to get back in the game,” he says. “But for now, we’re still eating.”

This last story does not provide enough information to see if they were walking away from a house they could afford but was underwater or walked away prior to imminent foreclosure. Those are two entirely situations. Since the article states half of the daycare business was lost and the mortgage was above their means, it was probably the later - imminent foreclosure.

There were two other stories featured - one about a couple that bought their house at a bargain and another that was able to have their unaffordable ARM converted into an affordable fixed-rate.

Walking Away and Short Sales

Calculated Risk takes a look at Walking Away and how pessimistic to be about the future. The post reviews Professor Roubini's article: The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implication. (Subscription Required)

While the whole thing is a good read - lets pull out some interesting numbers. This paragraph has so much info that it is worth taking a look at (and, yes, it really is this long) -

The argument for a trillion dollar of losses on mortgages alone is based on the following three parameters (two of which an undisputed while a third is more subject to uncertainty. First, let’s conservatively assume that home prices fall about 20% rather than 30% so that only 16 million households are underwater; this assumption is not very controversial as most now would agree that a cumulative fall in home prices of 20% is a floor, not a ceiling to such price deflation. Second, lets assume – as Goldman Sachs does – that a foreclosed unit causes a loss of 50 cents on a dollar of mortgage for the lender as, in addition to the fall in the home price one has to add the large legal and other foreclosure costs including loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale. Third, lets assume – and this is more controversial – that 50% percent of households who are underwater eventually walk away or are foreclosed. Then, since the average US mortgage is $250k total losses from borrowers walking away from their homes are $1 trillion. Goldman Sachs agrees with me on two parameters (20% fall in home prices and 50% loss on a mortgages) but more conservatively assumes that only 20-25% of underwater home owners will walk away. In this case mortgage losses would be “only” $500 billion. But home prices may likely fall more than 20% and with a 30% fall in home prices 21 million households (40% of the 51 million with a mortgage) would be underwater. So, there is certainly uncertainty on how many underwater households will walk away but given the recent evidence of subprime but also near prime and prime borrowers walking away even before they are foreclosed one can be pessimistic on this.

So the current conservative estimate is that house prices will fall 20% from peak, which will cause 16 million households underwater.

The next interesting number is that every foreclosed mortgage costs the lender 50 cents on the dollar. This makes us wonder why most lenders do not try to streamline the short-sale process. With the lenders taking such a potential hit the best thing would be to take a short sale - a known loss now rather than an unknown, potentially huge loss later. The potential costs of having a foreclosure appear huge to the lender - these include "loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale."

Lastly the prediction that 50% of those underwater will go to foreclosure or walk away. That would be 8 million households going into foreclosure or walking away.

The post concludes -

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

We think walking away already is becoming acceptable for the middle class. In someways it is even more acceptable than going into foreclosure - walking away shows some control over the situation and foreclosure illustrates none. Either way your credit score takes a huge hit. The smartest thing would for a massive industry wide push to streamline short sales. This would prevent walking away and foreclosure, while reducing the huge potential loss to the lender. It may be the only way to prevent a total meltdown. It also sounds like it would be in the best interest of the sellers, the lenders and the potential buyers.

Trust In FICO

One funny thing I have noticed is that all these well paid executives never imagined that anyone with a decent FICO score would consider walking away. In article after article industry experts and risk analysts are stunned people are doing what is best for them and their families for the immediate future - even if that might mean a hit to their credit and FICO score. My prediction is that as the numbers skyrocket bad FICOs for middle and upper incomes will become less and less of an issue. It will be what a tattoo was in the 1970s. Once just for those on the fringes, now it is they are sported by the nurses in my doctors office.

So today there is an article in the International Herald Tribune about problems arising when homeowners (should really say homedebtors) walk away.

... Rapid declines in home prices in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will sell for, removing the single most powerful incentive to keep up with payments.

The phenomenon of "walkaways" or "jingle mail," so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.

One in five borrowers under water. It is said that only about 2/3 of homeowners have a mortgage - so taking that into account then approximately 13% of all properties will be owe more than their house is worth. I wonder if the models ever took that into account...

Wachovia went so far as to change its models on how quickly loans will go bad in the face of what it called "unprecedented" changes in consumer behavior.

"I don't know where the tipping point is," said Don Truslow, chief risk officer at Wachovia. "But somewhere when a borrower crosses the 100 percent loan to value, their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up."

If you are underwater AKA upside, one has to figure out how long it would take them to break even. As the property values spiral downwards people are even more underwater. The analysts need to look at various underwater points - 1%, 5%, 10%, 25%, and 50% underwater. I can not see anyone that underwater staying put - unless renting in the area is more expensive which does not seem to be anywhere. Since people have been encouraged to view their homes as a long-term investment and retirement fund it makes sense for people to walk away. The housing paradigm has changed drastically the last ten years - if a lender paid someone to take a house - with the did with some of these 100% with cash-outs what incentive is their to stay. If your home is worth 50% less than what you owe your credit score will rebound faster than your home value will. So what have the models based on...

He added, "It's almost regardless of how they scored, say, on FICO or other kinds of credit characteristics."

FICO, a credit score developed by Fair Isaac Corp., is one of many barometers of creditworthiness used in home lending to help predict the likelihood that a borrower will repay.

Oh, of course they placed all their trusted in the FICO score. Why would someone want to hurt their credit score - self preservation is stronger than caring about ones FICO score. Modelers used the FICO score to predict future behavior but how many ran those models on properties that lost 30-40 even 50% of their original purchase price or peak value.

... Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first-mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

This is just for June, the longer and deeper the recession gets the larger and larger these numbers will become.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

Why would anyone worry about the banks - when an investment bank was given a sweetheart deal on a Sunday afternoon. While any help to the individual homeowner drags on and on and includes subsidies for big business. Everyday it seems the Federal Reserve Board is coming up with new ways to help the banks (see here and here) - other than scolding the home-owners not to walk-away what has been done for the little guy? What will be done? And when?

... While borrowers acting in their own best interests really should not shock anyone, the costs associated will be just another unwelcome drag on the economy and finance until the value of U.S. houses stops falling.

The models should be recalibrated using what would be in the homeowner's best interest rather than than relying and focusing on the FICO score. Stories abound of people having problems getting in touch with the current owners of their mortgages, top that off with the lenders rejecting short sales or making them so difficult that people who are trying to do the right thing are not able to - and there are not many choices left. People with great credit and equity are upset about losing their HELOCs. Imagine how furious the people who played by the rules (at the time even if they were too loose) only to find out they are underwater and its getting worse everyday.

Walk Away - Save $200,000

Interesting interview on NPR regarding a couple who are considering walking away. They bought their house well before the peak at $400,000 it went upto $600,000 but now it is all the way down to $200,000. That is a third of its peak value - a loss of 66% - a huge hit anyway you look at it.

Obviously they also used an ARM which makes the situation even harder. The couple realizes they are so underwater that it will take them years before they have any equity in their house. With the rate of foreclosures in the neighborhood the value of their property can fall even more - over 75 percent of peak value. Of course the house was well beyond what they need - but it was available and affordable to them so why not.

There are numerous abandoned houses in their neighborhood which is escalating the neighborhoods falling house prices. Brown lawns and signs stating a property is "bank-owned" can really bring down a neighborhood.

Here are some of the interesting parts of the interview-

The [Sinclairs] bought their house three years ago. It's 3,600 square feet, including a four-car garage and a pool. Their purchase price: $440,000.

Sinclair: But the prices kept going up. At one time, our house was worth over $600,000. In fact, a model just like this they were asking $699,000 -- and now things have entirely collapsed.

A similar house down the street is already in foreclosure and the bank is entertaining offers for under $200,000.

The Sinclairs stopped paying their mortgage in October when the payment jumped from $3,000 a month to $4,000. Now they're basically squatting in their own home, living there for free.

It's happening all over the country because mortgage companies and bankruptcy courts are so backlogged, nobody's sending the sheriff to kick people out.

The backlog in foreclosures is allowing people to stay in their homes longer. This will allow for people to build up a little nest egg before vacating a property. Probably the best thing that could happen to many people.

Sinclair: We had to start making some hard choices, which included going into foreclosure on our house and kind of starting again. We're midway through the process, about a six to eight month process and we kind of have a plan of attack. If plan A doesn't work, we go to B, C and D.

Plan A is asking the mortgage company to lower the principle they owe on the house, something Fed chairman Ben Bernanke has suggested to the banking industry.

Plan B: Try for a short sale.

Plan C: Just walk away.

Plan D: Chapter 7 bankruptcy.

These are the same choices millions of people are facing all over the country. It is unfortunate but for most people option C will probably be the best choice. It will also allow them to have the most control over their lives.

Sinclair: We would do it if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money.

The Sinclairs say they want to take responsibility for their debts, but right now it makes more financial sense not to.

Sinclair: I mean, you ask a good question. Is it really the right thing to do to let the mortgage companies take up the difference? That's a really tough ethical question.

Dan says he experienced the various stages of grief, including denial and anger. Now he's just relieved.

Sinclair: We went through months of being skinflints, because we knew that we were going into the red, so we didn't buy anything. All the sudden, we had a bank full of money and we're living rent-free, but we know that's not really our money.

... It does feel great, because all the sudden, we feel like we have a little margin now where we can go out to dinner, get a babysitter...

And they say they are paying a price. They're losing their home, most likely and their credit is shot.

This family is making a tough economic decision about what is best for them. Many people in the walking away category look at their house first as an investment not as part of their identity. When you do this it makes it a bit easier. When you realize your family is better without the house even with the hit to ones credit score. Walking away is better than sticking it out and paying the mortgage.

Most of the mortgage analysts never envisioned huge numbers of people walking away. But when your house has lost 50% or more of its value and you are underwater it is a very rational decision to walk away. In many cases it is probably the best choice they could make for their families and themselves. As it becomes more and more common to walk away it will lose a lot of its stigma.

Are they really subprime?

Just because brokers lie does not mean people are subprime. People with excellent credit were lied to and taken advantage of by mortgage brokers during the Great Housing Bubble. I know someone with good credit that is just like one of the people in this article Brokers who lie and more subprime nightmares.

Here is the first story in the article

She thought the $1,478 monthly payment quoted by her mortgage broker included taxes and insurance. In fact, Cruz says she asked the broker repeatedly if those costs were included and was reassured they were.

"We just took his word for it, and unfortunately that's not what it was," Cruz said.

Soon, she began receiving tax bills from her town of East Windsor, Connecticut. She couldn't afford to pay them.

And the second story -

Working out a new loan has also been a struggle for Odelle Boykin, a Connecticut home health care worker who housing advocates claim is a victim of a predatory lending.

Boykin says her mortgage broker promised her when she refinanced two years ago at a teaser rate she could afford that she could refinance again when the payments went up. She says when the loan was about to reset in October, with payments shooting up from $1,431 to $1,702 a month, she contacted the servicer, Fremont Investment & Loan, but the company told her it no longer handled refinancing. The payment is set to go up again next month.

We are going to hear story two over and over again. I tried warning people during the bubble - what if your broker is no longer in business in a few years or you run into problems or interest rates shoot higher before you can refinance etc. etc. etc. But the lure of cheap money and low payments was too strong for too many people. Also the idea that the smart people had ARMs and we timid conservative people were the ones going with 30 year fixeds.

Also no wonder people call it Hope No or No Hope -

Faith Schwartz, Hope Now's Executive Director, says the number of loan modifications is increasing. But she admits the vast majority are not getting their payments reduced. "If it's appropriate, they are," she said. "The key here is that it's between the servicer and the borrower. Every circumstance is different."

So other than letting the government know the particulars of your finances what good is it doing? I wonder how much worse off the Hope Now people will be as compared to the You Walk Away people. I think much, much worse.

Stand Up or Walk Away

More walking away stories today. Regardless of the other market turmoils today - people from Main Street are still trying to figure out how to deal with being underwater. The You Walk Away folks are getting so much publicity lately they should cut their advertising to $0.

Here are 2 stories from today's SF Gate article -

"It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.

The couple paid $455,000 for their Vacaville home almost three years ago, shortly after Nicklaus Skaggs returned from a year in Iraq. Now the home's value has dropped to $290,000. Their adjustable-rate mortgage, which started at about $3,000 a month, has reset twice, climbing to about $4,000.

They have no regrets about their decision.

and

A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything. Why shouldn't I be building equity over the next four to five years instead of playing catch-up?"

The man said he has not made a mortgage payment for five months.

"I'm playing the bank game," he said. "I'm playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I'm really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I'd love (to have it) lopped down to a $450,000 basis rather than $710,000."

If the bank won't negotiate, he'll walk away, the man said.

and why would they make these choices-

"In the long run, I think this is the best financial solution," Nicklaus Skaggs said. "I have to do what's right for my family. I don't care if someone judges me. I certainly wouldn't put my family in a position to lose $150,000 if I can help it."

Any way you look at it - when people realize they do not have to take these incredible losses they banks will suffer - technically. The banks will pass it on to all of us - so basically we are all underwater now, some just more than others.

These loans were made for walking

The New York Times has an article about walking away from upside-down mortgages. Here are some interesting parts -

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried....he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford.

...Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, ... Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

...The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away...“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

...But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.

The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.

...Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “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.”

The company You Walk Away sounds pretty good. I am sure there will be numerous others sprouting up all over the country. Here are some things they promise on their website -

• Your lender WILL NOT be able to call you in attempt to collect!
• Your lender WILL NOT be able to collect any deficiency or loss they may receive by you walking away!
• You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!
• You CAN have the foreclosure REMOVED from your credit!

I really can't blame anyone for not doing this. Why bother with a short sale when you can do this. As more people who use these options come forward this will be even more prevalent.