More California homeowners walk out on mortgage

By TIM SHEEHAN
McClatchy Newspapers


A generation ago, a house was more than a house.
It was part of the "American dream." And foreclosure was a horrifying but unlikely prospect for families who plunked down their savings and took out mortgages to become homeowners.
But a two-year recession has driven foreclosures to a record pace. For many families whose homes are worth far less than what they owe, financial and emotional stress is changing the "stay-at-all-costs" mindset.
In areas hardest hit by plunging real-estate values - including the San Joaquin Valley - some people who can afford their mortgage are opting to walk away from their loan and let their bank repossess the house.
"It's very stressful to get to that point," said James Graham, a 48-year-old power-plant worker who walked away from his home in Bakersfield last fall. "You're raised up to do the right thing and pay your mortgage, pay your bills."
"But when you get to that point where it's time to walk, it's time."
It's called "strategic default," and experts say it stems from frustration with home values that have plummeted since buyers bought or refinanced at the peak of the real-estate boom, and banks dragging their heels on loan-modification requests.
"If you've got a mortgage that's $400,000 and the homes around you are selling for $150,000 ... it doesn't take a rocket scientist to figure out there's a compelling reason to walk," said Robin Kane of RCK Organization, a Fresno property broker. "Especially when you find out the guy across the street is renting for $1,200 a month and your mortgage payment is $3,600 a month."
There's no definitive figures on how many mortgage defaults are by choice versus crisis. But a recent survey by the University of Chicago suggests that about one-third of U.S. home mortgage defaults are strategic.
"Foreclosure is no longer the 'F-word,' " said Jon Maddux, CEO of YouWalkAway.com, a San Diego company that charges a fee to coach homeowners through the foreclosure process. "There's much less stigma attached to it now."
With foreclosure and mortgage delinquency rates in the San Joaquin Valley among the highest in the country - and uncertainty over how long it will take home values to recover - experts believe strategic defaults in this region will increase.
A GROWING CONCERN
"People are walking away from homes in every county in California," said Walter Dees, the Los Angeles-based lead housing counselor for the nonprofit Clearpoint Credit Counseling Solutions. "They don't see the value of continuing to pay for a house that will take 10 years or more to regain the value it had before."
Many in that situation don't feel like they're getting the help they need from their lender, Dees added. "People are trying to do modifications first, and depending how that goes, frustration sets in and they start talking about walking away."
Economists estimate that about 25 percent of U.S. mortgage borrowers are "under water," owing more on the loan than the home is worth. In the San Joaquin Valley, where median home values have fallen by 40 percent or more since 2006, nearly half of home mortgages were under water by the end of 2009, according to CoreLogic, a real-estate tracking company in Santa Ana, Calif.
Graham, a control-room operator for a power plant, bought his three-bedroom, two-bathroom Bakersfield home for about $162,000 in 2003. As property values roared upward in 2005 and 2006, lenders inundated Graham with offers to refinance against the rising value the house.
"People were just dying to give me money and I was just dying to take it," said Graham, who eventually refinanced for $320,000 to consolidate some other debt. "I thought I'd always have my house to back me, that it would keep going up in value." But when the market collapsed, "my house was worth 60 percent of what I owed."
Graham was transferred for work to Sacramento and had no takers when he tried to sell his home. Rent in Sacramento and mortgage payments in Bakersfield "financially drained me to the point where something had to break," he said. "It was so stressful, I decided to let (the house) go because it was just eating me up."
Graham's home was taken over by Fannie Mae in August, and a new owner bought it in December for $171,000. But Graham, who transferred back to Bakersfield and now rents an apartment there, doesn't regret his decision despite a sizable knock to his credit score from the foreclosure.
"It was very hard to get to that point where you actually make that choice," he said. "It's such a prideful thing when you're used to making your payments. ... But my life has improved greatly since I walked away from that mess."
A SENSIBLE CHOICE?
For homeowners who owe substantially more than the home is worth, an Arizona law professor suggests walking away makes more economic sense than continuing to throw money at a mortgage.
"Millions of homeowners could save hundreds of thousands of dollars by strategically defaulting on their mortgages," said the University of Arizona's Brent T. White in a discussion paper published earlier this year.
"Homeowners should be walking away in droves. But they aren't," he said.
The reasons, he added, are more emotional than financial: "the desire to avoid the shame or guilt associated with foreclosure," and "fear over the perceived consequences of foreclosure."
A national housing survey made public in April by the Federal National Mortgage Association, or Fannie Mae, shows the considerable cultural pressure to hang in with a mortgage.
"The public (still) strongly believes in the importance of upholding the financial commitment involved in buying and owning a home," Fannie Mae CEO Mike Williams said, "even during these challenging times when home values have fallen."
The Fannie Mae survey revealed that almost 90 percent of Americans, and about 70 percent of mortgage borrowers who are delinquent on payments, "do not believe it is acceptable for people to stop making payments on an underwater mortgage." But borrowers reported they were twice as likely to consider stopping payments if they knew someone else who had defaulted.
FACING CONSEQUENCES
Like any foreclosure, a strategic default leaves a scar on a borrower's credit history.
Credit counselor Dees - whose housing counseling program is underwritten by an assortment of federal grants and grants from banking organizations and other industries - said many of his clients are frustrated after their bank has denied a plea for help, especially after so much news about bank bailouts and government programs to modify loans.
"One of the first things we explain is that you're not hurting the bank by walking away," Dees said. "You're only putting yourself in a worse situation."
While still a red flag, either a short sale - in which a bank agrees to let the owner sell the home for less than the balance owed - or a deed in lieu of foreclosure "look more favorable on a credit report," Dees said. "It's much better to work with the lender to get it sold the right way."
Maddux and White suggest that the effects of foreclosure are overblown.
"The perception is grossly misrepresented," said Maddux. "The damage isn't as bad as people think - it's about 100 (to 125) points on a credit score."
White said most people "can expect to recover from the negative impact of foreclosure on their credit score within a few years." By renting for far less, they can apply the rest of their mortgage payment to get ahead on other bills, he said.
"The financial costs of foreclosure, while not insignificant, are minimal compared to the financial benefit of strategic default, particularly for seriously underwater homeowners," White wrote.
Kane, the Fresno broker, said he believes a modest surge in consumer spending across the country may be in part because more people have stopped making mortgage payments.
"When you've got 7.9 million mortgages in the United States that are delinquent or in default, that money is going somewhere else," he said. "These people are doing something with their money."
Part of what is slowing down bank willingness on loan modifications, he added, are credit checks that reveal many delinquent borrowers are current on their credit cards, medical bills or other expenses, Kane said: "The only thing in delinquency is their mortgage."
EMOTIONAL DISCONNECT
Kane said the latest generation of homeowners views real estate differently than their fathers and grandfathers.
"Up until this decade, people bought a home because they wanted a place to raise their kids," he said. "They wanted good neighborhoods, good schools."
Now, however, "What was an American dream became an asset to trade," he said. "There's no emotional attachment to an investment. ... And the older generations are perplexed by that attitude."
Adding to the detachment, Kane said, are the changes in banks and the entire process of dealing with loans.
"Years ago, you went to the bank, met with someone who trusted you and loaned you the money. Those days are gone," he said. "The moral justification not to walk is really diminished because the relationship between the borrower and the banker is gone."
As more mortgages are sold to other servicers as investments, Kane added, "when you call about your loan, you're not a person. You're a number on a computer screen in India."
Despite incentives from the federal government to modify loans for struggling homeowners, Kane said banks have been largely disinterested in working out mortgage modifications that involve reducing the principal owed to reflect the deflated value.
But, he added, a rise in strategic defaults may work to bring more bankers to the table to work with borrowers on loan modifications and avoid the costs of a foreclosure.
"As long as someone keeps making their payment, there's no reason for a lender to step up and give you a break," Kane said. "The best thing about this is that lenders may finally get serious about modifying loans."