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To walk or not to walk: underwater homeowners face dilemma

DEERFIELD BEACH, Fla. – March 9, 2010 – Michael Keigans is “underwater” on his mortgage, owing $80,000 more than his Deerfield Beach house is worth.

Keigans figures it could take a decade or two to recover the lost equity, so he’s tempted to walk away, even though he has the money to pay. “Why keep putting money into a house that’s going down in value?” he asks.

It’s a question being debated in many households nationwide as the housing crunch continues. Some borrowers feel they have a moral obligation to pay the mortgage, but a growing number of homeowners and consumer advocates say walking away could be a smart business decision.

The scale of the problem is daunting: More than half of all residential mortgage holders in Broward County are underwater, California research firm First American CoreLogic said last week. In Palm Beach County, nearly half of mortgage holders fall in that category.

And there are several reason for the crisis: Homeowners who now are underwater have seen their property values plummet after they paid peak home prices from 2004 to 2006. Many of these borrowers bought with adjustable-rate mortgages, putting little or no money down. Some are underwater because they refinanced their homes at the market’s peak.

So should they walk? Hundreds of thousands of people are doing just that.

Keigans, 36, is considering it, too. First, he wants to try to unload the house in a short sale, in which a buyer would agree to pay current market value – probably no more than $200,000 – and his lender would forgive the remaining debt. If that doesn’t work, he sees little choice but to walk away.

But borrowers have to weigh several practical considerations of so-called strategic default. They risk being sued by the lender for the unpaid mortgage balance for up to 20 years. Their credit will take a huge hit, making it difficult to get a credit card or a car loan. And the poor credit rating could affect future employment and mean higher auto insurance rates.

Some homeowners, unable to strike deals with their lenders, are willing to face those consequences for the opportunity to shed burdensome mortgages.

“There is no easy way out,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

In a recent study, global information services company Experian and consulting firm Oliver Wyman estimated that 588,000 borrowers nationwide chose to walk away from their mortgages in 2008, up 128 percent from 2007. The taboo of abandoning homes appears to be dissolving amid the mortgage meltdown, the report said.

Those who walk away and let their homes fall into foreclosure can expect to see their credit scores drop by 200 to 300 points, said Shari Olefson, a Fort Lauderdale real estate lawyer. Foreclosures stay on borrowers’ records for 10 years, and they won’t be able to get other mortgages for at least two or three years, she said.

“We should be encouraging people to meet their obligations,” said Olefson, author of Foreclosure Nation, a book about the housing downturn. “It’s the right thing to do. We should be setting a good example for our kids.”

Florida law allows lenders to seek personal judgments if homeowners default on the mortgage. The increase in homeowners walking away likely will result in more lawsuits from lenders seeking to recoup losses, credit counselors say.

There may be tax issues, too. If lenders forgive the mortgage debt, borrowers who walk away from investment properties risk having to pay federal income taxes on the forgiven amount. Forgiven mortgage debt through 2012 is not taxable income on a primary residence as long as the debt was used to buy or improve the house.

“We don’t think [walking away] is a good option for homeowners,” said Nancy Norris, a spokeswoman for banking giant Chase, which lends in all 50 states. “A mortgage is a contract. We expect you to pay the money back that you borrowed.”

But sometimes that doesn’t make financial sense, said Brent White, a University of Arizona law professor who wrote a research paper in December on underwater borrowers.

White contends that most underwater homeowners stay put to avoid the stigma of foreclosure and because of the “exaggerated anxiety over foreclosure’s perceived consequences.” Borrowers who have good credit before they walk away can rebuild their credit rating within two years of the foreclosure, White wrote.

He said homeowners should make decisions in their own best interests, without worrying about “unnecessary shame and guilt and fear.”

Lenders and other businesses break contracts without considering morals or ethics, White said.

He points out that securities giant Morgan Stanley announced plans in December to hand back to its lender five San Francisco office buildings to get out of the loan obligation.

“We have a double standard,” White said. “It’s indefensible.”

But legal, Cecala said. Businesses often buy assets by setting up corporate entities that protect them from liability. Generally, most underwriters for residential mortgages require borrowers to be on the hook personally.

Edward Sunshine, a theology professor at Barry University, says borrowers and businesses should honor their contracts if they have the financial means to do so. Deciding to walk away from a mortgage in anticipation of financial problems that have not yet happened is rationalization, he said.

“Our whole economic system is based on trust,” he said. “It is important for people to fulfill their obligations and do what they said they’d do.”

Keigans, the Deerfield Beach homeowner, bought the property for $327,000 in 2005. He didn’t make the February mortgage payment of about $2,100. And if he walks, he thinks he’ll be able to rebuild his credit faster than the house would regain the value of his mortgage.

He said he doesn’t feel the least bit guilty. He blames the banking industry for creating the mortgage mess by lowering lending standards to make homeownership attainable for many Americans who couldn’t comfortably afford it. The increased demand helped push prices to record highs.

“The financial minds that made these decisions had to know that someone making $40,000 a year couldn’t repay a $400,000 loan,” Keigans said.

Boca Raton resident Hilton Wiener said reaching out to lenders often is a waste of time.

Wiener, a Fort Lauderdale lawyer, has tried unsuccessfully to make deals with his lenders on 10 underwater investment properties he owns across Florida. But he said they wouldn’t work with him, either refusing to take back the properties or rejecting offers for short sales.

Unwilling to deplete his savings to cover the mortgages, Wiener has stopped making the payments. He said his first responsibility is to his family – not the banks.

“You have to make choices in life,” he said.
 
Copyright © 2010 Sun Sentinel, Fort Lauderdale, Fla. Paul Owers. Distributed by McClatchy-Tribune Information Services.

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WASHINGTON – March 17, 2010 – The government keeps promoting programs designed to help existing homeowners refinance their mortgages at a lower rate, as well as get perspective buyers into homes. In other words, Uncle Sam says he’s here to help.

“Phooey,” say homeowners and prospective homeowners, who keep complaining that it is ridiculously hard to get a mortgage or refinance one.

Can both sides be right?

Unfortunately, yes. But if you are willing to do a bit more work than in the past, it is possible to lower your mortgage rate to 5 percent or arrange to buy your first home. It is clear that there is pent-up demand to do both.

Seemingly qualified buyers keep telling me they can’t get a mortgage. According to Credit Suisse (CS) and others, more than one-third of homeowners hold a 30-year conventional mortgage at 6 percent or higher. I will tell you what you need to do, but first we must understand what is going on in the marketplace.

A demanding lending landscape

Today it is unquestionably more complicated and difficult to get a home loan than it used to be. Burned by the recent housing meltdown they helped to create, lenders currently go over every requirement with a fine-tooth comb. They are looking for higher credit scores and more money down.

Still, the situation is far from hopeless: Loans at attractive rates are still available for those with less-than-perfect credit and minimal-to-no equity.

How should one negotiate the landscape? I checked with industry experts and here’s what I learned: Banks and mortgage brokers can still get you a mortgage of $417,000 or less at the best rates through Fannie Mae (FNM) and Freddie Mac (FRE) programs if you have a credit score as low as 660 and can put 20 percent down. Jumbo loans, those greater than $417,000, remain more expensive.

What about more complicated scenarios? I checked on a number of specific situations – for example, people who can put 20 percent down but have a credit score of only 630, or people who have a score of 630 and only 10 percent to put down. I found these deals can get done but, not surprisingly, you will pay an additional quarter- or half-point. This means that instead of getting a 30-year mortgage at 5 percent, you would have to pay from 5.25 percent to 5.5 percent. Not too bad.

What about tougher scenarios, such as trying to buy or refinance with average credit, but zero to negative equity? According to expert Brian Fishman of Illinois-based DB Diamond Mortgage Group, the zero-down days are over, apart from incentives such as the soon-to-expire homebuyer credits.

Refinancing is possible, however. Freddie Mac has refinance opportunities for those with mortgages of up to 105 percent of their appraised value. Fannie has them for up to 95 percent. The lower credit and low-or-zero-equity deals will cost at least a point or more above published rates. But it might get done.

Don’t assume your hands are tied

Believe it or not, even if your first and second mortgages total 125 percent of the appraised value, Fannie or Freddie may yet have programs that will refinance the first mortgage at a reasonable rate, as long as the second-mortgage holder doesn’t object. Since every scenario is different, I’m not suggesting that you refinance this type. I’m simply suggesting you weigh all reasonable options vs. assume that you have no choices.

How can you determine which opportunities are available to you and which best suit your particular circumstances? I’m still a big fan of doing homework. I recommend that you consider seeking input from multiple sources, such as your current servicer, your local bank and your mortgage broker, and your local real estate professional.

To start, I’d suggest a reputable mortgage broker. While they are being paid a commission by lenders to help place you with them, they will often get you an equal or possibly better rate by shopping for you. You are also more likely to know where you stand among the various options before you get bogged down with paperwork.

In a nutshell, if you have credit scores in the low 600s or higher, 10 percent or greater equity in your home, and you’re paying above 6 percent, you should be shopping to refinance. If you’re in the market to buy a home, set these levels as your minimum standards, understanding that the better your credit and the more you can put down, the better your chances of getting the lowest mortgage rate available.

No matter what you do, remember that you have options and should do your homework. If you find that you’re so far under water that nothing seems to make sense, maybe it’s time to seek an alternative strategy, such as a short sale.

Copyright © 2010 The McGraw-Hill Cos., Marc Roth. All rights reserved.

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