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Title: Borrowers Abandon: Mortgages as Prices Drop
Source: [None]
URL Source: http://online.wsj.com/article/SB120 ... 611.html?mod=hpp_us_whats_news
Published: Feb 29, 2008
Author: RUTH SIMON and SCOTT PATTERSON
Post Date: 2008-02-29 06:23:13 by Kamala
Keywords: None
Views: 443
Comments: 7

Borrowers Abandon: Mortgages as Prices Drop

By RUTH SIMON and SCOTT PATTERSON

February 29, 2008; Page A3

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.

Typically borrowers who turn in their keys are those who have run into financial trouble or need to relocate but can't sell their homes. But mortgage-industry executives and consumer counselors say they are starting to see people who aren't in dire financial straits defaulting on their mortgages because they don't want to pay for properties that have negative equity.

Many are speculators who had planned to quickly flip the home, but others appear to be homeowners who had second thoughts about their purchase.

"It may not be a big thing yet, and hopefully it won't be," says David Berson, chief economist for mortgage insurer PMI Mortgage Group Inc., of Walnut Creek, Calif. But if it turns out to be a significant trend, he says, it means that "delinquencies and defaults could be higher than the industry is estimating."

Some borrowers feel they have no good alternative. A tight credit market has made it tough for would-be sellers to find buyers or for borrowers looking to lower their mortgage costs to refinance.

Other borrowers are walking away in frustration because they can't arrange a workout with their lenders, says D.J. Enga, director of outreach services for Auriton Solutions, which counsels homeowners nationwide. Mr. Enga expects that 10% to 15% of the roughly 4,000 callers counseled this month by Auriton, of St. Paul, Minn., will walk away from their mortgages.

Sgt. First Class Nicklaus Skaggs is among those looking to walk way. Mr. Skaggs bought his home in April 2005 shortly after returning to California from a one-year tour of duty in Baghdad.

The $455,000 three-bedroom home he and his wife purchased in Vacaville, about one hour northeast of San Francisco, is worth an estimated $285,000 today, well below the $453,000 he owes on his mortgage. The monthly mortgage payment, which jumped after its interest rate increased, is now $4,000, up from $2,980 when he bought the house.

Mr. Skaggs expects to be redeployed to Iraq again later this year. But he can't sell his home, since there are few buyers, and he can't refinance because lenders require a large down payment he doesn't have. Now, the 18-year Army veteran has decided to walk away from his mortgage. He hopes in a few years lenders see his decision as a unique situation created by the housing meltdown. "I don't think that house is going to recover in value any time soon," said the 40-year-old. "I'd just be throwing the money away."

A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income. And even then, the number of people who walked away was relatively small. During the oil bust in the Houston area during the 1980s and in California during the early 1990s, for instance, there was a brief spate of people sending in their keys to their lenders.

What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School. He also notes that new homeowners may not have strong ties to the community.

Some borrowers, says Mary Kelsch, senior director at Fitch Inc., are less willing to make the sacrifices needed to stay in their homes, given the current environment. "It's a change of mind-set" she says. They are "looking more at their home as an investment that has lost its appreciation potential and don't really want to continue to pay."

Some in the industry want to toughen the consequences for borrowers who walk away. Executives at Fannie Mae say they are working to create harsher penalties for people who walk away from mortgages, and they plan to pursue some borrowers in court. They also want to extend the amount of time between when borrowers default and when they become eligible again for a Fannie Mae-backed loan.

"Of course, we will make exceptions for extenuating circumstances, like divorce or death," says Mike Quinn, a Fannie Mae executive. "But who we are trying to get are the people who can afford to make payments but have decided not to."

Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country's outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and Alt-A -- a category between prime and subprime -- will be attached to negative equity.

"The focus has been on the [interest rate] resets," said Goldman Sachs economist Andrew Tilton. "But if you're in a deep enough negative-equity position, defaulting has its own kind of logic."

In the Phoenix area, where home prices were off 15% in the fourth-quarter when compared with a year ago, accountant Steven Ulrich says several of his clients have recently said they plan to walk away. One client's home is now worth $100,000 less than the mortgage and the other is $60,000 underwater.

"It surprised me," said Mr. Ulrich, who works at The Focus Group in Scottsdale. "I'd never had people doing that before, if they had to it was something they were forced into. But these people are choosing it as a strategy, and I think it's going to be happening a lot more."

Some financial advisers are even encouraging homeowners who are upside down to consider foreclosure, which they see as a purely financial decision with limited negative consequences. YouWalkAway.com, a Web site started in January that offers foreclosure counseling to homeowners, advises that borrowers who default on one mortgage can typically get another mortgage between two and four years after a foreclosure. Then, "before you know it, you will have this behind you and a fresh start!" the site says.

A foreclosure will stay as a "strong negative" on your credit report for as long as seven years, though the impact on a borrower's credit score declines over time, says Mike Campbell, chief operating officer of Fair Isaac Corp., maker of the popular FICO credit score.

"Every single person we talk to either owes 100% [of their equity] or is upside down anywhere from $10,000 to $300,000," says John Maddux, co-founder of YouWalkAway.com, which charges borrowers about $1,000 for advice. Mr. Maddux says the site has received more than 190,000 visits and about 20% of their clients are investors.

Write to Ruth Simon at ruth.simon@wsj.com and Scott Patterson at scott.patterson@wsj.com

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#1. To: Kamala (#0)

Good (bad) stuff Mark. Thanks for digging out the gems and posting them. Much appreciated.

Jethro Tull  posted on  2008-02-29   8:05:34 ET  Reply   Trace   Private Reply  


#2. To: Kamala (#0)

army sergeants buy 455k homes? damn!

kiki  posted on  2008-02-29   9:27:00 ET  Reply   Trace   Private Reply  


#3. To: Kamala (#0)

"It may not be a big thing yet, and hopefully it won't be,"

If people are smart, it will be. Kind of like they woke up and said, DAMN! Maybe its time to rethink this and start to act smart, as in retrench. If its this bad now..........

is worth an estimated $285,000 today, well below the $453,000 he owes on his mortgage.

One client's home is now worth $100,000 less than the mortgage and the other is $60,000 underwater.

I must be dense, or maybe I just forgot how to do math. what happened to all of the reports I have read estimating that AVERAGE home prices have declined what, 6 or 7%? Course, I have to admit I laughed when I read those reports.... but still....

When a man who is honestly mistaken hears the truth, he will either quit being mistaken or cease to be honest. Attention, Shrub; A life of evil is ultimately a life of wretchedness.

richard9151  posted on  2008-02-29   10:10:39 ET  Reply   Trace   Private Reply  


#4. To: kiki (#2)

army sergeants buy 455k homes? damn!

LOL!! That was pretty much my reaction as well!

Talk about a dream world where only the financiers make money!!

When a man who is honestly mistaken hears the truth, he will either quit being mistaken or cease to be honest. Attention, Shrub; A life of evil is ultimately a life of wretchedness.

richard9151  posted on  2008-02-29   10:11:41 ET  Reply   Trace   Private Reply  


#5. To: Kamala (#0)

But these people are choosing it as a strategy, and I think it's going to be happening a lot more."

Can't say that I blame them.

Fred Mertz  posted on  2008-02-29   10:33:23 ET  Reply   Trace   Private Reply  


#6. To: Jethro Tull (#1)

I know only a portion of the articles get read, many get skipped, but it doesnt matter, I'll keep putting them up.

Mark

If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower

Kamala  posted on  2008-02-29   15:36:55 ET  Reply   Trace   Private Reply  


#7. To: Kamala (#6)

I know only a portion of the articles get read, many get skipped, but it doesnt matter, I'll keep putting them up.

Good...we ARE reading. :-)

Remember...G-d saved more animals than people on the ark. www.siameserescue.org

who knows what evil  posted on  2008-02-29   16:00:09 ET  Reply   Trace   Private Reply  


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