Foreclosure 2.0: Mortgage Running

mortgage runningThere’s a disturbing trend developing in the real estate market today.  I have no scientific data to support this trend.  I didn’t hire a consulting firm to do market analysis for me to come to this conclusion.  It’s more than just a hunch.  I sense an avalanche, or perhaps a tsunami coming.  All types of people I meet in the online and offline world are grumbling about it.  Here it is:

Honest, hard-working Americans with integrity and significant cash reserves, including many with deep religious faith and beliefs, are giving up on the dream of homeownership.

I’m not the first to notice this trend.  In an article written on February 8th, 2008 in the Wall Street Journal called ‘The Rise of the Mortgage Walkers’, it was reported that “The apparent willingness of borrowers to ‘walk away’ from mortgage debt has contributed to extraordinary high levels of early default on loans issued during the 18 months before the mortgage bubble burst.”

But many industry experts expected mortgage walking to cease when the $750 billion TARP plan was rolled out last fall.  The banks, presumably flush with cash and performing assets on their books, would be more agreeable to modifying loans and helping distressed homeowners stay in their homes.  Instead they stuffed the money under their mattresses to improve their balance sheets and kept rolling along with record foreclosure filings nationwide.

running awayAs a result, property values have continued to spiral downward and even the most responsible homeowners find themselves stuck in homes worth half of what they paid for them.  Among these homeowners, what is most stunning is the emotional transition that has taken place over the past six months.  They no longer have any attachment to the home.  Therefore, the decision to run, not walk away from the home is business, not personal.  Forget about the fact that they signed a promise to repay the lender.  Forget about the fact that their credit will be negatively affected and forget about the fact that everyone they know will find out that they lost their home in foreclosure.  All of this pales in comparison to losing hundreds of thousands of dollars on a place to live.

In fact, outside of a tarnished credit report, for primary homeowners there is very little at stake in walking away from a mortgage.  In Arizona, for example, banks are forbidden from getting a deficiency judgment against a borrower if the loan was used to purchase the property (refinancing and home equity lines of credit don’t count) as long as the dwelling is four units or less and sits on 2.5 acres or less.  It doesn’t matter if the home was an investment property or not.  And, in January of 2007 the IRS changed their guidelines and no longer count forgiven debt (from a short sale or foreclosure) on a principal residence as a taxable gain.  This means that if you walk away from your primary residence your only concern is about a 100 point loss to your credit score.

Armed with this information most homeowners are packing up and moving on.  They aren’t walking anymore, they’re running.  Until the banks begin to voluntarily reduce principal balances on all mortgages to within 10% of market value, regardless of whether or not the homeowner is current, this mortgage running problem will not cease anytime soon (see The Missing Piece of the Foreclosure Solution by Jim Randel, 6/6/09).

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1 Comment

Filed under Homeownership

One response to “Foreclosure 2.0: Mortgage Running

  1. Real estate is one of the biggest business in the world. To be a
    successful investors you have to be familiar with marketplace. One
    should check the property market value, condition and location before he
    buy and invest on any type of property.

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