One some level,
walking away just makes sense,
especially in jurisdiction where mortgage financing is non-recourse
- meaning the lender cannot go after the homeowner for the
deficiency. Even in jurisdictions where lenders can pursue
collections against the homeowner for the balance due after
foreclosure, I don't believe it is routinely done. Perhaps that is
because the deficiency judgment is too cumbersome or expensive to
obtain, or maybe it just isn't worth it if the homeowner has few
other assets to make collections practical. So what is
the consequence of giving up on repaying a mortgage and allowing
the home to go in to foreclosure?
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At this point, the consequences remain serious. For someone
with pristine credit, a foreclosure could mean a drop of 200
points overnight, said Craig Watts, a spokesman for Fair Isaac
Corp., which developed the nation's most widely used scoring
formula, FICO.. . . "A foreclosure is a serious delinquency, and it is in the
same category — as far as a credit scores go — as a bankruptcy or
a tax lien," Watts said.
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Many of those walking away are already delinquent and the
additional hit they may take on their credit score isn't considered
a major deterrent. Even some who could afford to make their
payments are dropping keys in the mail because they have very little
invested in their home. And, the value has fallen so much that they
no longer see their home as a good investment.
This is the biggest problem with the creative financing options
we have had for the past decade. No money down or very high
loan-to-value mortgages have allowed many people to become
homeowners. But the reality is that these people don't fee as much
like they own their home as they feel they are renting from the
bank. Frankly, if you have no equity, what exactly do you own?
With the record number of foreclosure, we will see many people
with plummeting credit scores. That may mean that they will have
trouble obtaining credit cards and car loans, which will have an
impact on our economy generally. In addition, potential landlords
and some employers routinely run credit checks to determine the
level of applicants' responsibility. So, these people may also find
it harder to rent a home or obtain meaningful employment.
It has been suggested that a foreclosure may not be such a
serious problem in the future because it will be somewhat common.
Sure it will impact the credit score, but in a few years when the
person reviewing the credit score sees a foreclosure in 2008 or
2009, they may just say "oh, that was in the midst of the mortgage
and credit crisis... everyone was having problems."
"The more the house is underwater, the more people are likely
to walk away from a house and go rent rather than keep money tied
up in it," said Todd Zywicki, a professor who specializes in
bankruptcy, contracts and commercial law at the George Mason
University School of Law.
"The traditional restraint on this has been that people have
been concerned about the impact on their credit scores ... but
with the large number of foreclosures that we have been going
through, my guess is that in a couple of years, a foreclosure is
not going to look quite as menacing as it does now."
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A generation ago, this would not have been such a phenomenon.
When lenders required a meaningful down-payment to purchase a home,
people worked hard and saved to obtain the American Dream.... they
earned it. They had a vested interest and they actually owned
something.
Here is something to think about -
the banking industry and Republicans in Congress vehemently oppose
changing the bankruptcy laws to allow for mortgage relief in
bankruptcy court. The most common reason they cite is that everyone
will pay higher interest rates and down-payments because of the
losses that lenders will suffer.
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Most congressional Democrats say the quickest way to save
homeowners like Troy Butler of Saginaw, Mich., is to let them
declare bankruptcy and allow judges to dictate new mortgage terms. [T]he lenders that would absorb the pain — and lose control of
any deals to ease the terms — do not want to get dragged into
bankruptcy court by millions of overextended borrowers...
The chief lobbyist for the Mortgage Bankers Association, Steve
O'Connor, said new homebuyers would end up paying higher
interest and bigger down payments if lenders are saddled with
the risk that a judge could change mortgage terms.
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But, what does it do to mortgage rates when homeowners are
willing to simply walk away from their mortgages because they don't
have anything personally invested?
Losses in foreclosure are around 40% - if the bankruptcy changes
were to pass we are only talking about modifying the interest rate
by a couple of points to make the payments more affordable. It
would seem that we are seeing larger losses from jingle mail that we
would face if the bankruptcy laws were modified. And, the homeowner
is taking about the same drop in their credit score whether they
choose to mail their keys back to the bank, or file for bankruptcy.
It seems that most Democrats in Congress and President Obama
support bankruptcy reform as a part of the solution to our current
crisis.
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A bill to give judges authority to alter loan terms for primary
residences may be the quickest way to arrest the housing market's
collapse. Most Democrats in the House and Senate support that
plan. President Barack Obama told Democratic leaders Friday he
also backs it, according to a Senate aide who was not
authorized to be quoted by name. |
However, President Obama has asked that it be removed from the
economic recovery package to ensure that it doesn't delay its
passage.
Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill,
said Obama persuaded him in a White House meeting Friday to
remove the bankruptcy proposal from an economic recovery package —
to ensure it doesn't jeopardize the stimulus bill. But Obama
pledged his support for the bankruptcy solution, Durbin said.
Obama said he would work with Durbin to attach the proposal
to other "must pass" legislation — with the hope that
supporters of the overall bill would not vote against it because
of the bankruptcy provisions.
We might see bankruptcy changes in the future, but how many
borrowers will lose their homes in the mean time? I hope this isn't
one of those things that finally passes when its no longer needed.
Perhaps instead of mailing keys back to the lenders, those facing
imminent foreclosure should send a little jingle mail to their
congressmen. Let them know that they could have kept their
family in their homes if they were able to get a little relief in
bankruptcy. If only Congress would force lenders to take a loss of
a couple of points on the interest rate rather than let them choose
to lose 40% in foreclosure.
