Tiffany B. Brown

a mish-mosh of stuff

On the housing crisis and walking away

Yet there is an inherent imbalance in the borrower-lender relationship that makes this morality message unfair to consumers, White says: Banks set the rules during the housing boom, handing out home loans with no down payments, no income checks and inflated appraisals. Now that property values have dropped 20% to 50% in many areas, banks have been slow to modify troubled mortgages and reluctant to reduce principal debts.

Kenneth R. Harney paraphrasing University of Arizona law school professor Brent T. White in the November 29th Los Angeles Times article Professor advises underwater homeowners to walk away from mortgages.

Sadly, Georgia does not make this easy. In Georgia, banks can, by law, sue you for what you owe if you go into foreclosure. They usually don’t, but now that times are hard all the way around, I wouldn’t be surprised if they started. While I wish I had been a more savvy home buyer,* I also think it’s a special kind of f*cked up that I and others like me — who didn’t borrow more than I could afford, and bought a modest house — am now forced to choose between my good name (credit) and my financial future.

Home values in some metro Atlanta neighborhoods have dropped between 25% and 50%. How much values have dropped isn’t clear because county appraisals aren’t taking foreclosures into account. My county appraisal was about $40,000 higher than the most recent home sale on my street and yet was about $40,000 less than what I owe.

Assuming the market stopped tanking tomorrow, it would take about 25 years for my house to return to its supposed value when I bought it in 2007. In 10 years — three more years than it would take for a foreclosure to roll off of my credit report** — I will still be underwater to the tune of $20,000.

That, my friends, is some bullsh*t.

Hat tip: JT

* Had I paid attention to recent home sales, I would have realized that my house was suspiciously over-valued for the ZIP code. But I bought the house under duress and didn’t do as much research as I should have.

** Assuming that my mortgage servicer didn’t sue me.

  • Matthe MacCarthy

    I take issue with those who advocate “strategic default,” i.e. walking away from a home with negative equity because of the expectation that the deficit is too substantial to overcome. Setting aside the moral discussion, some of which strikes me as a bit paranoid, there are a number of reasons borrowers should stick it out:

    1. A home is the single largest investment an individual can make, and has been shown to be the fulcrum that leverages families up the socio-economic ladder. Abandoning all chances of this asset recovering value is like signing over your 401k some stranger because it lost money. As the housing market normalizes – we have had 12 recessions in the country's history and 12 recoveries – so too will your loan-to-value ratio and, therefore, your home's value to you.

    2. What if we took the kind professor's advice and all underwater borrowers vacated their homes? Right now, the nationwide delinquency rate is just over 10 %: including negative equity folks pushes this number higher to double that, or more (there are a number of folks current on their mortgage payments with negative equity) who “should” be walking away. So, that would mean a flood of homes for sale on the market as 15-25% of residential housing units inexplicably go on sale. You think your housing value is low now? As of the last census, that would mean an additional 18 million homes on the market. Overnight.

    3. Recent studies on strategic default have shown that the probability a borrower will do so increases as those around them abandon their homes. This implies the rough estimates above could be even worse. Which is very, very scary.

    What the housing market needs is a reality check, not an irrational shock to its system. I agree that servicers have been slow to react to the mortgage crisis, and are still reluctant to make the hard choices (i.e. workouts with principle AND interest rate reduction components, which are the most effective remedy.) But by giving away your most precious asset, you forfeit all chances of getting back to even.

  • tiffanybbrown

    “A home is the single largest investment an individual can make, and has been shown to be the fulcrum that leverages families up the socio-economic ladder.”

    Except when it it's not. My net worth is -$110K right now. That is DOWNWARDLY mobile in a big, big way (about 1/4 of that is credit card debt). You only have leverage when you have positive equity. You only have wealth if you have positive equity.

    In some previous local housing busts, home prices took a decade to recover from *single-digit* price drops. Houston's home prices dropped 21% and took 7 years to recover. Hartford dropped 23% and took 13 years. Source: http://money.cnn.com/2002/12/02/pf/yourhome/q_h…

    Values in some neighborhoods have dropped by 50%. FIFTY PERCENT. Home values would have to return to boom-level appreciation in order for an individual to recoup those losses within a decade. Even if the mortgagee aggressively paid down the principal, she would owe less. But — and here's where my understanding of equity gets fuzzy — she wouldn't necessarily have more equity or net worth if the home's value remains low.

    That's the sad truth about real estate: for many Americans, there is a very real possibility that their home's value will appreciate so slowly that it remains below what they owe for the next 10, 15, or 20 years. This is true of your average house in your average neighborhood in America. And in predominantly black neighborhoods the possibility of low property values tips towards probability. Not only were home values were ridiculously inflated in many of those ZIP codes, but the pool of potential buyers is smaller and tends to have less home buying power.

    Remember, neighborhoods can and do hit the skids. Values can decline over time, even without an economic crisis. By staying, underwater mortgagees run the risk that their bad investment could become a worse one.

  • tonycartman

    Georgia bank really have some advantage. This isn't good for the homeowner that is fighting against foreclosure…

    Regards,
    Tony
    http://www.georgiaforeclosuresforsale.com/

  • tonycartman

    Georgia bank really have some advantage. This isn't good for the homeowner that is fighting against foreclosure…

    Regards,
    Tony
    http://www.georgiaforeclosuresforsale.com/