Just Because you Crawl Today, Doesn’t Mean you Won’t Walk Away Tomorrow from a Home: The Next Chapter in the Foreclosure Cri

This weekend I’ve gotten many e-mails talking about the walking away “myth” and an onslaught of articles now addressing the issue. For those of you that read many of the economic and housing blogs, this is something you are already familiar with. In fact, there has been a sudden shift of trying to define what constitutes an actual “walkaway” from a home. The underlying assumption of a walkaway is when a homeowner who has sufficient income to pay for a mortgage chooses not to do so for various reasons. Typically, the primary reason is being underwater, that is owing more than the home is worth. There are a few articles that came out this weekend talking about walking away as being a myth: In mortgage market, ‘walkaway’ homeowners may be urban myth Mortgage Holders Find It Hard to Walk Away From Their Homes Saying that walking away is a myth only provides a narrow perspective on the shifting psychology which is occurring in the current housing market. I think these stories were spurred by the high profile case of Jose Canseco walking away: “Even so, the idea that some people are simply refusing to pay their mortgages has gripped the popular imagination. The notion picked up momentum in the last few weeks after “Inside Edition,” the celebrity-focused TV news program, reported that Jose Canseco, the former American League most valuable player who made millions during his baseball career, abandoned his $2.5 million mansion outside Los Angeles to move into a smaller property.” “You look at the Jose Canseco issue and say that it’s a walkaway, but he is probably the only person on his block that did that,” said Robert Padgett, director of loss mitigation for Freddie Mac. “Those types of stories garner a lot of attention,” he added, but they are “isolated occurrences.” The story was also picked up by the Wall Street Journal : “Mr. Canseco, 43, who retired in 2001, told the celebrity TV show “Inside Edition” that it did not make financial sense to keep his 7,300 square-foot home in the Los Angeles suburb of Encino. “Inside Edition” said it had foreclosure documents showing Canseco owed a bank more than $2.5 million on the house, Reuters reports. “I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else,” he said.” Clearly the situation here is unique but the mentality behind it is something we are going to have to get used to especially here in California. Anyone thinking that people are not going to walkaway in the next few years in California is going to be just as shocked as Ben Bernanke when he stated that the subprime issues were contained. Just because it hasn’t happened on a large scale doesn’t mean it won’t. Mr. Canseco also gives us the insight into his walking away: “Canseco said the foreclosure was not a difficult issue emotionally. But he sympathized with the millions of other Americans who have already lost or face losing their homes because of soaring interest rates on sub-prime loans “I decided to just let it go, but in most cases and most families, they have nowhere else to go,” he said. It was not clear from the “Inside Edition” report, Reuters reports, where Canseco was now living. Canseco said a good portion of the money he earned in his heyday went to pay for his divorces. “I had a couple of divorces that cost me $7 or $8 million,” he said.” Given the cost of his liabilities, walking away may have been the wisest financial option. Interestingly enough, you can see the psychology of so-called affluent folks and how they view themselves as “prime” owners while those that lose their home due to financial strain or having subprime loans is somehow a different beast. If you are to read the articles, you will see that most people that do intentionally stop paying their mortgages are usually speculators. But again, how in the hell does the industry know who consciously decides to stop paying and who stops paying because of financial strain? It is the case that mortgage lenders have a hard time getting a hold of their own clientele! How much? How about 30 percent in some cases: “Mortgage lenders hunting for delinquent homeowners who have dodged their phone calls and letters are employing aggressive new methods to track them down, potentially making every knock on the door or fancy envelope seem like part of the pursuit. Even wedding invitations are suspect. …Wells Fargo estimated that it had no contact with about 30 percent of delinquent homeowners who went into foreclosure in 2006. Last year, it began testing envelopes in bold or unusual colors or resembling wedding invitations. Last month, it began experimenting with offering $250 gift cards to delinquent borrowers who had been unreachable, said Joe Ohayon, a Wells Fargo vice president.” Of course these people are not walkaways but simply subprimer’s who are “bad” while “good” affluent folk will keep making payments on their home. Anyone believing this is in for a world of shock these next few years. Keep in mind Southern California was still positive until the later part of 2007! In fact the Southern California region was up on a year over year basis up until August of 2007: August Data: Median Southern California Home Price: $500,000 (year over year change, +2.7%) Now of course, I am being very specific here and going out on a limb saying that California will see a large increase of folks intentionally letting their mortgages go even if they can pay for it. There is a tipping point emerging where people are pushing themselves away from heavy liabilities including buying large SUVs because of the associate costs. It is the case that California has a ridiculous budget short-fall that is now at $20 billion which by the time we hit next month, will probably grow another billion or so. How is it the case that when these lenders cannot reach these people they have an idea behind the psychology of those defaulting? How do they know?  It isn’t like you are going to pick up the phone, call your lender and say, “hey there lender.  I overpaid for my home two years ago and guess what, I think I’m going to stop making payments.  Is that okay with you?” You either are betting that lenders have better data than we do but clearly the way the market is imploding they had no freaking clue what they were doing and dishing out mortgages to anyone so I take their data with a grain of salt. And let me present to you the biggest leading indicator of why walkaways will be catching on: *source: Zillow *source: Zillow As you can see from this chart, we now have folks that bought from 2004 in negative equity positions. But wasn’t Southern California in the green in August of 2007? The rules have changed incredibly fast and that sticky market correction went out the window. Assuming that California has more to decline (it is already down according to the California Association of Realtors by 30% from a year ago in price from the peak) this chart is going to push further back. Each subsequent decline by definition is going to put folks in more negative equity positions. Yet according to some folks homeowners don’t have the mindset of investors: “In fact, researchers say the rich are no more or less likely to walk away - “ruthlessly default” is the economic term for it - than those of more modest means. A person’s credit history is usually a better indication of how he will behave than his income. How much money a person put down on the house when he bought it also makes a difference. Investors “are going to default right away because they have negative equity,” said Robert Van Order, an adjunct professor of finance at the University of Michigan. “But that’s different from people who moved into the house. Owners who live in their homes do tend to default more when home prices fall. That is because being under water leaves borrowers fewer options if they run into financial trouble. When prices are rising, borrowers can usually sell their houses for more than they paid or refinance their mortgages.” So what is the difference? That investors default quickly while homeowners default slowly? Is this like the soft landing argument? These folks are going to be in for a major shock. A large part of California and her economy was tied to real estate and the housing boom. Agents, brokers, construction workers, and others who were tied to this market had high incomes and good credit scores. What jobs are going to pay their $4,000 or $6,000 mortgages? And the credit score is dubious at best. Heck, even Warren Buffet isn’t 100% prime : “Fortune Magazine reported that Warren Buffett has a FICO score of 718 (2008, March 31, The Oracle’s Credit Crisis). How can that be? Isn’t Warren Buffett one of the wealthiest men on the planet?” Bwahahaha! Warren Buffet looks like an Alt-A borrower. And we all know how poorly his financial budget sheet is. The point I’m making is walking away is a trend that is going to pick up steam. There is no myth to it. The issue is that there is no reliable data to track who and how many people are walking away. I would venture to say in the current environment that it is a handful. The major pain right now is being caused by those in tighter financial circumstances because they simply have no choice but to default because of lack of income. Yet those Alt-A and prime borrowers are going to be the next wave. Remember the Pay Option ARM problem facing us?: The government would also like you to believe there is no inflation: Just because something isn’t happening on a large scale today doesn’t mean it isn’t going to explode tomorrow. Now in those articles I didn’t read anywhere that they are denying folks are walking away but they are simply stating it isn’t happening on a large scale. Remember the argument for stated income was for “lawyers, doctors, and high paid folks” who simply didn’t want to disclose their 7 figure incomes? We all know how that turned out. Now assuming folks won’t be walking away especially in places like California is the real myth. Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information Share This Related Posts: ■ New Century files for Chapter 11. ■ Real Homes of Genius: Today we Salute you Stanton. ■ Real Homes of Genius: Today We Salute you Artesia. 626 Square Feet of Barbie Love for $360,000. ■ Dr. Housing Bubble Examines Patients of the Housing Bubble. ■ Ponzi Financing – The House that Credit Built.