Walking away will gain cachet

December 30, 2009

Rolfe Winkler2.jpgWhy bother? That’s the question more underwater Americans are asking themselves about their mortgage.

Trapped in the abyss of negative equity, more will decide to quit paying. As they should.

About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.

Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying more than market prices.

But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

But foreclosure is hardly the mark of Cain, especially in states like California and Arizona, where lenders have no practical recourse to pursue a borrower’s other assets.

As more underwater homeowners realize there’s no hope to regain their equity, more will cut their losses. The reduction of liabilities brings immediate debt relief and often a lower cash outlay — on rent — for comparable housing. The financial shot in the arm should outweigh the stigma of foreclosure.

Financial self-interest is likely to be contagious. A study by three economists suggests that when a few borrowers in a neighborhood just say no, others are likely to follow.

Lenders do what they can to keep the disease of economic rationality from spreading. They try to “extend and pretend” with lower interest rates, extended terms, and the pretence that eventually the borrower will make good. Anything, really, to avoid the hit to capital that comes from a writedown of the principal.

Until now, borrower guilt has helped protect bank balance sheets. That is likely to change. If it does, the next chapter of the financial crisis could be a painful one.

Comments

US housing is set to take a a turn for the worse in 2010 as strategic foreclosures, currently 25% of all foreclosures accelerate. Why stay in a mortgage when your neighbors are renting previously foreclosed homes at 1/3 your monthly mortgage payment? Read a wild California foreclosure story at http://storyburn.com

Posted by voomies | Report as abusive
 

You can walk away from a home mortgage. But fail to pay a college loan or a credit card debt, and the heaves will fall on you.

Posted by BlueOkie | Report as abusive
 

Walk away, and kiss your credit rating goodbye.

And remember, the bank is willing to end your mortgage at any time. But they will get every dime they are owed, even if they need to bankrupt you to do it.

Posted by Anon86 | Report as abusive
 

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