The WSJ and the NYT each have articles running tomorrow highlighting the ease with which borrowers are walking away from their mortgages. Both are highlighting the services of YouWalkAway.com, which for a $1000 fee will help borrowers do exactly that.
As house prices fall, more homeowners find themselves upside down, owing more on their mortgage than their house is worth. This is especially true in a world where 100% financing wasn’t uncommon even 18 months ago. With little or nothing down, even a small drop in home prices can lead to millions of upside down homeowners. And since those homeowners put little or nothing down, they face little risk from simply walking away.
First the stats. Buyers put nothing down:
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.
So now trillions of mortgage debt is being carried for properties that are upside down:
Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country’s outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and Alt-A — a category between prime and subprime — will be attached to negative equity.
“The focus has been on the [interest rate] resets,” said Goldman Sachs economist Andrew Tilton. “But if you’re in a deep enough negative-equity position, defaulting has its own kind of logic.
And both articles are chock full of great lines that really capture the dynamic. For example:
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”
Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”
The NYT features a borrower that was “terrified” about his high mortgage payments….
Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”
Keep this in mind when banks talk of bailouts to keep people in their homes. In a zero down world, homeowners suffer little from foreclosure. It’s the lenders that suffer. It’s the banks left holding huge portfolios of foreclosed real estate that are in need of the bailout.
Smart homeowners have already rescued themselves simply by walking away.
Forcing buyers to pay off mortgages on properties that have fallen in value benefits no one but the banks/investors who own the mortgage.
This is a classic story of the little guy sticking it to the man. I say let ‘em. It will bring prices back to normal.
Unfortunately, even if Congress resists a bailout plan, there are a few ways the rest of us could suffer anyway.
- One way is the potential for Fannie and Freddie to go under; with implicit taxpayer backing, the failure of the mortgage behemoths could leave the rest of us with a tab in the hundreds of billions.
- Another way is rising interest rates; as more buyers default, no amount of Fed rate cuts will keep mortgage rates from trending up.
- A third way could be a hit to the dollar. Trillions of dollars are parked in mortgage-backed securities. If these prove unsafe, indeed if the U.S. economy is coming apart at the seams as pessimists are predicting, you could see a run on dollar-denominated assets. The Fed isn’t helping matters with rate cuts that reduce the incentive for savers to park their assets in dollars……
Read other popular posts on OptionARMageddon:
The Latest Borrower Vehicle: your 401(k)
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Bailout Watch, keep Congress on speed-dial
CDS, a hedge-funder’s view
Is anyone immune?
Credit Default Swaps, yet another shoe…..