Chance Gates' Blog

RISMEDIA, March 31, 2010—(MCT)—Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert, Calif., home, even though she could afford the payments.

Bloch paid $385,000 for the two-bedroom home in 2006 when prices were still surging. Comparable homes are now selling in the low $200,000s. Bloch, a retired psychologist doubted she’d see her investment rebound in her lifetime. Plus, she said, she was duped into an expensive loan.

The way she sees it, big banks that helped fuel the mess all got bailouts while homeowners like her are left holding the bag. No more. “There was not a chance that house was ever going to be worth anywhere near what my mortgage was,” said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. “I haven’t cheated or stolen.”

Time was when Americans would do almost anything to hang on to their homes. But that commitment appears to be fraying as more people fall behind on their loans, while watching the banks and lenders that helped trigger the financial crisis return to prosperity.

Nearly one-quarter of U.S. mortgages, or about 11 million home loans, are underwater, with buyers’ houses worth less than their loans. While home values are regaining ground, they remain far below their 2007 peak. Many homeowners are just now coming to grips with the idea that prices will take years to reach the pre-crash peak: as long as 14 years in California, according to economist Chris Thornberg.

Stuck with properties whose negative equity won’t recover for years—feeling betrayed by financial institutions that bankrolled the frenzy—some homeowners are concluding it’s smarter to walk away than to stick it out.

“There is a growing sense of anger, a growing recognition that there is a double standard if it’s OK for financial institutions to look after themselves, but not OK for homeowners,” said Brent T. White, a law professor at the University of Arizona who wrote a paper on the subject.

Just how many are walking away isn’t clear. But some researchers are convinced that the numbers are growing. So-called “strategic defaults” accounted for about 35% of defaults by U.S. homeowners in December 2009, up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago’s Booth School of Business. He and colleagues at Northwestern University’s Kellogg School of Management reached that conclusion by surveying homeowners about their attitudes and experience with loan defaults. They found that borrowers were more willing to walk away if someone they knew had done it, and that the greater a homeowner’s negative equity the more likely they were to default, even if they had could make the monthly payment.

Similarly, an analysis released last year by credit bureau Experian and consulting firm Oliver Wyman estimated that walkaways accounted for nearly one in five homeowners who were seriously delinquent on their mortgages in the last three months of 2008.

“The fact that people are strategically defaulting—there is no question,” Zingales said. “The risk that the number of people doing this might explode is significant.”

A flood of walkaways could damage the nation’s fledgling housing recovery by swamping the market with foreclosed properties. Still, some experts are dubious that millions of underwater homeowners will pull the plug like Bloch did. Home ownership remains the cornerstone of the American dream. Moving is a hassle and the stigma associated with a foreclosure is likely to keep many hanging on for a recovery.

The biggest surprise is that so many underwater homeowners continue to pay, according to White, the Arizona law professor. He’s convinced that personal shame, as well as moral suasion by the government and financial institutions has kept many homeowners from walking away, even when they’d be better off financially to dump their homes.

But real estate veterans said old taboos are eroding fast. Jon Maddux, a former real estate investor who founded You Walk Away, a for-profit company that guides homeowners through the process of default in 2007, said his earliest customers struggled with emotional ties to their homes as well as remorse about reneging on an obligation. That’s changed as more homeowners have concluded that the housing market isn’t going to rebound quickly and they’d be better off cutting their losses. “Now, it’s more of a business decision—it’s people who could afford their house, but it’s an inconvenience,” Maddux said. He and other experts said average Americans are fed up with hearing how they’re supposed to honor their debts while businesses operate by another set of rules.

Consumers typically begin to think about walking away once the value of the property is 25% lower than the value of the debt, according to research conducted by Sam Khater, senior economist at real estate research firm First American CoreLogic. About five million people nationwide are in that situation, he said.

Some purchased their homes at the peak of the market only to see the value drop precipitously when the bubble burst. Others bought low, but couldn’t resist borrowing against their rising equity to make home improvements and to pay off other bills. When home values fell, they too found themselves underwater.

Ken Henrich purchased his Marysville, Calif., home for $187,000 in 2004. He and his wife later refinanced the property, tapping the equity to pay off credit cards. They now owe around $300,000 on a place that’s worth about $132,000. They let the four-bedroom residence slip into foreclosure and are currently waiting for it to be sold at auction. They’re planning on renting for a few years until they can possibly buy again. “We can more than make the payment,” Henrich said. “The way we look at it, our credit would still be perfect years from now, but we’d still owe tons more than it’s worth.”

There are consequences to walking away. A default will knock down a credit score by at least 100 points, said Craig Watts, a spokesman for FICO, the company that developed credit scores. That could make it tough to borrow money, rent an apartment or get a job since many employers now routinely check credit histories of potential hires.

To some, it’s a small price to pay to gain a measure of revenge against the financial institutions whose loose money helped to fuel the crisis. Joseph Shull, a marketing professor, said he’s planning on walking away from the town house he bought in Moorpark, Calif., in June 2006. “I’m angry, and there are a lot of people like me who are angry,” he said. He purchased the home for $410,000 and spent $30,000 renovating. Now the house is worth around $225,000. Shull admits he overpaid for his property, but he said it fell in value in part because of “regulatory mismanagement.”

(c) 2010, Los Angeles Times.

Before walking away there are other things a homeowner can try please checkout the following:

http://www.makinghomeaffordable.com/requestmod.shtml

http://chancegates.com/2010/03/18/short-sale-the-rise-the-revenue-the-reality/

http://chancegates.com/2010/03/14/home-owners-to-be-paid-to-short-sale/

http://chancegates.com/2010/02/26/2009-foreclosure-legislation/

http://chancegates.com/2009/06/12/homeowners%E2%80%99-right-to-mediation-requirement-before-foreclosure/

Please get all your legal advice from an Attorney.

As a Reno – Sparks real estate consultant I encourage questions and comments regarding the Reno – Sparks real estate market or any of the articles I post here.  I can be reached at chance@ballard-company.com

RISMEDIA, February 10, 2010—Home values across the country declined again in the fourth quarter of 2009, as the Zillow Home Value Index fell 5% year-over-year, and -0.5% quarter-over-quarter, to $186,200. That marked the 12th consecutive quarter of year-over-year declines, according to the fourth quarter Zillow Real Estate Market Reports. Despite home value declines seen across most of the country throughout 2009, some markets experienced what appeared to be a bottom in home value declines, or even increases in home values during the year. However, the fourth quarter of the year brought signs that the fledgling recovery of home values in many of these markets is slowing again. If the declines are sustained, the result will be a “double dip” in home values, defined as two periods of sustained declines in home values separated by a brief period of stabilization or recovery.

One in five, or 29 of the 143 markets tracked by Zillow, showed at least five consecutive month-over-month increases in home values during 2009 before beginning to flatten or fall again in the second part of the year. These markets include the Boston metropolitan statistical area (MSA), the Atlanta MSA and the San Diego MSA.

Home values in an additional 29 markets, including the Los Angeles and New York MSAs, increased on a month-over-month basis each month throughout the fourth quarter. However, the rate of increase slowed from November 2009 to December 2009 in 21 of those markets, and several appear likely to experience several months of sustained decline in early 2010.

The percent of single family homes with mortgages in negative equity was essentially flat from the third to the fourth quarter, changing from 21% in Q3 to 21.4% in Q4. This comes after a decrease in negative equity from the second quarter’s 23%.

The number of homeowners losing their homes to foreclosure across the country reached a peak in December, with more than one in every thousand homes being foreclosed–a number not reached since Zillow began recording national foreclosure data in 2000.

“While we have seen strong stabilization in home values during 2009, there are clear signs that they will turn more negative in the near-term,” said Zillow Chief Economist Stan Humphries. “What we saw in mid-2009 was a brief respite from a larger market correction that has not yet run its course. The good news is that, for those markets that will see a double dip in home values before reaching a definitive bottom, this second dip will not be a return to the magnitude of depreciation seen earlier, but rather will look more like a modest aftershock of the earlier downturn.

“The recent stabilization owed a lot to policy support in the form of tax credits, lower interest rates and increased Federal Housing Administration lending. The remaining correction in home values we’ll see in the first half of this year is a function of market fundamentals, such as the increasing flow of foreclosures, high levels of inventory in the market and a probable decrease in demand as the impact of the tax credit wanes and mortgage rates rise. While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year. Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

Foreclosure re-sales across the country remained high, making up more than one-fifth (20.3%) of all U.S. home sales in December. Foreclosure re-sales also made up the majority of sales in several MSAs, including the Merced, Calif. MSA (68.3%), the Las Vegas MSA (64%) and the Modesto, Calif. MSA (62%). Additionally, 28.5% of home sales nationwide sold for less than what the seller originally paid.

Several markets across the country showed positive longer-term appreciation. Home values increased year-over-year in 27 of 143 markets and remained flat in 15.

The Boston MSA was the largest area with year-over-year appreciation, despite its more recent downturn in home values. The area’s Zillow Home Value Index rose 1.9% in 2009. Home values in the Boston area rose for eight months in 2009, which outweighed the recent declines.

As a Reno/Sparks real estate professional, I encourage all questions or comments on the Reno/Sparks real estate market or any of the articles posted on this blog.  I can be reached by email at:   chance at ballard-company.com or http://www.myspace.com/chancegates