Mortgage "Walkers"

That's what Nicole Gelinas, writing on tomorrow's Wall Street Journal Editorial Page calls them. It's an accurate, descriptive phrase, but The FDC personally prefers "foreclosure of convenience".

What Ms. Gelinas is talking about is the recent phenomenon of home owners walking away from their homes voluntarily. This is contrary to the image painted in the media of a naïve first-time home buyer victimized by some slimy mortgage predator who conned them in to a mortgage they had no business getting. As that legend continues, the victimized homeowner struggles valiantly to make the mortgage payment, doing what they have to do, getting six or seven extra jobs and working 36 hours a day, eight days a week to save their American dream from crashing in on them. But alas, despite their Herculean efforts, the large, rich, mean, and nasty bank seizes back their lovely nest, and leaves all of their hopes and dreams tossed aside like a used Kleenex. And the story must end this way, because if it doesn't wouldn't really be very convincing victims - would they?
More often it happens this way:
Many of these so-called victims obtained 100% financing, and had the Seller pay their closing costs when they bought the home. What a deal! So as they move into the house they have zero equity, and haven't spent one dime on the home - until their first mortgage payment. Next comes the credit crunch. Prices start falling, their adjustable rate mortgage rate is about to do so, they can't refinance because they are upside down, and they wouldn't qualify credit-wise anymore due to tightened down underwriting. What to do? Walk away. Let the bank have the house back. The buyer has effectively "rented" the house for the period that they lived there. Sure their credit will be toast for awhile, but that is a wound that time can heal - or perhaps a credit repair company (for a fee, of course).
Mortgage walkers are gentle creatures who are acting rationally to the incentives that have been created for them. They are not to be confused with the cold, calculating predatory borrowers (see FDC post dated 1/16/2008)who exploit and even commit fraud to take advantage of banks and mortgage lenders.


Sue said...

I've been employed in the mortgage business for 20+ years and I have to say that the media is making a mountain out of a molehill on the foreclosure rates in this country. Unfortunately, the impression is that "everyone" is in foreclosure. So when the Jones' come up against a hard time, instead of doing everything in their power to save the house they figure "everyone else is in foreclosure" why should we try to save ours?

Many of the people blaming their rising ARM rates for their problems also have quit a job after they bought the house & then racked up thousands of dollars in consumer debt because there wasn't enough income to pay the bills. The government came out with FHA Secure to help save these people but I have yet to see one person whose mortgage delinquencies started AFTER the ARM adjustment. Most often, they had problems before that for the reasons I've noted. Or, they overstated their income and committed fraud when they bought the house.

It's been reported that after analyzing thousand of delinquent stated income mortgages that over 76% of those in default were originated by less than 7% of the lenders. So we had a small pocket of lenders committing a large amount of the fraud on these loans.

And no, we don't need a bail out. We (you and me the taxpayers) are already paying for it with falling housing prices and tougher lending laws. Sometimes, you have to pay for your mistakes.

Anonymous said...

With all of the media articles about the subprime crisis, something is clearly being overlooked. None of the artcles state that houses are overpriced in relationship to the income of Americans, and they were artifically elevated to these levels. Also, throughout this mess, the prices of real estate must drop considerably, to reflect the income levels of Americans working in a lower paying service economy.