USA Today reported yesterday: 
When Sharon Sakson was laid off recently from her job as a television writer and producer, she burned through her savings to pay the $2,400 monthly mortgage on her home. But she soon decided it didn’t make sense: Her home was worth thousands less than the mortgage she carried on it.
The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it’s not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.
“I’m walking away from my house,” says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. “The bank can have it.”
What Sakson did is called a strategic default, or a voluntary foreclosure, and it’s fast becoming a major challenge to the government’s $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years. Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson’s predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.
The truth is that FHA and other government loan programs will allow you, if you have had a hardship, buy a home in as little as 3 years after a foreclosure. I think it’s safe to say that someone will come up with a program for walk aways to buy before then, seeing that there are and will be millions of ex-homeowners wanting to buy at the bottom of the market.
Sharon Sakson is a customer of ours at You Walk Away and she is not alone. Her story like so many others is becoming more and more prevalent today.
USA Today goes on to say:
The number of borrowers who walk away is expected to increase, along with the rise in homeowners who owe more than their homes are worth. An unprecedented 16 million homeowners currently are underwater, according to Moody’s Economy.com. That’s about a third of all homeowners with a first mortgage.
Moody’s Economy.com estimates the number of underwater borrowers will peak at 17.4 million in the third quarter of 2010.
An even higher estimate comes from Deutsche Bank, which predicted in an August study that the number of homeowners underwater will grow from 14 million (or 27% of all homeowners with mortgages) in 2009 to 25 million homeowners, or 48% of all those with a mortgage, by the time home prices stabilize.
Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida.
From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.
In other geographic regions, the increase in strategic defaulters ranged between 3 times and 18 times more.
The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay. The study was based on an analysis of about 12 million borrowers.
So if by the end of 2010 there are around 25 Million people that have underwater mortgages, How many million of them will go through foreclosure? Or be in default? How many million will wait it out… 5 years… 7 years… 10 years until they have equity again.
The biggest part of homeownership is actually owning a part of your home… Equity. If there’s no equity, aren’t you worse off than a renter? Renters are typically paying about a third or half of what someone would be paying if they bought a home between 2002-2007.
Conclusion
We clearly have a long way to go before housing recovers.
Subscribe
Bookmark
{ 2 comments… read them below or add one }
Bravo!!!
Very interesting article on strategic foreclosure. That’s what I did. I bought in 2006 for 285,000. My self employed business went down 60%, and the house was worth 100,000$ less than what I paid for it just
2 years after moving in. I saw the disaster, and did not want to be stuck like a hamster on a treadmill, slowly drowning. And drowning for what reason? The house would likely take 10 to 15 years to get back to what I paid for it, and then another 5 to 10 to have even a slight bit of equity, all to pay a 2,400$ a month mortgage?
No way.
I’m sure the bank would have tried to get a lower payment, but I doubt it would have been significantly lower, so….I walked away. I didn’t care if my credit was ruined, I wanted to have a life. The only concern now is if they will try to come after me or not. Apparantly they have up to 12 YEARS to do so! That does not sound ethical. I can rebuild my life, and then they come and take what I built up later? I may try to declare bankruptcy to get it all off my back.
You Walk Away was very important in holding my hand, as I had no one to really talk to about all this.
Ironically, I told a friend about the foreclosure on my house, and the auction, and he went to the auction,
and bought the house for 118,000$!!!! My mother said had she known what it would sell for at auction, she would have bought it for me, and I could have moved in and paid her rent, probably about 750$ a month! This is so crazy.
I don’t feel bad about this because so many people made money off me initially: the broker, the agents,
all the home repair people, etc.
I hope to get this all behind me, and I don’t ever plan to buy a house again in my lifetime. Never.