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Monday, September 15, 2008

Are we seeing a change in American mores?

The social stigma associated with defaulting on a mortgage seems to be disappearing as the nation's housing crisis escalates. More homeowners are choosing to freely walk-away from their homes as the values plummet. Traditionally there's been a social stigma tied to homeowners who default on mortgages, but as home values decrease as a result of Wall Street and mortgage lenders creative financing that acted to manipulate home prices to new all time highs, the stigma that ached at the heart of the foreclosure crisis is eroding.

Many home owners are choosing to leave their homes to foreclosure instead of paying higher mortgages on adjustable rate loans where they have no equity. And because the problems are so wide-spread; almost everyone knows someone who has been foreclosed and the stigma that used to accompany that dilemma has now turned to sympathy and understanding. If anything, people tend to assign the role of victim to the unfortunate foreclosed homeowners and lay all of the blame on the “mortgage loan sharks” involved.

While it isn’t right and may even be illegal, this trend also gave birth to the “buy and bail” phenomenon that I reported on earlier in the year. In those case, homeowners who can see that they will be in foreclosure soon are using their good credit, before the foreclosure, to obtain a mortgage to buy a second house (most often small and of less value), by claiming that it is a vacation home or rental property. Then they just walk away from their primary home when it is foreclosed.

Susan Wachter, professor of real estate and finance at Wharton School of Business, says the depth of this crisis shows social attitudes are changing. "This is the kind of conversation that's going on at cocktail parties, at swimming pools," Wachter said. "And suddenly this option, which was truly unthinkable in the past, becomes thinkable." Studies have not yet been conducted on walk-aways, but the country's major mortgage lenders and banks acknowledge that walk-a-ways are an increasing part of the foreclosure crisis.

As a result, personal bankruptcy filings are increasing in the majority of states. Home prices in many of the nation's harshest hit markets have deflated as much as 60% on average in California, Florida, Michigan, Ohio and other pockets scattered across the country from the markets peak. Some 3-million more homes are forecast by Housing Predictor to be foreclosed through 2011 due to the crisis.

There are consequences to walking away from a mortgage and allowing the bank to foreclosure. Foreclosures remain on credit reports for 10 years, but with the re-establishment of good credit in other areas many have been able to obtain a mortgage again as soon as three years after a foreclosure. However, mortgage experts warn that may not be the case in the future considering changes in federal lending laws, which are expected to experience sweeping changes affecting the entire mortgage system. The recent collapses of Fannie Mae and Freddie Mac and the resulting Federal takeovers have just served to increase the need for changes to the system that will likely result in it becoming much harder to obtain a mortgage.

But for now the question remains, is it OK to just walk away from your mortgage obligation? Should everyone just nod knowingly and say, “Well, it could happen to anyone, what’s a person to do?” are we going to be satisfied by that hack phrase “It is what it is”, or should we push back and state, “No, it is what you made it to be.” Where would we draw the line? If that displaced homeowner reacted to being foreclosed and evicted by robbing a bank to get the money to pay off the loan, would we say “Well, you do what you have to do?” I think not.

I know several people who are going through this personal financial mess. The ones that I know are good people who didn’t get greedy or take out toxic loans on their homes. They’re just average working Joes who had a bad break turn their lives upside down – a divorce here or a layoff there or a prolonged illness without medical insurance. It often doesn’t take more than that to start the foreclosure ball rolling. Once it gains momentum, most people find themselves unable to catch up, unable to cope and unable to stop the foreclosure process.

So, is there a stigma attached for them. You betcha! If nowhere else, it’s in the hearts of the foreclosed. It hurts to go through the loss of your home. But, do I think less of the one that I know as a result? No, they all tried as best that they could to find a way to keep up with the payment or to arrange a workout with the banks involved. There just isn’t enough interest or emphasis on the part of the banks to work with the beleaguered homeowner to restructure a bad loan situation in order to save a customer and homeowner from falling into foreclosure. I’ve tried to help more than one get in touch with their banks to see if a short sale or a restructuring could be worked out. All were told that there was nothing that the banks could do until the homeowner is delinquent on the loan. By then it’s often too late.

Are our mores changing to accommodate this crisis and remove the stigma involved? I don’t think so. We are, as always, a forgiving people and a people who truly would try to help a neighbor or friend or relative, if we could. We are more likely to be concerned about where the neighbor who got foreclosed is going to go, or what he’s going to do now; than to waste time looking down our noses and going “Tsk-tsk, you know I always knew that he was a deadbeat.” That’s not the American way. Our mores and values aren't changing, and I'd add that it is those values that will get us all through this mess. The good honest people who've been swept up in this maelstrom will bounce back eventually and the few bad apples who have taken advantage of things (on either side of the mortgage) will get their comeuppance someday. That's the American way.

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