When your house is underwater…

That was the Detroit Free Press Front Page headline this morning, superimposed over a house sinking into the surf and the shadowy figure of what one presumes is he homeowner walking away. The sub-head was “More homeowners are just walking away.”

On the front page statistics told of the 532, 774 homes in Michigan that have mortgages that are greater than their current values, which was estimated at 38.5% of all mortgages in Michigan right now. The article detailed the growth of so-called “strategic defaults” from 5,100 in 2005 to 17,250 in 2008 (the numbers for 2009 are apparently not in yet).

There was also advice from a Southfield real estate attorney that, “When things are that bad (referring to the huge loss of value and the economic hardships that many in Michigan face), your moral compass and the obligation to make payments that most people feel, has got to give. He opined that, “the stigma of defaulting on a mortgage, even if one can still pay, is disappearing.”

Yet inside the paper the article took a nasty turn and focused upon the ability and the growing tendency for the banks to go after the defaulters for deficiency judgments and collection of the shortfall, if they have to sell the house as a foreclosure. Articles by Greta Guest, a Free Press Business writer and well known columnist Susan Tompor both gave examples of how the lenders could pursue ex-homeowners for years.

Guest wrote about Michigan laws that would allow the lender to turn the deficiency judgment over to collection agencies and have up to 36 years (if it was a 30-year mortgage) to harass the ex-creditor for fulfillment of the original contracted amount, including any back taxes owed on the place at the time that bank took it over. She wrote that mortgage recovery actions were up 26% in 2008 and some 187 since 2006. She sites data from First American Core Logic which shows Nevada to be the worst state for underwater mortgages at 70%, with Arizona second at 51% and Florida third at 48%. Michigan was fourth on that list, followed by California with 35% underwater mortgages.

Topor focused more on how long it might take to recover the value that has been lost in this recession and opined, as I have several times, that it will be decades before we get back to 2006 levels, if ever. Her example was a $200,000 home that the buyer bought in 2006 with a 5% down payment and a mortgage for the rest. In our area that home has dropped in value by 30%, so it is now worth about $140,000. The original mortgage for $190,000 is probably still in the high $180,000’s. Topor uses an appreciation rate of 3% per year once a recovery starts and positive appreciation returns and figures that it will be 2022 before this owner gets back to his original purchase price.

There was comment made in the Guest article on the very slow progress of any of the Federal programs to help in this situation, especially the mortgage modification programs. The banks complained that the whole process is too complicated and that borrowers are reluctant to go through the whole financial disclosure process that get eh modifications. They also sited the state’s high unemployment as a primary factor that they can’t do anything about. One foreclosed ex-homeowner was quoted, “Everything that I’ve worked for for the last 20 years is gone. Now I’m a dirtball. I can’t even go and get a used car.”

In a related story, the Free Press reported on a local Catholic nun who has lived in the same four-plex apartment for 22 years, who is now facing eviction because the landlord is in foreclosure. The foreclosure happened before the current moratorium on evictions went into effect in Michigan. That is going ot be more and more of an issue as more owners of apartment buildings and commercial building get into trouble.

I tried hard to find any positive news in all of these articles, but couldn’t. In the main article by Guest a local Realtor was quoted as saying, “When you’re living in a $200,000 house and can go buy the same house for $70,000 cash, why not just walk away?” He went on to state, “If there has ever been a time that you can let your credit go and it’s acceptable, it is now.” That’s a sad, but probably true, commentary on our times.

Get strategic before you get foreclosed...

From an Associated Press story by Alan Zibel (12/17/2009) comes this projection for foreclosures in 2010.

More than 1.7 million homeowners were verging on foreclosure this fall, making it likely that these houses will soon end up on the market one way or the other, driving down overall housing values.

"We're going to be dealing with high levels of distressed (sales) in the marketplace for at least a couple of years," says Mark Fleming, chief economist of researcher First American CoreLogic, which has been studying the problem.

And from The Wall Street Journal, James R. Hagerty and Nick Timiraos (12/17/2009) and Bloomberg, Emily Friedlander (12/17/2009) comes this update that more people are choosing to walk away from underwater homes.

"We've been in recovery mode for most of the year. How many foreclosures do they have to dump on the market to affect that? I don't know," says Deborah Farmer, owner of StarLight Realty in Tampa, Fla. "Any house priced under $225,000 will be affected by a large increase in foreclosures in this market."

A growing number of home owners in Arizona, California, Florida, and Nevada—where prices have fallen the most—are walking away from their properties. They are leaving the deal behind not because they can’t pay but because they don’t want to. A study by researchers at Northwestern University and the University of Chicago concludes that as many as 25 percent of defaults are driven by strategy, not necessity.

If many other people follow suit, “It’s going to be really difficult to prevent a cascade effect," says Paola Sapienza, a professor of finance at Northwestern.

Brent White, an associate law professor at the University of Arizona, points to actions by banks themselves to avoid staying in bad business deals as an example of why homeowners should make a decision "unclouded by unnecessary guilt or shame."

For instance, on Thursday, financial services firm Morgan Stanley announced that it is turning five San Francisco office buildings back over to its lender two years after it purchased them when the market was at its priciest. The buildings are estimated to be worth about half of what Morgan Stanley paid. “This isn’t a default or foreclosure situation,” spokeswoman Alyson Barnes told Bloomberg News. “We are going to give them the properties to get out of the loan obligation. Morgan Stanley is apparently current on the loan, so this is what is known as a “strategic default.”

Some might ask: If strategic defaults are OK for banks, why aren’t they OK for ordinary homeowners? You may recall that not too long ago I opined the same in this Blog in a post titled "Just Walk Away Renee." It's interesting that the same institutions that label foreclosed homeowners as deadbeats find it strategically expedient to do the same thing. So maybe I should have labeled my earlier Blog post - Just Get Stategic Renee. Of course, the banks likely wrote non-recourse deals for their building purchases, which allows them to just give the building back to satisfy the contract. Too bad that they won't do the same for their borrowers (a few will; but, most balk at that as a resolution of the debt).

Most of the Market Analyses that I do for homeowners these days result in current market value estimates that are below what they owe on them, which results in them wandering off mumbling to themselves and abandoning whatever plans that they had that involved moving. A homeowner has to have been in the house for at least a decade without refinancing (or at least without taking out equity if they did refi) in order for them to be in a position to consider selling. For those people the issue is giving up the perceived value that they thought they had in the house.

Since I'm just a Realtor and not a lawyer or financial advisor; I, of course, advise people to seek advice on what to do from those qualified professionals. If they want or need to try a short sale I can help with that and there are a few (though very few) reasons to try that route first. I've re-opened my Web site http://www.mishortsales.net/ just to help people better understand their options. I'll have to go update that site to better explain the "strategic" option of walking away.

Don't walk away Renee...

You can't go home again. So said Thomas Wolfe in his famous book. Well, apparently you can't just walk away from home either. of at least not from your home mortgage.

According to a news feed that I got today, the government and the lending industry are taking aim at “walk-away” home owners who stop making payments and months later send the house keys back to their lender.

Such borrowers will not be able to get another mortgage through Fannie Mae for five years, unless there are “documented extenuating circumstances.” In that case, the prohibition is three years. Even after the prescribed time has elapsed, a borrower with a foreclosure in his file will have to make at least a 10 percent down payment and have a FICO credit score of at least 680 to qualify for a Fannie Mae loan.

Freddie Mac, which counts foreclosures as major credit black mark for seven years, is now aggressively pursuing walk-away borrowers where permitted under state law, a senior official said.

Federal legislation enacted last year allows home owners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven.

Walk-away borrowers, by contrast, have nothing forgiven, and the Internal Revenue Service may demand taxes on the balance they never paid, the IRS says.

So the "I'll just walk away" option is getting nasty for the beleaguered homeowner. I guess it's better to let them drag you, kicking and screaming, from the house on eviction day. At least you can claim that you did not walk away.

Locally I'm seeing more and more of the walk-aways and those people aren't just moving to somewhere else in Michigan, they're leaving to go somewhere where there is work to be had.

I don't think our "leaders" in Michigan have yet figured out that they have a serious population drain going on and that the state is undergoing a fundamental change. I did see an interesting article in the weekend Detroit Free Press comparing the Detroit area to the Pittsburgh area and what they went through in Pittsburgh when their major industry died.

I think our state leaders are still in denial that our major manufacturing industry is dying or rapidly changing away from Michigan. We will be lucky to come out on the other side of this mess with two Automotive companies left in Michigan and more likely with only one. And even if the local companies survive, they will have to become more global and much less Michigan-based and oriented.

I did a post some time back with a graphic of a man beating a dead horse. If I could find a graphic of a bunch of politicians sucking on the teats of a dead cow I think that would be a better representation of our current situation. One just wants to scream - "let go of the automotive cow teats and develop other job sources." A variation on the old saw "that dog don't hunt" might be "that cow don't suckle anymore."

But, back to the main theme. If you were thinking, "I'll just turn in my keys and be done with it" as a solution to your foreclosure problems, forget about it. The lenders and the government want a pound of flesh and you know whose rear that is coming out of.