The new 52-page academic paper is titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis." He contends that more, and in fact, far more, of the estimated 15 million U.S. homeowners who are underwater should leave their lenders in the lunch and default on their mortgages.
By doing so, his report states, mortgagees could save hundreds of thousands of dollars that they "have no reasonable prospect of recouping." He adds that in comparison to the prospect of paying hundreds of thousands of dollars they may never get back, penalties for defaulting on a loan are not as bad as one might believe.
In fact, White said, "Homeowners should be walking away in droves. But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits." He points out, however, that despite a foreclosure, one could have a "good" credit rating, but "not great," meaning above 660, "within two years after a foreclosure." That fact could surprise many.
White also notes that by buying everything they might need for the next few years, in advance, they can default "strategically." For example, if a consumer needs a new car, get it now, before your foreclosure, so you can assume "limited credit" for the next few years.
It's a startling assessment, one that will draw criticism from lenders and the White House as well. While if one does the math this is an obvious positive move for many who are hundreds of thousands underwater in their homes, it could have the potential of derailing the recovery by causing yet another housing crash as foreclosed homes enter the market at low prices.
White also points out, that while many consider a mortgage a binding legal contract, many states have anti-deficiency rules (California and Arizona are examples) where lenders have limited rights to pursue defaulting homeowners' assets beyond the house itself. In other states, lenders may decide that it is not worth the legal expense to pursue walkaways.
Given such assertions, aside from lack of knowledge, what prevents homeowners from walking away? White said that many are embarrassed by the prospect of a foreclosure. Others feel it is immoral to walk away, despite the positive financial implications for themselves and their families.
At the same time, White asserts, fair is fair. Banks and real-estate firms allowed a huge bubble to form and then burst, nationwide. This created the housing and debt crisis in which taxpayers have been forced to foot the bill. Despite this, many financial institutions refuse to revise mortgages, which means that taxpayers already footing the bill for bailouts would, if they do not walk away, be penalized still further.
One wouldn't expect such a report to either go unnoticed by the mortgage industry or be well received.
"Borrowers who walk away from their mortgage obligations face serious consequences," including severely depressed credit scores for extended periods, said Brian Faith of Fannie Mae. In addition, he said, "there's a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community."
Written by Michael Santo
HULIQ.com
Posted November 29th, 2009 by Michael Santo
