The real estate blog.

Listen to the people in this video that appeared on 60 Minutes last week and you’ll hear some of the rationale behind the unbelievable behavior that’s attracting mainstream media attention. Homeowners are walking away from loans they can pay so they don’t lose any more money. Some are taking everything inside the house with them including copper pipes, plumbing, wiring, appliances, sinks…everything. An empty, worthless shell is what the lender gets to foreclose on.

At the other end of this reckless behavior are homeowners literally burning down their homes. MSN reports -

In Woodland Park, Colo., a homeowner was accused of burning his home

just before he was evicted in a foreclosure action. In Houston, a man was charged with faking a racial hate crime to cover arson at his home. In Russellville, Ind., a woman was accused of trying to cash in on an insurance policy by offering her neighbor $5,000 to help torch her home and cover up the crime.
The Detroit Fire Department can’t draw a definitive link between its rising arson rate (151 arrest warrants in 2007), rising foreclosures (up more than 65% last year) and falling housing prices (the region’s median house price dropped 17.3% in the past four years, to $145,173).

People aren’t just burning down their homes, some are willing to commit insurance fraud on autos. This was common enough in Utah during the last recession.

For example, auto repossessions are rising, and so are cases of auto arsons. Weydert, the Stockton prosecutor, says cases have doubled in the past three years. He now has about 15 such cases. Recently he prosecuted a young man who drove his new Nissan extended-cab pickup into a canal and collected on insurance after he realized he couldn’t make the payments.

This behavior seems counter intuitive to the American spirit of taking on challenges. It appears that morally we have no backbone and no sense of commitment any longer. Housing doesn’t always go up and it doesn’t always go down either. This is shelter we’re talking about here.

Lenders are witnessing the alarming trend of total lack of personal responsibility. Calculated Risk recently showed -

In Fitch’s opinion the contraction in the mortgage markets has contributed to an acceleration and deepening of home price declines, and has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Additionally, the apparent willingness of borrowers to ‘walk away’ from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages.

Home owners walking away from or burning away their problems consider that action to have few consequences. With the mortgage debt relief act passed, homeowners who short sell or have their home foreclosed on no longer have to pay taxes on their forgiven debt. Additionally, they think the only consequence will be a poor credit score.

Would be arsonists should consider the jail time they face should their case be successfully investigated, not to mention the potential harm to neighbors homes or health should their fires get out of control.

I understand it’s hard to look at the long term when the wolves are knocking at the door. Homeownership is a long term activity. For a while I thought a home price downturn was inevitable and given that outlook, cutting losses is the best thing to do. The one thing we can be sure of is things will change. Everything is temporary. Recent activity by the Fed and Congress lead me to believe government will do everything in its power to prevent a housing crash.

Some troubled homeowners will ultimately lose their homes, but they don’t need to strip them down or burn them down before it happens. Others willing to walk away should contact their lenders first and explain the situation to see if they can negotiate a rate freeze or lower payments. Walking away with the kitchen sink is unconscionable.

I’ve already talked about Johnnie Pitts in California as an example of someone who understands personal responsibility. When his ARM reset, he sought loan modification and worked overtime to raise more money. His lender agreed to the modification and Pitts is still in his home…happy to be there.