The real estate blog.

MSN ran a Slate story on the rising anecdotes, yet statistically unproven trend of people who can afford their mortgage payments, but choose to turn in their keys because of home depreciation. These are called “ruthless” walk aways in that this is a strategy that is chosen by the borrower instead of forced on them by the lender. There is a bit of a difference.

I got a call yesterday from a woman in an economically hard hit part of the Rust Belt. Here’s her situation:

She’s retired on a fixed income and bought a home two years ago. She put 50k down. The home has cost her more than she expected because of property taxes and utilities. She’s now looking at a short sale, not because she can’t afford the payments, but because she couldn’t afford the maintenance.

Her

strategy besides the short sale is to buy a condo that is cheaper for both utilities and taxes. Her problem is the existing house. Tendering a short sale will harm her credit and she would have to buy before the sale goes through. She doesn’t make enough to support both payments. Besides, she told me she was planning a short sale meaning one of her lenders was going to take a loss. I can’t ethically or legally write another loan, knowing the circumstances. Even though this borrower was planning to walk away, she couldn’t get another home.

Now, some unscrupulous borrowers can walk away so long as they don’t tell the new lender what they’re doing. They may also have to falsify a rental agreement if they don’t have enough income to cover the new loan. If I were an underwriter for any lender these days and I saw a borrower with another home, I’d want written documentation as to what they planned to do with it. About the only satisfactory answer is rent it out and I’d want “proof” of the rental transaction including speaking to the renters listed on the agreement as well as a copy of rent or deposit checks.

Calculated Risk mentioned some time back that lenders are seeing high FICO borrowers default as part of their portfolio. This has been attributed to the “ruthless” walk away. I submit it could also be mortgage fraud through the use of straw buyers. A straw buyer has to have good credit to begin with and unless the home is sold, they usually end up being foreclosed on.

Those borrowers that don’t care about owning as their next stop can walk away with abandon, but to walk away into a cheaper, purchased home is impossible to do without lying or committing mortgage fraud. So when the press tells you things like…

Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages.

Certainly, that’s the case for all the California homeowners who in the next year or two are going to find themselves with the choice of whether, faced with a huge new wave of interest-rate resets and a historic decline in the value of their homes, they will simply walk away.

…be aware it’s much easier said than done. Those that are foreclosed on will suffer serious repercussions to their credit for years to come. Further, most of them won’t be able to simply buy another home and walk away from their existing one. People are walking away, but they’re not doing so voluntarily and they’re not buying new homes either. They are mostly people who got in over their heads and will now be renting for quite some time.