by Catherine Reagor – Mar. 17, 2010 12:00 AM
The Arizona Republic
More Phoenix-area homeowners are walking away from their mortgage payments, and many more are likely considering it.
These are not people losing homes due to severe financial problems. “Walking away” now also describes people who can make their payments but don’t want to because they owe much more than their home is worth.
Metro Phoenix’s 50 percent drop in home values has left tens of thousands of homeowners here underwater, owing more than the market value of their house. Many people who bought houses during the market peak are paying mortgages double their home’s current worth. Most can’t sell now and will have to wait years before values rise enough for them to sell without taking a loss.
So, many walk away. Many of them are angry about federal bailouts for lenders who seem reluctant to work with homeowners on loan modifications. Frustration and anger increasingly outweighs the social stigma of foreclosure. In a populist twist, some homeowners are even proud of stiffing lenders.
Circumstances are also on their side. Lenders are overwhelmed and slow to foreclose, allowing mortgage defaulters to stay in their homes for months without paying anything. Many homeowners who walk away can rent comparable houses for half their current mortgage payment. And laws in Arizona prevent lenders from going after the personal assets of those who default on a mortgage.
There are no hard figures on the number of Phoenix homeowners who have walked away from their mortgages. Nationally, one recent study found at least 25 percent of all foreclosures are driven by “strategy,” not necessity. And there are fewer penalties for walking away in Arizona than most other states. Foreclosures in the Valley continue to hover around record levels.
What worries housing-market experts is that if more people walk away, then even more foreclosure properties will continue to depress the market and delay any recovery.
By the numbers
Joe Giovale paid $390,000 for a north Phoenix home in 2006. He knew home prices wouldn’t keep climbing at the same brisk pace, but he expected steady appreciation of about 2 percent a year.
Giovale’s home is surrounded by foreclosure properties. He owes at least 50 percent more than his house is worth. Giovale can rent a similar house in his neighborhood for $1,000 less a month than his mortgage payment.
“My lender won’t cut my principal, despite the federal help it’s getting,” Giovale said. “I can afford the payments. But I have done the calculations. It’s going to take 18 years until the value of my home rebounds to what I paid for it. Why shouldn’t I walk away and rent? I can probably buy again in a few years.”
Strategic default
Walking away is almost as easy as it sounds.
Homeowners stop paying their mortgages and wait for the notice that their lender has started to foreclose. Lenders call this a strategic default.
Lenders used to foreclose on a home after three missed mortgage payments. But the record number of foreclosures in Phoenix has significantly slowed that process. Now, some lenders do not get around to filing to foreclose until the homeowner misses six or more payments, which can mean half a year of free housing for someone who plans to walk away.
Once homeowners receive a notice of a foreclosure, they usually have three months until their home is sold through a foreclosure auction or trustee sale. But, again, because of the backlog of foreclosures, auctions are often delayed by several more months.
Many homeowners who plan to walk away will try to find a rental home before the black mark of a foreclosure is on their credit report.
Given the housing-market crisis, some landlords care less about a foreclosure on a credit record than proof of steady income.
Angry at lenders
Patrick Brennan thinks about walking away from his Laveen home. Not because he is underwater but because he’s so angry at lenders.
“I’m in a unique position of wanting to walk away from my mortgage based on principle, not principal,” Brennan said.
But he is going to stay put and continue paying his mortgage because he says his family does not stand to gain much from walking away. Brennan has become a prolific blogger on the topic, frustrated with lenders blaming homeowners and making them pay the price for the housing crash. He advises people to feel no remorse for walking away and not to worry about what their friends and family will think.
“Why should we insist that there be a false moral obligation on the part of the downtrodden homeowner to help the bank that refuses to renegotiate a bad loan?” he said. “Whether to walk away or not is a conversation we must have in society now, mainly so that the average consumer can become better armed with information and make the best choice.”
Penalties and credit
The impact on personal credit histories varies when it comes to homeowners and their mortgages.
Currently, homeowners who walk away from a mortgage receive a black mark on their credit that stays there for at least seven years. Brent White, a University of Arizona associate law professor, believes the nation’s credit-reporting system should be changed in the wake of the housing crash. He doesn’t think foreclosures should be a black mark on people’s credit records when many can’t avoid the financial catastrophe due to the weak economy and depressed home values.
He wrote a controversial paper about his views that continues to draw national attention. White believes more homeowners should walk away until a fairer situation is created between lenders and borrowers.
“It is time to put to rest the assumption that a borrower who exercises the option to default is somehow immoral or irresponsible,” White said. “Lenders walk away from bad deals all the time, and they don’t have to pay a price as heavy as a homeowner with a foreclosure on their credit score.”
Critics say homeowners who walk away should face bigger credit penalties than homeowners who cannot obtain a loan modification and lose their home to foreclosure.
People who walk away, critics say, further damage the market by depressing prices and creating more foreclosures, and they should not be rewarded.
“If people walk away, they should not be able to do so without a cost,” homeowner Pete Taggatz said. “No chance should exist for them to obtain any home loan until a mandatory waiting period has passed, seven to 10 years. Anyone that obtains a home loan and subsequently walks away from their loan should be charged with mortgage fraud.”
The nation’s biggest mortgage lenders, Fannie Mae and Freddie Mac, won’t fund a mortgage for five years for any borrower who walks away.
More lenders are trying to track down homeowners who walk away, even in Arizona. But Arizona is a so-called anti-deficiency state, which means that, in most cases, lenders that take back a borrower’s primary residence through foreclosure can’t go after that borrower’s other assets.
State legislation passed last year would have allowed lenders to go after assets of homeowners who lost houses to foreclosure and couldn’t show they lived in a home for six months straight. The law was aimed at housing speculators but would have affected many retirees and second-home owners.
The law was repealed in December, but its backers, including the state’s banking industry, have been looking at ways to help lenders recoup their losses from borrowers who purposefully default on mortgages.
Not every Arizona homeowner is protected when it comes to personal assets. When people refinance in Arizona, some new loan documents don’t offer anti-deficiency cover for the difference between the sale price and outstanding mortgage balance.
There could be tax implications for people who walk away, particularly on second homes. The money a lender loses on a foreclosure home can usually be considered income for the former homeowner, according to the Internal Revenue Service. But because of the national foreclosure crisis, some home-loan debt canceled through loan modifications, short sales or foreclosures are exempt from being treated as income by the IRS until 2012.
Homeowners lose hefty tax deductions from the interest on their mortgage when they stop paying.
Marcel Thierot is an investor who would rather take a tax hit than keep paying on his Scottsdale winter home. He bought a new home in 2005 for more than $500,000 and estimates the current value at about $200,000.
“I am not paying for this housing bubble,” he said. “The bank won’t do anything to cut my payments, but I know they will very happily sell my home at a foreclosure auction as soon as they take it.”
