In the past it's seemed that having a foreclosure or personal bankruptcy on your record were the 'third rails' of personal responsibility -- and responsible adults did everything possible to avoid either scenario. But that's been changing greatly over the past 20 years. First, filings for personal bankruptcies rose by 350% between 1980 and 2005 in the U.S., prompting Congress to pass sweeping changes in the Bankruptcy Code.
Now it seems we're in a scenario in which borrowers with negative equity in their homes or unable to make upward-adjusting payments are welcoming foreclosures so they can (a) live in their homes for up to 12 months rent- and payment-free while they wait out the process; or (b) purchase other homes at discounted prices, move and then simply stop paying. And some people are simply angry at lenders that won't budge on loan terms or converting to more affordable fixed-rate alternatives:
From a story in today's L.A. Times by Peter Hong and Andrea Chang:
Falling home values helped push a record number of Californians -- more than double the previous high -- into foreclosure and out of their homes in the last three months of 2007, data released Tuesday show.
Leandro Hernandez of Chino Hills is among thousands more who could be next. He tried to sell his house in 2006 to get out of a mortgage he couldn't afford but found no takers.
Faced with a house worth less than his loan balance, he's trying to cut a deal with his bank. But if the lender won't budge, Hernandez, 45, says he knows what he will tell them.
"Foreclose me," he said defiantly.
Hernandez knows that an eviction is a lengthy process. "I'll live in the house for free for 12 months, and I'll save my money and I'll move on."
Moreover, since California is a non-recourse state for original loans, the lender won't be able to go after him for the balance unless he refinanced when he was living there. He'll simply have really bad credit for 7 years, something many people are clearly willing to face.
At the L.A. Land blog, a reader writing in plans to take advantage of his currently high credit score to get into something he can afford:
"I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.
"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.
"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.
"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions.
"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."
A new attitude, indeed.
According to the Calculated Risk blog (one of the best out there), this new social order could have a profound impact on the estimated 10 to 20 million people with negative equity in their homes:
In a previous post, I calculated that somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes will be worth, over the next couple of years. (See Homeowners With Negative Equity)
As I've noted before, one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes. These are homeowners with the "capacity to pay, but have basically just decided not to".
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