banktime.com

What do you do when you are so upside down on your mortgage that the entire situation seems completely hopeless? Do you continue mailing in a mortgage payment that you can ill afford in this economy, essentially throwing away money that you can’t hope to get back, or do you walk away from the whole situation? Many American homeowners in distress are choosing the latter – enough to constitute something of a disturbing national trend. I recently read an article in the New York Times about homeowners abandoning their mortgage obligations. One gentlemen mentioned owns a condo on Miami Beach that he estimates will take approximately fifteen years to regain the value it lost during the housing crash. Benjamin Koellmann, the man in question, paid two hundred fifteen thousand dollars for the modest unit, the likes of which are currently selling at foreclosure for just ninety thousand. Koellmann has been giving fault to defaulting on his mortgage. He told the Times that he feels that “there is no financial sense in staying” at his current place.

Experts estimate that when a home’s value falls below seventy-five percent of its amount owed, the threshold is reached at which homeowners begin seriously thinking about reneging on their obligation. At that point, homeowners start to weigh their options, and wonder whether they can’t rent a nicer place instead of tossing cash into the bottomless pit represented by their home mortgage. Three years of plummeting home values, the frustration of bank bailouts, and the failure of the much-vaunted mortgage modification program, under the Obama administration have all contributed to homeowners’ sense of hopelessness and potential need to “get back” at the banks that got them into the position they currently inhabit.

The situation is completely unprecedented. For many of the millions of Americans who have either walked away from a mortgage or are considering doing so, sometimes there isn’t even a choice. Foreclosure gets to seem like a foregone conclusion, and the question simply remains as to how long they choose to keep living on the up-and-up before abandoning the albatross around their neck. There have never been so many homeowners underwater on their mortgages before, and the government is currently at a loss as to what to do about the massive problem. Economists say that we have arrived at the point of “maximum vulnerability” for the majority of distressed homeowners, where angst about the impossible financial situation is now outweighing their emotional attachment to their properties.

It used to be that only the most audacious voices would recommend that consumers would do better to go back on their mortgage than to keep throwing money away. These whispers have been in place for a few years, but only recently have they become a full-throated consensus. This week, the fact that the proprietors of an eleven-thousand unit residential complex in Manhattan, New York simply abandoned the property has shown the world that no mortgage is too prestigious to abandon in the worst of circumstances.

Steve Walsh, a mortgage broker from Arizona interviewed by the New York Times, stated that he has advised sixty people to walk away from their mortgages since the beginning of December. Walsh claims that widespread hopelessness is to blame. He says that these homeowners are not fortunate enough to qualigy for the much-touted mortgage mods, and that it has gotten wearying to keep “paying for a property that is not worth it.” In fact, Walsh admits that he recently defaulted on a rental property that he owns.

It can be very difficult for banks to differentiate between so-called strategic defaults and those that came about in the traditional way, after a long period of turmoil and struggle for homeowners. But there’s more and more research showing the signs that consumers are not going to put themselves through the foreclosure treadmill experience when they sense that the end is near. The Oliver Wyman consulting firm estimates that slightly less than one-fifth of all foreclosed homeowners probably chose foreclosure as a strategic option, based on the mortgage payment history (did the payments get spotty over time, or did the homeowners just up and stop paying one day?), and trouble paying other bills. In 2008 alone, this number represented over half a million people.

The perils of defaulting on a mortgage remain enough to keep many homeowners solely hypothetical in their plans to default. At the end of the day, most people hate the idea of willfully skipping out on a debt that they have actually incurred. That’s to say nothing of the hit that borrowers will inevitably take on their credit scores for making this decision. Plus, there are many other factors: if a homeowner has children, they might have to move school districts, for instance. The U.S. Treasury maintains that this is a concept much more discussed than actually done. It estimates that it would take over seven hundred forty-five billion dollars to catch every struggling homeowner in the nation up on their mortgage payments. But research has shown that this would be an overwhelmingly unpopular bailout. Taxpayers don’t want to pay for what they perceive to be greed and poor decision-making, and it’s also unfair to those homeowners making tremendous sacrifices to stay current on their mortgages. But if the walk-away trend continues, the impact on the fragile economy could prove to be devastating.

Walking away from an upside-down home has been called “jingle mail” since the 1980s, representing the idea that homeowners give up and just mail their keys to the bank as a trigger to foreclosure proceedings. Wachovia Bank, one of the nation’s most aggressive and large mortgage lenders, says that it has been confounded by customers who were technically able to pay their obligation, but “basically just decided not to.” There are two major groups into which these people fall: there are those who bought their homes at the peak of the boom, committing to a mortgage value at which the home would never be worth again, and then there are those homeowners who had been in for a while longer and made the mistake of using their homes as cash machines with second mortgages and home equity lines of credit.

Bankers, of course, will argue back and say that these homeowners need to honor the contracts to which they initially agreed and pay up. As adults, they claim, these borrowers should be responsible for the agreements into which they entered. Banks claim to be loathe to help these customers because they refinanced and took all the equity out of their homes at the first possible opportunity, and are now complaining.

But at the end of the day, homeowners still hold the ultimate power. If banks don’t want to work with them and their credit has already taken a hit through their financial troubles, then it might just make sense to walk away. And with more and more of their neighbors exercising this option, perhaps they will as well.