Walking Away, And What It Leaves Behind
Saturday, January 10, 2009
Benjamin McNelley said he loathed the idea of walking away from the mortgage on his four-bedroom, two-bath house in Fauquier County.
The former Prince William County prison guard said he worried about what the decision might mean for his credit rating and whether he might still be on the hook for any outstanding debt.
But when both his father and his stepfather fell ill last summer in South Carolina, McNelley said, he had no choice but to quit his job and move. By then, the house he had bought brand-new and then refinanced twice during the boom years was worth far less than his mortgage. Selling the property proved difficult. He grew anxious.
With property values plummeting, real estate experts say American mortgage holders are increasingly walking away from properties -- effectively choosing to have their lenders foreclose on them as a way out of the obligation -- particularly when they owe more than their homes are worth. The practice is known simply as walking away or as "jingle mail," referring to when a homeowner mails the keys back to a lender.
While there is no precise way to know how many foreclosures are due to people walking away, experts said the practice has become more common as more homeowners owe more on their mortgage than the home is worth. In some cases, homeowners can afford to keep paying but decide not to because they have little invested in the property or owe so much that they no longer see the value in continuing to pay.
"The prevailing sentiment over the last five to six years has been that a home is primarily an investment and secondarily a place to live," said Guy Cecala, the publisher of Inside Mortgage Finance in Bethesda. "If that is in fact your thinking, it makes it very difficult to make a decision to continue paying your mortgage if you don't think that investment is going to increase over the next five years."
The decision to walk away will almost certainly carry serious consequences, real estate experts said. A foreclosure is considered one of the most serious defaults possible on a credit history and will wreak havoc on any score. That could make it difficult to rent an apartment, secure certain jobs, get any line of credit in the immediate future or buy a house for years to come. In many jurisdictions, including Virginia, Maryland and the District, lenders can legally pursue a walkaway for the balance of the mortgage even after the property is in their hands. And when people abandon their mortgages, that also adds to the number of communities struck by foreclosures and increases the woes of lenders that are left holding the bad loans.
In July, McNelley decided to quit paying his $2,300 monthly mortgage. He said he sent his lender, Countrywide, a letter explaining his situation, that he had moved and quit his job. Countrywide has yet to foreclose on the property, he said, and McNelley is also exploring the option of a short sale -- which is when a property is sold short of the balance on the mortgage, a transaction possible only with the lender's blessing. He said he would also consider trading his deed to Countrywide in lieu of a foreclosure -- which is when a lender forgives the debt on the home in exchange for the deed, avoiding the expense of a foreclosure. But he sees none of these options as particularly attractive. The home is sitting empty.
"I already have a '90 days past due,' " McNelley said. "It's going to be six of one or half a dozen of the other. My credit is shot, so either way you look at it, it is not going to matter much."
Experts said that for some borrowers who bought at the height of the market using the high-risk financial products popular during the boom, such as adjustable-rate subprime mortgages and no-down-payment loans, there may be little incentive to keep paying for homes they do not think will ever be worth more than they owe.
About 12 million Americans, or about one in five mortgage holders, are "underwater," the term for those who owe more on their properties than what they are worth, according to the financial research firm Moody's Economy.com.
"The more the house is underwater, the more people are likely to walk away from a house and go rent rather than keep money tied up in it," said Todd J. Zywicki, a professor who specializes in bankruptcy, contracts and commercial law at the George Mason University School of Law. "The traditional restraint on this has been that people have been concerned about the impact on their credit reports . . . but with the large number of foreclosures that we have been going through, my guess is that in a couple of years, a foreclosure is not going to look quite as menacing as it does now."