By Alejandro Lazo
Washington Post Staff Writer
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."
At this point, the consequences remain serious. For someone with pristine credit, a foreclosure could mean a drop of 200 points overnight, said Craig Watts, a spokesman for Fair Isaac Corp., which developed the nation's most widely used scoring formula, FICO. The company's most recently updated credit formula, which will be available to lenders and credit agencies in the spring, will continue to count a foreclosure as a significant predictor that a potential borrower will be a high credit risk, Watts said.
"A foreclosure is a serious delinquency, and it is in the same category -- as far as a credit scores go -- as a bankruptcy or a tax lien," Watts said.
Advocates for troubled homeowners argue that the workout deals that lenders are willing to make with borrowers do not get at the root problem of falling home values. They call offering periods of interest-only payments and deferrals of principal payments quick fixes.
"Frankly, people are making the rational decision to walk away because these servicers and investors are not providing long-term, affordable mortgage payments," said Bruce Marks, executive director of the Neighborhood Assistance Corporation of America, a nonprofit organization that helps troubled homeowners negotiate with their lenders. "What we see is that virtually all of the solutions are temporary solutions of exactly the same structure that created the mortgage crisis in the first place."
The result is neighborhoods with empty homes and higher crime rates, Marks said.
"The consequences are the devastation of individual lives and the devastation of their neighborhoods," he said. "You also see the elimination of hope and the confidence that if you work hard that you will be able to be a homeowner and provide a good standard of living for your family."
Last month, the federal government's centerpiece for helping struggling borrowers avoid foreclosure, HOPE for Homeowners, was called a failure by the man in charge of overseeing it, Secretary of Housing and Urban Development Steve Preston.
The goal of that program was to allow underwater borrowers to refinance into more affordable 30-year, fixed-rate mortgages insured by the government. But part of the problem is that success hinges on the willingness of lenders to participate, as they often must forgive some of the balance of a loan. Many have balked.
John Garza, a bankruptcy lawyer with Garza, Regan & Associates in Rockville, said that the problem on the ground is even more muddled. Over the past several months, he said, he has seen a steady stream of clients who have mortgage payments they cannot afford on houses that have fallen in value to more than $100,000 below the amount owed. Some are interested in organizing a short sale or having their payments adjusted, he said, but that has proven difficult because many of the lenders are themselves in disarray, having shuffled personnel or even gone out of business.
"What I am finding is that it is very difficult to do any of these things because a lot of the lenders are disorganized," he said.
Some states, such as California and Arizona, provide protection to people who walk away from their mortgages through "nonrecourse" laws, which means a lender can not pursue a borrower it has foreclosed on for the additional balance of the loan once the property is in its hands, said Zywicki of George Mason. Yet as a practical matter, few lenders appear to be pursuing those who walk away even in states where they can, he said.
"A deficiency judgment may be available but too cumbersome or expensive to obtain," he explained. "Or the borrower might not have any assets worth chasing -- as would be especially likely to be the case for subprime borrowers."
In McNelley's case, he said he and his former wife bought the Bealeton house for $214,000 in 2003 and refinanced it twice until the mortgage on the property was for more than $400,000. McNelley said they spent that money. When the two separated, McNelley said, he assumed the mortgage payments and agreed to a court order in which he would sell the house when it could fetch at least $40,000 profit -- of which he would split with his ex-wife. She did not return repeated calls seeking comment.
Now, he says, he believes the home will never sell for that much. But he said his decision to walk away came last summer when he learned both his father and stepfather were seriously ill.
"It wasn't really me crunching the numbers and deciding that the mortgage wasn't for me," McNelley said in a recent phone interview from South Carolina. "If it wouldn't have been for the family crisis, I would have gotten two or three roommates to make the thing work."
Since moving, he said, he has struggled to find employment. Last week, he took a trip to Dallas to learn how to drive big-rig trucks but was disqualified for having high blood pressure.
"Two years ago, I was on top of the world, and now I am down to my last $500, and it's hard to see the light," he said.