Monday, May 05, 2008

The Psychology of "Walking Away"

by Tanta on 5/05/2008 09:02:00 AM

My attention was arrested by this story in today's Washington Post, which is not, actually, about "walk aways" at all. It's about borrowers getting mortgage modifications--that is, borrowers who are in fact making a real effort to stay in their homes. But one borrower's story here actually has more insight about the "walk away" meme, it seems to me, than any story I've read purportedly on that subject.

[The Ramseys] bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.

The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.

Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.

"I was willing to do whatever it took so that we didn't lose the house," she said.
Absorb that statement for a minute: in a short sale, you do "lose" your house. Whatever we're talking about here is psychological, not literal.

Litton turned down the short sale bid--it was only $200,000. Eventually the Ramseys got Litton to agree to a modification:
It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.

"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."

She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.
In a sense, Mrs. Ramsey understands what a foreclosure is much more clearly than people who talk about "walking away" do: a foreclosure is not "giving the house back to the bank." It is being forced to sell your property at public auction in order to satisfy a debt. To the Ramseys, it isn't actually "losing the house" that seems to be the real fear--they were willing, after all, to sell short. It's simply that a short sale "felt" voluntary; it felt like "a plan."

One of the reasons why nobody is really quantifying the "walk away" problem is that, in reality, there is no legal or logical distinction between a "walk away" and a "foreclosure," because they're both foreclosures. The only difference is that the former can be interpreted, psychologically, to mean that the borrower is "leaving my house because I want to," while the latter acknowledges that the sale of the home has been forced.

I'm guessing that we'll have a least a few commenters to this thread asserting that the Ramseys "should have just walked away." Their mortgage payment is back to its original level--around $2000 a month before taxes and insurance--but their mortgage is still seriously underwater and I for one wouldn't bet on how long it will take for its value to climb over the loan amount. Even in that part of Maryland, the Ramseys could probably cut their monthly housing expense in half by renting.

Such calculating advice, however, ignores the fact that to the Ramseys, foreclosure equals defeat, and they're realistic enough to realize that dressing it up in the euphemism of "walking away" doesn't change that. They are, in their own way, just as "ruthless" as the so-called walkers-away: they would, apparently, have been happy to see their lender take a $100,000-plus loss on a short sale to salve their pride. Human nature is like that; I have no real interest in heaping coals on the heads of the Ramseys. I am more interested in the way this story helpfully scrambles some confident assumptions about what motivates borrowers, and what really stigmatizes foreclosure in our current culture.

Servicers keep going on about a "sea change" in borrower attitudes about foreclosure. I just don't see that. I see borrowers whose actions suggest that foreclosure still carries a very powerful stigma, so much so that they are able to convince themselves that "walking away" is actually an "alternative" to foreclosure rather than a synonym for it. The Ramseys rather usefully remind us that "walking away" is not a financial strategy, it's a defense mechanism. If you can tell yourself that you are the one making the plan and executing the options, you avoid having to admit to being forced.