Sunday, January 31, 2010

Is this really "Walking Away"?

by Bill McBride on 1/31/2010 06:51:00 PM

The NY Post has an article: I'm walking from my underwater mortgage

I stopped paying my $1,450-a-month mortgage ... in September 2008 -- after making the hard decision to walk away from my mortgage because it is hopelessly underwater.

... in this case I had no practical solutions to my financial dilemma -- I lost my job, was turned down for a mortgage modification and owed a lot more than the house is worth.

I am a single parent with three children, one with medical issues. So, with only unemployment benefits and child-support money, I decided to pull the plug on my mortgage payments.
This house originally cost $100,000. In 2005, as the housing market heated up and I needed cash, I refinanced it. An appraiser said it was worth $154,000 ... I cashed out the house at that value.

Today, with the housing market in bad shape, the house is worth about $120,000. On top of that, it is starting to fall apart.
First, "walking away" usually means the homeowner can afford to pay their mortgage, but are choosing to strategically default (or in the language of servicers "ruthlessly default") simply because they owe more than their home is worth.

This homeowner lost her job and has other financial issues. Yes, she owes more than her house is worth, but this sounds like a normal foreclosure caused by financial distress.

Second, why is her mortgage payment $1,450 per month on a $154,000 mortgage? Is that a 10%+ interest rate? Is this PITI? Is there a 2nd with Tony Soprano? Perhaps the reporter could have explained this a little better.

Third, if she stopped paying her mortgage in September 2008, what has the bank been doing?
There are no foreclosure signs up -- because there is no bank forcing it.
Why isn't the bank foreclosing? What are the foreclosure laws in Pennsylvania? Are these recourse loans? Why isn't the reporter asking questions?

The only good thing about this article is it gives me an excuse to link to Tanta's advice to reporters from two years ago: Let's Talk about Walking Away
I actually believe that reporters should never abandon their skepticism anywhere, including here. ... the danger arises that an "echo chamber" starts to create conventional wisdom about default behavior, which may be hard to challenge if it turns out to be a bit of an exaggeration.