Walk Away Homeowners
Divorce. Single parenthood. Debt. Bankruptcy. These and a long list of other social behaviors were once stigmatized and kept behind closed doors away from polite society, but are now, if perhaps not completely acceptable, at least openly tolerated and in some cases, even lauded as smart lifestyle choices.
Must we now add foreclosure to the list?
The evidence is still anecdotal, but news media have begun to report that some homeowners have decided to walk away from their homes just because they have no equity and, consequently, don’t want to make their mortgage payments even though they could afford to do so.
Not long ago, foreclosure was viewed as a shameful outcome of severe financial difficulties, but today, some homeowners seem almost proud of their decision to ditch their home and their mortgage payments. Consider Stephanie Valdez, a homeowner in Stockton, Calif., who told a "60 Minutes" correspondent that she and her husband saw no point in making the payments on their house because it was no longer worth as much as they had paid to buy it.
Such behavior isn’t new, of course. Homeowners in the last real estate down cycle also signed over the deeds to their homes to their lenders in lieu of a protracted foreclosure process. But today, this so-called "deed-in-lieu" has become so much a part of the landscape that a new term, "jingle-mail," has been coined to describe those envelopes of house keys mailed back to lenders.
What’s changed in this cycle, however, is that the negative consequences for walk-away homeowners have become so minimal that the decision to ditch a burdensome home and oversized mortgage seems to make a strange kind of good economic sense.
Not only the social stigma, but also the financial pain of foreclosure has diminished. Landlords reportedly have put out the welcome mat for former homeowners despite their impaired credit. Everyone seems to acknowledge that even a foreclosure will drop off a credit report in a matter of a few years, and that then these walk-away homeowners will be ready and able to get new mortgages and purchase new homes. Expect them to do so just in time for the next upturn in the housing cycle.
In non-recourse states, lenders can’t pursue former homeowners for unpaid mortgage debt after foreclosure. And now that much of this forgiven debt can be excluded from taxable income, those who walk-away from a mortgage often can avoid the federal income tax liability as well. Not even the all-mighty Internal Revenue Service can touch these folks.
Meanwhile, the homeowners can avoid the risk of more negative equity and eliminate the cost of owning and maintaining their home from their household budget. And since the property now belongs to an institution rather than another family, why not strip the fixtures and sell them for cash on your way out of town? (Read a recent AP report of a California homeowner caught doing this.)
But while the consequences of all this jingle mail may be minimal for the fair-weather homeowners, various other people will pay the price.
Lenders, institutional investors and individual shareholders will get stuck with the financial losses that result when borrowers irresponsibly refuse to pay their mortgages. Nearby homeowners will suffer the ill effects of foreclosed, vacant and uncared-for homes, which create blight, attract squatters and put additional downward pressure on home prices. And let’s not forget the children of walk-away homeowners, who are exposed to a lifestyle that depends on irresponsibility and irrational debt.
Moreover, walk-away home ownership perpetuates the sad modern notion that a home is neither a lifelong place of residence nor a long-term investment, but instead, just another disposable consumer product that differs little, if at all, from a television set or a tube of toothpaste. Buy it. Use it. And then lose it.
If legions of upside-down homeowners simply decide not to make their mortgage payments, the idyllic "American dream" may be exposed as no more than a fantasy, and at the end of the day, the bedrock notion of home ownership as good public policy may be placed in jeopardy. That’s yet another potential negative outcome of the current mortgage crisis that should give pause to anyone whose livelihood depends on real estate.