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September 5, 2010

Walking away from home and mortgage

Many homeowners behind on their mortgages stopped paying because they simply didn't have the money. A growing number, though -- one in eight, by some counts -- defaulted on purpose.

They're generally far underwater on their mortgages and want their lenders to foreclose because they want out. When stories started popping up several years ago, they were all anecdotal because no one was attempting to count. Now researchers are finding that these walkaway borrowers are pretty numerous -- and debate is raging about whether it's a reasonable reaction to a difficult situation or a selfish move that damages neighborhoods.

I thought you all would like to get to know a walker. What triggers such a decision? What is life like afterward?

Wallace Farmer, who left his home in Baltimore this summer, agreed to share his experience. He's part of the community of commenters here, so some of you already know a bit of his story.

Boiling a complicated situation down, he came to the city five years ago with plans of living as an urban pioneer and owning one rental on the side as a long-term investment. He left with savings shot, credit ruined and not one or even two but rather three mortgages defaulted.

How he ended up with two investment properties when he only intended to have one, and why he cut ties with a home he loved, is a boom-and-bust tale. You'll find the story here.

Posted by Jamie Smith Hopkins at 8:24 AM | | Comments (19)
Categories: Mortgages, The foreclosure mess, Underwater
        

Comments

No doubt he has done the right thing. Quote from the article sums it all up:

"I'll be saving a lot of money," he said. That's priority one.

Being a debt slave is not a smart option. A mortgage is a business contract, not a moral obligation. The rules of breaking the contract are spelled out.

Wallace, disregard the threats posed in the article that you will not be trusted enough for rentals, loans, etc. When you save up your greenbacks and wave them under someones nose, you can have whatever you need. Word of advise though - make sure what you spend your hard earned $$ for are truly "needs", and not "wants".

Congratulations on your exit from debt serfdom!

Appraisal or no appraisal, anyone who believed an unrenovated row home in Harlem Park was worth $180,00 must have been living in dream (or greed) land. That goes for the buyer as well as the lender.

Also, those who take the attitude that a mortgage is simply a business contract between two parties must also be willing to accept that the government has no business intervening in that contract in an attempt to effect loan modifications or keep people in their homes.

It wouldn't surprise me if those properties were "flips". I think the appraiser who said it was worth 200k and the Realtor who pushed the property are also to blame. $180k purchase price? Come on now. Something doesn't sound right. I guess it is too late to look into that now, but a chain of title will tell the full story. Also, a BK could possibly be avoided. No sense in doing a BK until the bank actually goes after you. Why do the BK now when the bank might not even pursue the deficiency? Did the homeowner move out of the home before the sale? The sale can take a long time to go through. And, even after the sale, it can take another 6 months to get the "Write of Possession" and eviction from the Sheriff. I would have advised to to the BK the day before the auction to delay it even more. Either way, with an income of 65k a year, you can only do a Chapter 13 since he can't pass the means test for a Chapter 7. That means the debts won't be discharged. You will still be making payments on all the debt. As far as the deficiency is considered, that might or might not be discharged completely. I'm sure an attorney would know. But either way, I would have postponed the BK as long as possible before doing it. That way you only do it if or when the bank pursues. No reason to preempt it if the bank wouldn't pursue anyway.

There is more to this story than what is being told! First of all, this property was renovated and flipped on 7/19/06 for $180,000 after the flipper paid $37,000 on 5/25/05. Secondly, there were no other comparables in the immediate neighborhood, so why did an appraiser say it was worth $180,000? That apprasier should be in jail! Thirdly, Mr. Wallace indicates he owes the bank $360,000. How could this be? He paid and financed $180,000 when he bought the house. In addition, he received $5,000 closing help and a homeowners property tax credit!! So, what did he do with the additional $180,000 he said he borrowed? Maybe he put it in his or a friend's pocket!! I would walk away from this house, too! The Sun needs to do a better job of investigating all the facts, not just some of them that fit their agenda! It appears to be a serious case of fraud, here. Also, you should investigate why 4 other homeowners at 636, 640, 642, and 648 N. Fulton cashed out at $407,000 and $552,000 around the same time period!

The story explains the $360,000 figure -- that's what he would pay in total over the years, interest included. He zeroed in on that, feeling it was the true cost of the loan rather than $180,000. He didn't cash-out refinance his house.

I didn't have any agenda writing this story except the one any reporter has -- to shine a light on a trend.

hungry eyes said:

"Also, those who take the attitude that a mortgage is simply a business contract between two parties must also be willing to accept that the government has no business intervening in that contract in an attempt to effect loan modifications or keep people in their homes"

Not only do I accept this...it is my mantra!

At the end of the day you have to do what you have to do. Some people saw housing as their golden ticket and were blinded by money. It's unfortunate for all the other people that are standing by their homes that have to watch people foreclose or just walk away killing their home value even more.

It's unfortunate for all the other people that are standing by their homes that have to watch people foreclose or just walk away killing their home value even more.

Last one out is a rotten egg!

Don't blame others for realizing their mistake. Frankly the true value of homes is way lower than what you think it should be. These people are allowing the market to correct. If you don't want to be a bag holder join your fellow neighbors and walk out on your house.

Retribution

Ah, my favorite topic! Working in the business I can say with all honesty, more homes are being foreclosed due to "strategic default" that the numbers reflect. We are losing jobs at a much slower rate than previous years, yet the number of foreclosures is increasing significantly. I read a story in Yahoo a couple months ago of a woman in DC that decided to let her house go, even though she could comfortably afford the payments. I also read in another Yahoo new story that wealthy individuals are foreclosure at high rates than regular homeowners. The reason being wealthy people look at this as an investment which has gone bad, now they want to cut their losses. This continuing trend is only going to further damage neighborhoods and the real estate market as a whole.

I still believe the only way to stop the bleeding is to roll out a Principle Reduction program to allow those that are upside down to reduce their mortgage balance inline with their properties current market value. Those that can't afford their homes should short sale, and those that could will have a LTV of 95-100%; but at least that would stop the further devaluation of properties, which in turn will put a halt on new loan defaults.

ironhide196 - That attitude it one of the many reasons we have all these problems in this country. Apathy is a disease. Irresponsible people were allowed to buy $300k homes when they probably shouldn't even have been allowed a car loan. They tried to get rich and now that their greed caught up to them they bail. It's an issue of responsibility. They took out idiotic loans to keep up with their pals. I bought a home to live in, not an investment, and people like the gentleman in the story who purchase THREE homes on a $60k salary are ruining my ability to eventually sell. My wife and I make $180k/year and we have a $280k mortgage. It's called being responsible. Our mortgage broker told us we could afford a $600k house, but did we? No. Why? Because we are responsible. At the end of the day it's fine with me because I am moving anyway and will rent my house while buying another.
Retribution....Retribution for what? I'm the victim; I pay all my bills, live below my means and have to sit by and bail out everyone else for being irresponsible while watching my country go down the drain spending like a drunken sailor. The responsible people are the ones getting hosed here.

@M

You are renting your home out when you buy another so how are you a victim since that removes you from the selling pool? Do you live in the ghetto like this dude? My guess no.

Apathy? I think it's more self preservation.

I don't view homes as an investment. It's a dwelling that I want to call my own and hopefully be happy there. However the people who bought homes as an investment need to exit the market like any other investment. If the ship is going down get out before zero.

We didn't bail out individuals. We bailed out banks.

I do agree the responsible people are getting nutted on this one, but you seem like you'll easily ride this one out.

If was in your shoes I would have done a 15 year mortgage. Get that sucker paid off fast and when you'd rent it's money in your pocket.

Btw, this is by far the best east coast real estate blog. :)

Why thank you, Ironhide. The active community of commenters here really makes a difference.

@ironhide196 - You are right, I should have done a 15 year mortgage, but didn't. Now I am underwater and can't refinance!

While people are much worse off than I am and I feel somewhat fortunate, I do not want to be a landlord and hold two houses. That is just double the chances of something breaking or needing replacing, which with my luck is bound to happen. Just because I can rent doesn't mean I am in a good situation. I don't think I will be able to sell for years and it makes me anxious.

Bottom line is I am stuck and just have to deal with it.

A huge number of people are stuck. Our usually mobile society is gridlocked as buyers refuse to pay for overpriced, underwater homes, and sellers refuse or are unable to come to the table with the cash to cover the underwater mortgage. This leave many unable to move to or from their desired location.

The best way to make the market move is to have hundred of thousand of individuals do what the gentleman in this article did. If the inventory of bank owned homes becomes extreme, you will see the banks begin dumping homes at a fire sale, to avoid being the rotten egg at the bottom.

Interesting article. It helps you see the other side of the story, though I'm not totally sympathetic to Mr. Farmer's current situation. This is why real estate investors absolutely have to know the market in which they are purchasing. According to other comments, a Baltimore investment property worth $180k in Mr. Farmer's neighborhood was grossly miscalculated. Real estate investing is about growing wealth, with an educated eye as to what the numbers need to be. It can't just be an emotional response. Regardless, I wish Mr. Farmer the best of luck in his future endeavors.

Baltimore Investing, the $180,000 rowhouse wasn't an investment property -- it was his home. (He had two other properties he bought for significantly less.) Just wanted to clarify.

Well,

Just an update. First, thanks Jamie for trying to put as much of the story in as you could. I think many people thought I sold drugs or took out money to get my homes, no one knew that I sold my condo and made over 110K in profit to invest in Baltimore. I foolishly assumed a 3 bedroom home would be worth more than a 1 bed condo in the future, even in Baltimore...I also took advice from people that I thought were knowledgeable about future growth in the areas I went to (redline/MARC urban renewal/Coppin renewal). If I could have afforded the taxes in better established communities in Baltimore, I would have went there, but all that is hindsight 20-20.

I probably should have stayed and rode it out until they kicked me, but to be honest, I was just afraid and stressed out about living there. It seems like it was only getting worse, and it was a matter of time before something bad would have happened to me. I help my mom out, and she needs me now, I don't want her worrying about me, and she is relieved that I am out. I am just happy to be able to still help my mom out, she is first and foremost, no matter the negativity on here.

I love my new place, and I am able to pay my rent "EARLY" my new landlord says that I am not alone, and they love former homeowners more, because they know we will take care of the property and we have proven to be timely payers (even if we did walk from a very bad investment)...Which I am!

I wanted to put this up, it is a heartbreaking story, and I am sure these people would have been done better walking, but they will be called stupid just as well, simply because they wanted to live in a safe community and send their child to a good school - they believed in the lie of the dream too:

http://www.washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091606464.html?hpid%3Dartslot&sub=AR

People, myself included, always heard that owning property was the way to "pull yourself up by the bootstraps"...So I tried. I failed, but I tried. I am glad that I tried to better myself and provide for my family's future. How many people have never tried and wished they had?

Thanks Jamie for understanding that all I was trying to do was "try"...I tried to do something positive, but there were too many cards in the deck against me, and millions more. All the information I got was bad information. Bad information from the appraisers, realtors, banks, everyone. That is a lot of bad information to counter on just an army of one.

I don't regret walking. My only regret was I should have done it sooner, and maybe, I believed in Baltiomore a little too much...I believed that it could be better than its own people did...That was my mistake - I hoped.

Wallace, thanks very much for the update. I expected a variety of opinions from readers, as I mentioned, but I was disheartened by the level of vitriol from many who commented on the story page. Comments here ran the gamut but were much more measured, I thought -- which speaks well of the community.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie
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