Walking away from a mortgage

It’s not that easy or common to walk away from a mortgage

BY STEPHANIE FOX

If you listen to media coverage about the current housing and mortgage crisis, you are likely to hear tales about people who are walking away from their mortgages when they find themselves owing more on their homes than their homes are worth.

The stories range from people leaving their homes and simply mailing their keys to the bank, to those engaging in something called “buy and bail.” “Buy and bail” is a scheme where homeowners apply for mortgages claiming that the rental income on their current home will cover a new home’s mortgage payments. They then buy a second, often nicer, home and walk away from the first home and its existing mortgage, never renting it out as promised. They then allow the bank to take possession of their first home. The new mortgage is much cheaper since housing prices and interest rates are lower.

If walking away sounds easy, it’s not. These practices have hard consequences, including future credit problems, tax penalties and possible jail time, since some of these methods are considered mortgage fraud. Some banks have even begun suing the borrowers for personal assets.

But, these stories may represent the distinct minority of walk-aways. Some housing experts are claiming that true walk-aways are rare and in some communities, like the Twin Cities, nearly unheard of. Kurt Eggert, a professor of law at California’s Chapman University Law School and an expert on predatory lending,

said he thinks that mortgage bankers are trying to shift the blame for the foreclosure crisis to borrowers, with tales of cheating homeowners and innocent lenders.

“Lenders have an interest in painting themselves as responsible, even caring entities,” he said. “They want to cast blame for the sub-prime meltdown and make themselves seem like the victim of borrowers in order to fight off additional regulations.”

Eggert insists that the banks are trying to demonize people who can no longer afford their mortgages. “In the world of high finance, people who take loans to buy high-rise office buildings walk away from them all the time,” he said. “Why the double standard? Because the financial industry is trying to claim that they are the victims.”

In fact, many of the walk-aways are actually investor owned, not owner occupied. A report by Fitch Inc., a financial rating company, found that 66 percent of the delinquencies during 2006 and 2007 were sub-prime mortgages from “those engaged in mortgage fraud for the purpose of property speculation,” that is, investors who fraudulently bought homes not to live in, but to sell at a profit when housing prices rose.

In some states like Nevada, Arizona, Ohio and Florida, during the third quarter of 2007, non-owner-occupied foreclosures represented 22 percent of all loans made, according to the Mortgage Banker’s Association. But banks continue to treat residential real estate investors the same as they do the people who are living in their homes and who want to stay there.

Mark Ireland, supervising attorney for the Foreclosure Relief Law Project in St. Paul who works locally to help homeowners avert foreclosure, has questions about the common perception that homeowners don’t act in good
faith with their banks.

“I never talked to anyone who called me to say they just want to leave the lender high and dry,” he said. “What I do see are homeowners who are incredibly frustrated. They want to modify their payment or lower their interest rate—they just want to do something. They may not be able to make the full payments but they want to make things work.”

But, said Ireland, when they contact their lender, they get the runaround and eventually they give up and let the bank foreclose. “They just want to get on with their lives. But, this idea of the greedy homeowner who has no morals or ethics, I don’t see that at all.”

It would be a good business decision, Ireland claims, for banks to start to give a little on the principal owed when homes are worth much less than the mortgage. Currently though, even the giant mortgage corporations Fannie Mae and Freddie Mac both forbid their lenders to do this. (including properties of one to four units) rose to a seasonally adjusted rate of 9.64 percent, up from 6.99 percent from a year earlier. Of these, 33 percent were prime fixed-rate loans. The situation is not expected to change until employment figures improve.

Stephanie Fox is a real estate agent in Minneapolis who has worked with clients facing foreclosure.

Thank you for Stephanie Fox's article, "Walking away from a mortgage," March 2010. http://www.southsidepride.com/2010/03/
articles/Walking_away_mortgage.html  I used to live in MN and often read MN publications.
 
The FBI reported years ago that mortgage fraud was a widespread and growing crime capable of taking out the economy.  It asked the Bush administration for resources to combat it and was denied.  By about 2005 the FBI reported that 80% of this fraud was being done by industry insiders.  The most recent FBI report on mortgage fraud listed homebuilders in many more types of mortgage fraud than ever before.  FBI reports on financial crimes, white collar crime, and mortgage fraud: http://www.fbi.gov/publications.htm
 
Years ago, a consumer group I was with, was one of the voices in the wilderness making these same predictions, (based on consumer complaints), and trying to get the government to enforce laws that were designed to protect consumers, and avert economic damage.  The industry was doing nothing to stop it, obviously, and the government looked the other way, even giving its blessing through government backed toxic loans.  We are all paying for it in the form of bailouts and business tax breaks that go right into the pockets of bankers, builders, and others in these industries that perpetrated the scams in the first place.  These bailouts started with Bush in 2008 when he gave over $700 billion to the banks with no strings attached.  Obama has continued the gifts. BOTH parties sold out and betrayed the American public, and NEITHER party is the answer to the problem.
 
Thank you for pointing out something VERY important; that the industry is painting itself as the victim and blaming consumers, to avoid tighter regulation.  Even if consumers did suddenly decide to commit mortgage fraud it could not have happened without the industry's approval, and in reality the consumers did not have the knowledge to concoct the schemes, nor the idea of mortgage backed securities, etc. This was an industry-perpetrated crime on America, and our government is robbing taxpayers to reward cheating businesses. 
 
Thanks again for the article, it was a good one and wish it was in more mainstream media getting more notice.  Too many Americans are still buying the businesses excuse that consumers are to blame for all this. 
 
Cindy Schnackel
Former secretary for Homeowners Against Deficient Dwellings (hadd.com)