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Jingle Mail Mortgage Myth? May 11, 2008

Posted by tkcollier in Economy & Business, Lifestyle.

In mortgage market, ‘walkaway’ homeowners may be urban myth – Los Angeles Times
Jingle Mail is the sound of the house keys being mailed back to the lender. Experts say some supposed owner-occupants who are “walking away” may in fact be speculators in disguise: buyers who acquired properties as investments to resell for a fast profit. Investors, unlike genuine homeowners, will treat their purchases strictly as economic transactions; their decisions to abandon payments shouldn’t be seen as a sign that American homeowners no longer feel obligated to pay their debts, says Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA’s Anderson School of Management.

“A number of [foreclosed] properties are actually investor-owned, not owner-occupied, and we have to be careful that we’re not attributing to homeowners the actions of investors,” Gabriel said.

But there’s a major problem with all this talk about the phenomenon of solvent homeowners “walking away”: There doesn’t appear to be any hard evidence that it’s actually happening.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.

Nor could the Mortgage Bankers Assn., the leading trade group for housing lenders. Spokesman John Mechem said he believed that walkaways by homeowners who could afford their payments were “becoming more prevalent.” But he said that was based on “anecdotes we’re hearing from our members and what we’re reading in the newspapers.”

Wachovia’s Truslow acknowledged during the bank’s conference call April 14 that walkaways were “hard to quantify.” A bank spokesman said this week that “we have heard anecdotally that people are walking away” but that Wachovia had no hard numbers.

Sinai of the Wharton school points out that homeowners have long been known to do whatever it takes to avoid foreclosure — they’re concerned with maintaining their credit ratings and building equity in their homes, and are typically invested not only in their property but in their communities.

Historically, owner-occupants didn’t default on their mortgages except in a handful of extraordinary situations, such as death, divorce, illness or job loss. Their predictable behavior helped keep mortgage rates low.

“If it’s correct that there’s a change in behavior, all the default and credit risk models will have to be recalibrated,” Gabriel said. But he added: “I have not seen one shred of data that conclusively or systematically speaks to that point.” On the contrary, analyses of the most troubled segments of the mortgage markets suggest that the problem is still rooted in borrowers’ financial distress rather than their cynicism.

In a survey issued this week of Alt-A mortgages originated in 2006 and 2007 — these are nonstandard mortgages often marketed to buyers with less-than-prime credit — Fitch Inc. analysts found that a rise in delinquencies could still be traced to “borrowers who purchased a home they could not afford or those engaged in mortgage fraud for the purpose of property speculation.” Legitimate homeowners, the analysts said, “rarely view the home as a short-term investment … they do not default based solely on a drop in value.”

Fitch has also found a high level of misrepresentation in loan applications “by borrowers, brokers, and other parties.” When Fitch analysts subjected 45 sub-prime loans to detailed examination late last year, they found “the appearance of fraud or misrepresentation in almost every file,” a situation they termed “disconcerting at best” in a report in November.

Some 66% involved “occupancy fraud” — that is, the borrower misrepresented his or her intention to live in the home, rather than to buy it as an investment. That finding underscores the possibility that bankers are blaming owner-occupants for the more common, and not unexpected, phenomenon of “walking away” by real estate investors.

One source of walkaway “folklore” may be services that purport to help homeowners skip out on their mortgages without long-term harm to their credit ratings. Among them is San Diego-based You Walk Away, which launched a website in January offering to help homeowners “unshackle yourself from a losing investment and … Walk Away.”

Co-founder Jon Maddux acknowledged in an interview, however, that the firm’s typical clients are people facing genuine financial stress, whether because they cannot make their current mortgage payments or know that an upcoming raise in their interest rate will make default all but inevitable.

“We do have a lot of people who cry to us on the phone,” he said. “They’re under stress and don’t know what to do. A lot of these people should never have got the house.”



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