Sunday, November 22, 2009

Maybe more need to walk away, prof says

Posted in the Arizona Daily Star by Josh Brodesky:

Why aren't more "underwater" homeowners just walking away? That's a question University of Arizona law professor Brent T. White has been wondering for a while now as he's watched countless homeowners continue to chip away at their loans even though it could be years until they get back their equity.

White recently set the Internet abuzz after he put out a discussion paper on this point, saying it's in the best interest of many homeowners to turn in the keys, but fear and shame often keep people in check. By not walking away, these homeowners are throwing away their money and propping up housing values.

Most of the Internet chatter distilled the paper to something like this: "Prof says it's OK to walk away from home."

But really, White is arguing something much deeper — something much more in line with the question of why banks are bailed out for making bad loans, but homeowners are expected to hold up their own obligations on crummy loans.

"The government was encouraging people to buy, telling people that it was a good investment to buy. Real estate agents pushing people to buy, banks pushing people to buy," White said in an interview. "And then when the market collapses, the homeowner alone is left holding the bag and forced to bear the burden. And so I think we need to talk about the disproportionate burden that is falling on homeowners."

As of this summer about 15.2 million mortgages in the U.S. were "upside down" — meaning a borrower owes more than the property is worth — show numbers from First American CoreLogic, which tracks housing data.

But despite this huge number of underwater borrowers, lenders have done very little to bring things into balance. Instead, the loan modification process is whiplash-inducing. You know, like UA football.

If homeowners are current on their loans, they can't get a modification because they've shown they can make the payments. If they intentionally go into default (often at the suggestion of their lender) to get a modification, they risk taking a hit on their credit or losing their home.

"I think that we have seen rather clearly that lenders are not going to voluntarily modify their loans," White said.

The idea of countless Americans shirking their responsibilities conjures end-of-the-world scenarios. Just think of all the unkempt lawns on those bank-owned properties. But White said it wouldn't be that bad.

"Everyone is concerned about what happens if people actually do walk. The market is going to crash, and maybe that's the case," White said. "And maybe not. Maybe if people start to walk, lenders would start to modify their loans, and we might have decreased foreclosure rates."

Of course, it would be nice if we never got to that point.

To that end, White, who is slightly upside down on his own home, said he is a supporter of principal reductions for homeowners who are more than 20 percent underwater. He also thinks the government should issue hyper-low-interest mortgages to help keep housing costs down.

It's not so much about making a moral argument for people to walk away, he said, but fixing a burden that middle-class owners are being forced to carry.

"We are propping up the market on the backs of the middle class," he said. "If we are going to prop up the market on the backs of the middle class there needs to be some kind of bailout for homeowners."

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