Today, proper protocol, pacts with state governors and sound financial sense dictate that members of the mortgage industry should help distressed borrowers do all they can to avoid foreclosure. Succeeding on that front is a difficult enough task in itself, of course, even if the servicer and distressed borrower in question are working toward a common goal.
Now what about when the homeowner would actually welcome foreclosure and perhaps even seeks it out?
Walkaway borrowers – those who can afford their mortgage payments but voluntarily default on their mortgages in response to hopelessly tanking home values – have made recent headlines as arguably statistically worthy contributors to mortgage firms' financial losses, as well as tragic emblems of a modern American culture that sees contracts as breakable and homes as mere investments.
Online resources for borrowers looking to jump ship offer walkaway kits that promise several months of payment-free living and "protection" from mortgage lenders seeking contact, followed by damage-control sessions with credit-repair affiliates to help lessen the inevitable black smudge that a foreclosure – even one that sounds downright exhilarating, based on one company's pitch – creates.
"Unshackle yourself today from a losing investment and use our proven method to Walk Away," one such firm urges slightly stressed and semi-stressed borrowers. Doubly "shackled" homeowners – or, more likely, investors – will be no doubt pleased to note that they can walk away from a second property at only half price.
But fortunately for creditors, as well as guardians of the collective American morality, as easy as the walkaway process sounds, the most recent findings show that it is not necessarily taking place to any measurable degree so far.
According to a recent Los Angeles Times article by Michael A. Hiltzik, major lending firms and the Mortgage Bankers Association alike have confirmed that the incidents are occurring increasingly frequently, but they were unable to produce numbers.
Similarly, Marianne Sullivan of Fannie Mae – which recently increased the required post-foreclosure waiting period to obtain another Fannie Mae loan from four years to five years – told the paper that despite growing "folklore" about walkaways, the vast majority of borrowers continue to act in "good faith."
Cooperating is, after all, likely to prove the most effective response to mortgage distress – or negative equity – for the average borrower. "For a variety of reasons, most homeowners find walking away difficult and expensive," writes Vikas Bijaj in a May 10 New York Times article.
For example, "A foreclosure can make it hard for borrowers to get other loans and sometimes even an apartment. Economists refer to these as "transaction costs' that offset the benefit borrowers might get from defaulting on an underwater home loan."
Deficiency judgments to recoup the difference between debt owed and post-foreclosure sales value are another potential obstacle to walking away, the article notes, though the expense and time requirements for pursuing these types of claims prevent lenders from pursuing them frequently, except as a purposeful walkaway deterrent in a few visible cases.
A visible walkaway case that ended a bit differently – and possibly contributed to all the recent attention on the not-quite trend – was that of former Major League Baseball player Jose Canseco, who "made a mathematical decision" to allow his home to enter foreclosure, according to an Associated Press piece.
Canseco bought the 7,300 square-foot Los Angeles-area home for about $2.8 million in 2005 and transferred partial ownership to a trust in 2007 before defaulting in October. The foreclosure was recorded in February but made the news in May as perhaps the highest-profile case of foreclosure during an era when foreclosure itself is nearly a celebrity.
The Canseco incident "could be a good indicator," warns a poster named Cal on Los Angeles Times blogs. "Given the moronic, celebrity-obsessed culture we live in, having famous people saying it's okay to walk away from housing debt can mean only one thing. Jingle mail â�¦ [It's] not just for losers anymore."
– Jessica Lillian, Commercial Mortgage Insight