I get to listen to a lot of very good agents talk about this problem–and I get to watch them deal with it. If you have not heard because you don’t read about the economy too much, or because you are living on one of those markets fortunate enough to have a low percentage of defaults and foreclosures, here’s what’s happening.
Homeowners, seeing their home’s value drop far below the value it had when they bought it, are making an on purpose decision to walk away from their mortgage commitments. The rationale is simple: not only have prices fallen 20, 30, 50% and more (in some places) from 2007 levels–they are still falling, or flattening at best. Future prospects for value recovery feel slim. Homeowners see their mortgage payment going out the door, never to return–equity lost that will never be recaptured, or not recaptured for many years.
What if I stopped paying, they wonder? They look around them and see friends and neighbors doing it. “We have an income and we have assets, but we will never recapture this loss,” they think. “We hear people stop paying and it takes lenders forever to foreclose (the national average is now more than a year!) We can stay here for a while, save the payment, prepare to be foreclosed eventually, and get ready to own something else someday.” Or they think, “We can stop paying and see if we can qualify for a short sale; if we pull it off, we will preserve more of our credit and possibly be able to buy again sooner.” Either way, these homeowner see a way off their sinking real estate ship.
Agents in these markets who are short sale experts face these homeowners on the phone or across the kitchen table every day. Is there an ethical dilemma? After all, these customers aren’t wanting out because they can’t pay–they just don’t see the benefit in it anymore.
Some agents tell me they’ve reconciled in their minds that strategic defaulters are making “a business decision.” They’ve seen huge banks rescued by the government for making lousy real estate mortgage investments. “It’s my turn,” they’re thinking. “I’ll bail myself out.” Whether they sell short successfully, or just eventually get foreclosed, their lender takes a hit (almost always a bigger one in foreclosure than in short sale) and the homeowner has a shot at a fresh start.
If you’re reading this and have not experienced the dilemma “up close and personal”–as ABC Sports used to say in its Olympic athlete profiles–well you might be feeling something on a scale from queasy to downright angry. I know I did.
What about the agents? The homeowners are walking–in growing numbers according to top agents in the most distressed markets. A year ago the University of Chicago did a Chicago study and found 30% saying they were either doing it or seriously considering it. In some places, like Phoenix, Las Vegas, Florida, and parts of California, the percentage is higher.
Government loan modification and short sale “help” programs are failing miserably. One Phoenix area agent told me recently, “I have 183 short sales in some form of negotiation right now, and ony one of those people has qualified for the government’s HAFA (Home Affordable Foreclosure Alternatives) program.” Similar reports are coming in from agents I know in California. One agent there gave me this perspective the other day, “It’s the little people, small business people, who really need the help and can’t get it from HAFA,” they said. “HAFA demands to see assets to qualify. These people have been financially devastated, so they don’t qualify. What good is that doing anyone?”
So what are the lenders doing about all of this? Not much. In some cases they may demand a short seller bring some funds to the closing table to get out for less than they owe. But the bottom line for lenders, increasingly, is–the homeowners are leaving anyway. The bank can see the foreclosure process through and re-sell with a bank owned property agent, or by auction. Or they can go for a short sale, take a somewhat smaller loss, and find a new homeowner.
So another new phenomenon has blossomed on the landscape of American real estate. Agents are making the only decision they can make–to help wherever possible. And the homeowners? I guess until it’s your home, your family, your money, and your reputation you can’t know for sure what you would do. But many who are there have found an answer.
What would you do? Or, are you doing it?
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