'Walkaway' homeowners in US market might be an urban myth

Business Times - 13 May 2008


'Walkaway' homeowners in US market might be an urban myth

No hard evidence solvent borrowers are voluntarily defaulting on their loans

(LOS ANGELES) Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.

It's known colloquially as 'walking away', or more jocularly as 'jingle mail', from the sound your house keys supposedly make when you mail them back to your bank.

It's a way of saying that Americans are beginning to apply a cold financial calculation to home ownership: When a home's value has fallen below what is owed on its mortgage, they feel it makes no sense to keep up the payments.

'That is going on, clearly, and there's lots of evidence of that in the market,' Don Truslow, senior executive vice-president of Wachovia Bank, said in a conference call with investors last month.

A few weeks earlier, US Treasury Secretary Henry M Paulson had waggled a stern finger at homeowners contemplating walking away from affordable mortgages: Do that, and you're no better than a 'speculator', he said.

Elsewhere, media reports and Internet postings are rife with stories about the trend and a supposed sea change in American attitudes toward debt. 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 happening.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce figures. Nor could the Mortgage Bankers Association, the leading trade group for housing lenders.

Wachovia's Mr Truslow acknowledged during the bank's conference call on April 14 that walkaways were 'hard to quantify'. A bank spokesman said last week that, 'We have heard anecdotally that people are walking away', but his bank had no hard numbers.

Bank of America (BOA) chairman and chief executive Kenneth Lewis, whose company is acquiring mortgage lender Countrywide Financial Corp, decried 'a change in social attitudes toward default' in an interview with The Wall Street Journal in December.

In response to questions from the Los Angeles Times, BOA spokesman Terry Francisco said the bank had seen indications that some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances, often by raiding their home equity lines to pay their cards, a reversal of traditional customer priorities. But he said the bank did not have 'firm figures' on how many homeowners were unnecessarily defaulting on their mortgages.

Some people suggest that it might be impossible to find out. 'How would you know what someone's true ability to pay would be?' asked Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. 'I'm not sure you could even come up with a definition.'

At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, senior vice-president Marianne Sullivan conceded that there was growing 'folklore' about residential walkaways but said that the phenomenon probably was connected more to investors than people who live in their homes, or 'owner-occupants'. 'The vast majority of borrowers we find have been acting in good faith,' she said. 'If they get behind, they are interested in working with their lender.'

Bruce Marks, CEO of Neighbourhood Assistance Corp, a Boston-based non-profit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an 'urban myth' that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

Mr Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis.

'So many of the loans made were irresponsible - for the borrowers and for the lenders,' said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County, California. 'Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers.'

It is generally agreed that the real culprit in the meltdown is the proliferation of exotic mortgages that hit borrowers - many with paltry down payments and therefore almost no equity in the home - with huge payment shocks in the early years of the loan. The new payments are often raised to levels that the borrowers never could have afforded but expected to escape via a refinancing or a sale of the house into a rising market.

When home values fell instead, their exit strategy evaporated. But that does not necessarily mean that they can afford to keep paying.

Experts say some supposed owner-occupants who are 'walking away' might 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 the University of California, Los Angeles'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,' Mr Gabriel said.

Prof 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 behaviour helped keep mortgage rates low.

'If it's correct that there's a change in behaviour, all the default and credit risk models will have to be recalibrated,' Mr Gabriel said. But he added: 'I have not seen one shred of data that conclusively or systematically speaks to that point.' - LAT-WP

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