Lisa Simpson
Jan 28,2010
In: Mortgage

The Challenge of Underwater Mortgages Intensifies

With each passing day the challenge of underwater mortgages is intensifying.

With each passing day the challenge of underwater mortgages is intensifying. By underwater mortgages are meant those loans whose values are more than the fallen worth of the properties. It poses the question as to why the default number has not proportionately increased with borrowers walking away from such futile financial exercises.

One reason is ingrained ethical values that have been fueled by government propaganda from the time of Paulson, the Treasury Secretary during the Bush regime. But in non-recourse states like California and Arizona, this argument does not hold water because according to the mortgage contract the lender has the right to the property and the property alone, in case of default. Hence the borrower has every right to hand over the keys and walk off. The borrowers in these states have to pay extra dollars for this right.
Susan Woodward of HUD in a report stated that in these states the borrowers paid $800 extra in closing costs for every $100,000 they loaned. These facts and figures are not clearly explained to the borrowers. Had it been done more borrowers would have gladly defaulted without any compunctions.
There are some other reasons for people opting for these strategic defaults or intentionally not paying mortgage dues whether in recourse or non-recourse states. There are economic and emotional prices to be paid to move out of a building that is not just a house but also a home. The social stigma has also to be taken into consideration. The credit rating also gets badly hit. Nevertheless even after adding up all these negative points it is far more convenient and gainful for the borrower to walk off.
With more borrowers becoming aware of their rights and advantages the country should be prepared for another wave of foreclosure as the number of underwater mortgages increases. Bankruptcies and foreclosures have now become so common that it has changed the attitude of the people towards what is social and what is anti-social behaviour. Old stigmas are vanishing. New found rights are asserting themselves. Soon walking away will become contagious and fashionable. It will lead to more opting for people to become tenants in the same locality so that they would not have to find out new schools and associates.

Till now lenders have been non-cooperative about talking about modification and refinancing resulting in failure of government programmes to contain foreclosures. But perhaps with a change in the mood of the borrowers the lenders will start to sit up to realities.