Posts Tagged Home Affordable Modification Program
In 2010, John Adams walked away from his Castle Rock house and its $435,000 mortgage. The 49-year-old software architect left the keys in a kitchen drawer and moved his family of five to a less expensive rental.
Anotherwho defaulted was a Boulder County mail carrier with three children under the age of 5. He rents now, saving $250 a month.
Both men owed more on their homes than they were worth, and they feared they would be indebted the rest of their lives.
They had much in common with 12,000 Coloradans whose homes are in foreclosure. But unlike many, they made a plan and voluntarily walked away from their mortgages. They asked their lenders for lower payments, and when their lenders refused — in part because both men still had jobs and were healthy — the men stopped payments.
Most officials condemn these so-called strategic defaulters — homeowners who technically can afford to make payments but opt not to. “Any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation,” said former Treasury Secretary Henry Paulson Jr.
But Paulson had it backwards.
Wall Street bankers, not homeowners, failed to honor their obligations. Bankers took excessive risks, designed loans to generate the greatest number of fees for themselves, pushed no-down and predatory loans on unqualified and financially illiterate customers, and paid lip service to modifications.
When housing collapsed, bankers took $175 billion in taxpayer bailouts and, to show their gratitude, promptly handed out $33 billion in performance bonuses to their executives.
The question is not why homeowners are strategically defaulting. It’s why more aren’t.
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Strategic defaulters cover a spectrum.
Many are financially astute, such as the oilman who can easily afford the payments on his Vail vacation condo but makes a business decision to bail.
Others paid $400,000 for their home six years ago, but today see their neighbor’s identical house sell for $200,000. They buy it, halving their payments, and dump their old house.
“Buy and bail” is considered mortgage fraud, but it’s unclear how often charges are pursued.
Then there are the types like the mail carrier and the software architect: They borrowed too much, and when real estate tanked, they were trapped.
Defaulting used to be considered shameful. But today, when homes have lost one-third of their value, one-fifth are underwater, and 2 million are in foreclosure, choices are narrowed.
Still, the social stigma remains strong, says Brent T. White, a University of Arizona law professor who urges more upside-down homeowners to consider walking away. White believes lenders often exploit defaulters’ guilt and exaggerate its impact on their credit worthiness. A defaulter’s credit does suffer, but typically if he pays his other bills, his good credit rebounds within two years, White says.
“Homeowners should be walking away in droves,” White has said.
“, with the government and media’s help, have shamed and scared these homeowners into holding on — into scraping together to pay their underwater mortgages, even when it means sacrificing their retirement security, not being able to pay or save for their children’s college education, or scrimping on the basic necessities such as clothes and food,” White told Arizona Republic website readers.
Others agree that lenders exploit borrowers’ financial naivete, and argue banks are well protected.
“Mortgages are collateralized loans. Banks agreed to take on the risk when they did the property appraisal and created the contract on the loan — which spells out what happens if the borrower doesn’t pay: the bank gets the home back, and the borrower’s credit is damaged,” says Jon Maddux, CEO of YouWalkAway.com, which has helped more than 6,000 clients strategically default since 2008.
“People are not educated enough to know” that lenders aren’t doing borrowers any big favors, Maddux says. “Banks certainly have no problem foreclosing.”
Lenders don’t see it that way. Universal Lending’s Peter Lansing, past president of Colorado Mortgage Lenders Association, calls strategic default by anyone not in severe financial trouble “a scheme to screw banks.”
“You made a promise to pay, and you can pay . . . . Ifdecide they don’t have to pay debts anymore, what happens to those investors who want to loan you money? What happens to our moral compass?”
But Lansing feels sympathy for those who lose homes because of unemployment, health issues or divorce. “We [lenders] made loans under terms we should not have. We all admit that.”
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John Adams’ situation was complicated. In 2007, he put $21,750 down on a $435,000 home in Castle Rock. He was also heavily invested in real estate.
When housing crashed, his three rentals needed repairs, and one went vacant. He couldn’t find buyers. Then he lost $150,000 in three real estate investment clubs, which he now describes as Ponzi schemes. “I would agree 100 percent that I was overextended,” Adams says.
His salary was $100,000, but Adams didn’t see how he could recover. His balloon payment was due in four years, “and all my retirement seed money was gone. I have three kids to raise.”
Adams went to his lender, but the bank “was very aggressive. They had no intention of working with me on a loan modification. They would pop by the house to work me over, and then give me a lecture. They told my wife they would hunt us down to the ends of the earth.”
Adams contacted YouWalkAway.com, which helped him negotiate his default. Still, it took an emotional toll.
“All my life I thought anyone who defaults is a deadbeat. . . . Now I’m a deadbeat.”
Like Adams, the mail carrier is not proud of defaulting, and would talk to me only if he remained anonymous. He also is bitter about being rejected for a short sale, a modification, and the Home Affordable Modification Program on his condo, which he bought for $165,000 and was recently valued at $110,000. His $53,000-$55,000 salary was considered too high.
“The bank just would not work with us. We turned our back on the bank because the bank turned its back on us.”
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Maddux says he understands consumers’ anger. “A lot of people feel conned. Economists and government leaders were all saying there is no question that a home is one of the soundest investments you could make. [But] the American Dream turned into a nightmare.”
Indeed, millions of Americans will never recover. The crisis cost middle-class Americans $7.38 trillion — as much as half their wealth tied to their homes.
In a recent Vanity Fair article, economist Joseph Stiglitz writes the richest 1 percent of Americans receive nearly a quarter of the nation’s income. The top 1 percent control 40 percent of the wealth. The middle class, in the meantime, has gotten poorer.
The housing meltdown further widened that frightening wealth gap.
The crisis had many contributors: consumers over-borrowed, regulators fell down, and two presidents rescued bankers, then failed to hold them accountable. But by far the greatest sins were, and if more mortgage holders start strategically defaulting, the banking industry has only itself to blame.