Huge Rise in Walkaways

A growing number of homeowners are doing what was once unthinkable – strategically walking away from mortgages, and the trend is showing huge signs of increasing with the approval of academia.

A consulting company working for financial institutions, Oliver Wyman estimates that 16% of current foreclosures are of mortgage borrowers intentionally walking away, choosing to pay other debts first and stick it to the bank. Other financial firms estimate the rise in walkaways is as high as one in four. The walkaways are concentrated in five of the worst states impacted by the foreclosure crisis, California, Florida, Arizona, Nevada and Hawaii.

“Homeowners should be walking away in droves,” says University of Arizona law professor Brent T. White. “One can have a good credit rating again – meaning above 660 within two years after foreclosure.”

In a paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” White explains how homeowners who feel they were ripped-off by the system or in serious financial jeopardy can walk away and improve their financial situations.

Harnessing the emotional aspect of what is otherwise a business decision can assist homeowners in retaking control of their financial lives, according to White. Outside influences from bankers, who are only interested in collecting more payments on the mortgage, the government and the media is that “voluntarily defaulting on a mortgage is immoral.”

The mounting number of homeowners underwater, estimated to be one in four mortgage holders, and the rising flood of foreclosures has led U.S. households to lose about $5.9-trillion in value since the housing markets peak in 2006. While some markets are forecast to see improving conditions in 2010, the majority are projected to see home values continue to deteriorate.

Foreclosure filings are also expected to hit another mild-stone after reaching all-time record highs over the past two years. The rising tide of foreclosures means housing prices will decline in the majority of the U.S.

White says that most mortgage holders should plan in advance before they stop paying the mortgage. “Most individuals should be able to plan in advance for a few years of limited credit,” said White.

But what about the moral dilemma that makes it so difficult for many people to just walk away? White says that in states like Arizona and California anti-deficiency judgments aren’t available to bankers wanting to collect on future debts and bankers just end up with the house.

Many other states have seen little fallout from walkaways as homeowners find flaws in mortgage documents, disclosures and underwriting to challenge contracts, and sue mortgage companies. Banks might begin negotiating with more borrowers once even more homeowners walk away pressuring the system that triggered the nation’s economic mess.