More Home Owners Walk Away From Their Loans

02/8/2010 - Culture - 11 Views "Underwater" has become the popular term for a mortgage loan that is higher than a home's current market value. According to a recent New York Times article, as many as 4.5 million Americans find themselves in this predicament. That is like every home in Los Angeles plus every home in Boston being underwater. Research has found that when the home value falls to below 75 percent of the home loan, people seriously consider defaulting on the loan and just walking away from the house.

This is not a decision made easily, especially when a person can afford to pay the mortgage each month. This is largely a recent phenomenon, something people wouldn't have considered just a couple of years ago. The reason for contemplating such an unreasonable option as walking away from a debt obligation is that high mortgage payments are not building any equity.

The Obama administration's loan modification program that was meant to combat underwater mortgages and runaway interest rates has done little to address either. It was intended to help millions of homeowners, but the reality is that it has helped a fraction of that number. Banks are not very sympathetic to choices that they consider homeowners made willingly and are largely unwilling to reassess or modify loans.

The line between a bank foreclosure and an owner-initiated default is fine, at best. They both ruin credit. Certainly not all of those 4.5 million homeowners are going to walk away, but one estimate puts the number around 17 percent. Also according to the New York Times article, the projection is that 10 percent of all homeowners will be in this predicament by the end of the year.

"The overwhelming bulk of people who have negative equity stay in their homes and keep paying," said Michael Barr, assistant Treasury secretary for financial institutions. In other words, people talk about it, but the reality of uprooting the family and ruining their credit is too much risk for most people. These days a credit score is used for more than getting a credit card or a mortgage loan. Credit scores and history are used by potential employers and even graduate school programs to evaluate candidates.

As sales of previously occupied homes took a bigger than expected drop in December, the state of the housing industry remains unclear. Over the last two years, home values have fallen an average of 30 percent across the country, but more than 50 percent in some markets. The median home sales price is now around $180,000, which is a 1.5 percent gain from a year earlier and the first yearly gain since August 2007. For those homeowners drowning in negative equity, home values are certainly not rising fast enough. Swimming away from an underwater mortgage could become a popular sport.

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