Housing Woes: Borrowers Abandoning Mortgages Amid Falling Market

I don't often comment on the housing market (instead, I write more commonly on general economic instability), but there's been a few interesting - even juicy - stories out this week worth a quick post.

First, Mortimer Zuckerman at U.S. News has a nifty background on the credit crunch:

We are having a bad hangover from easy money. Very easy. Thanks to low interest rates and an expanding money supply, people and companies borrowed more than they could reasonably pay back....

Banks were willing to lend more and more to purchasers who bid more and more for a house, causing home prices to rise and giving the banks and other buyers even more confidence that prices would increase, justifying even more lending. So, too, with other asset prices. Banks set up off-balance sheet subsidiaries that piled up debt; leveraged-buyout groups borrowed many billions to take companies private; hedge funds borrowed to invest in assets—and the beat went on....

With all this money available, credit cards, auto loans, and other consumer debt were extended to almost everyone who could walk, resulting these days in a dramatic increase in loan delinquencies and defaults. And this is coming even before the unemployment rate has increased cyclically and before a formal recession has struck. American Express has responded by raising its provisions for loan losses by 70 percent to $1.5 billion. Goldman Sachs predicts credit card losses will reach $100 billion out of the roughly $1 trillion in the revolving balances of all U.S. credit cards. Lending standards are being tightened on nearly all types of consumer credit, and this may lead to the first full-scale contraction of consumer credit in over 15 years. The concern is that consumers may be pushed to the breaking point, reflecting not only the shutdown of the their buying spigot but a fundamental shift in their optimism and confidence in the economy.

Well, we pretty much seem to be at the breaking point now. I mean, the market could fall even further, but many struggling homeowners aren't waiting for that.

As the New York Times reported yesterday, more and more stressed borrowers are bailing out of their home loans, aided by a new style of business start-up for hard times: the mortgage walk-out assistance firm (the article mentions a company called "You Walk Away," which takes care of all the legal and financial arrangements for walking out and leaving the keys behind).

It turns out today's Wall Street Journal also has a report on the phenomenon, "Borrowers Abandon Mortgages as Prices Drop":

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.

Typically borrowers who turn in their keys are those who have run into financial trouble or need to relocate but can't sell their homes. But mortgage-industry executives and consumer counselors say they are starting to see people who aren't in dire financial straits defaulting on their mortgages because they don't want to pay for properties that have negative equity.

Many are speculators who had planned to quickly flip the home, but others appear to be homeowners who had second thoughts about their purchase....

Some borrowers feel they have no good alternative. A tight credit market has made it tough for would-be sellers to find buyers or for borrowers looking to lower their mortgage costs to refinance.

Other borrowers are walking away in frustration because they can't arrange a workout with their lenders, says D.J. Enga, director of outreach services for Auriton Solutions, which counsels homeowners nationwide. Mr. Enga expects that 10% to 15% of the roughly 4,000 callers counseled this month by Auriton, of St. Paul, Minn., will walk away from their mortgages.

One of the reasons I don't blog on the housing market is that, frankly, I don't like to think about it. Oh, I'm not in any danger, but we live in a new neighborhood in Orange County, a hotbed of the Southern California housing boom, so I see a lot of the volatility.

It's obviously tight all around the country, but crunches are strange here, which had a county-level unemployment rate of just 1.9 percent at the height of economic boom in the 1990s. I'm seeing big changes now, though: There's less of the robust tract construction, open houses are few and far between, and "bank owned" signs are cropping up at foreclosed properties on nearby streets.

This morning, as I was driving down to my eye doctor's (just to pick up some new glasses), I noticed a "going-out-of-business" banner across the top of a brand-new Wickes furniture store off the 405 Freeway (the business had just recently moved into its new location, a spiffy big-box retailing center).

To me, those "store closing" signs are way more significant than all the market blather about how the Fed's going to lower rates or the recent collapses of the Dow Jones Industrial Average.

When entire local shopping centers are riddled with idle storefronts (as was true back in 1991-92 in many communities), there's certainly economic change afoot.

Thankfully, my zip-code's seen housing appreciation in recent months, at least that's what all the realtors' ads on my doorknob are saying.

I frankly don't look at Sunday's real estate section all that much any more. I'm just riding it our, like many, I guess, hoping for markets to stabilize once again.