Just Walk Away

From CNN/Money:

Troubled homeowners: Can’t pay? Just walk away

Mortgage payments are set to jump. Home prices have plunged. “I’m outta here.”

Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets. So many people are handing their keys back to lenders that a new term has been coined for it: jingle mail.

“I stopped paying my mortgage in October, after shelling out about $70,000 in interest [over 15 months],” said one borrower, David, who doesn’t want his last name used. “Now, I’m just waiting for the default notice.”

The Los Angeles-based writer bought two properties in Hancock Park, west of downtown, using no-down, interest-only mortgages in 2006. He paid just over $1 million for both.

David had planned to sell them quickly but got caught in the slump. Soon his interest rate will jump by a few points, and his payments will go up by several hundred dollars a month for each place. He figures his properties have fallen in value by at least $60,000 each.
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Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many buyers put little or no money down, so they don’t have much invested in them. That leaves them with little incentive to keep making payments when a home’s market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores. For some, that’s better than throwing away money they’ll never recover by selling their home.

And while a mortgage default can savage a person’s credit record, trying to pay off a loan they can’t afford could be worse for borrowers if it leads to bankruptcy, said Craig Watts, a spokesman for the credit reporting firm Fair Isaac.

Credit scores are hurt much more by missing multiple payments – on credit cards, cars and so on – than by a single foreclosure.

“The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy,” said Watts.
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The trend of walking away is most pronounced among real estate investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association (MBA).

But families are doing it too. “If they have to stretch to make mortgage payments for a home that will not recover its value, then yes, they may walk away,” he said.

Often they chose hybrid adjustable rate mortgages (ARMs) that came with low initial payments. After a few years, interest rates on these loans reset higher. But buyers thought they could count on the increased value of their homes to refinance into affordable, fixed-rate loans.