Frustrated Homeowners Take a Walk

Sage advice says that a good walk will relieve stress. For an increasing number of homeowners in distress and facing foreclosure, that advice makes perfect sense — many are literally walking away from their homes as they see any chance to avoid foreclosure disappear along with their shriveling equity.

The walk-away phenomenon is building up a head of steam, as more and more homeowners face the stark reality of financial insecurity that has blindsided them after such a prolonged era of fiscal euphoria, with home values escalating so rapidly that many thought it would never end.

Waking up to the morning after the burst of the so-called real estate bubble, many of these homeowners, who were living by the mantra “let the good times roll” and bought more home than they realistically could afford, are hurting financially. And now they are being forced to seriously weigh their options — either fight foreclosure head on or walk way from the home altogether and let the lender take it over.

An increasing number of homeowners are choosing the latter option, evidenced by a new cottage industry targeting homeowners who just want to walk away — for a price, of course.

Walk-Aways: Fact or Fiction
Not everyone is convinced that walk-aways are a huge issue. One recent news report went so far as to claim that walk-aways are nothing more than an urban legend with only anecdotal evidence at most to back up the idea that there has been a recent spike in walk-aways at all.

However, other headlines tell a different story. One where people facing real life situations have decided to either walk, or are at least seriously considering it as an option, given their individual set of circumstances.

Many of these reports are coming from regions of the country with the highest concentrations of foreclosure activity, such as Las Vegas, parts of Florida and California, Arizona, Ohio and Michigan.

The stories emerging from those areas tell of homeowners who find themselves sitting on homes with negative equity, leaving them few choices but to either walk away or ride out the foreclosure. These are areas where price declines have been steep, sales activity virtually non-existent (relatively speaking), and inventories of unsold housing growing exponentially.

To Rancho Cucamonga, Calif.-based realtor Vickie Lobo, walk-aways are an everyday occurrence in her market area.

“You know why people walk away? Because it makes no sense to stay,” Lobo said. “In North Fontana a builder built three-story homes each over 4,000 square feet. People paid $700,000 to $800,000, and now a neighbor is selling the model match for $400,000. They can literally buy the house next door for half of what they spent. It’s not going to make sense to hold onto the property.”

John Maddux, co-founder of YouWalkAway.com, said his firm averages 20 calls a day from frustrated homeowners interested in learning how they can legally walk away from their upside down properties.

“We’re seeing it every day,” he said. “Honestly I think it’s just scratching the tip of the iceberg. We get them across the timeline, from two months before they decide to stop making payments, to after the house is sold. The joy of owning a home is dwindling away. They’d rather rent and let someone else fix the roof. They feel they’ve been lied to.”

Walk-Aways By the Numbers
One indicator that people are in fact walking away from their mortgages and their homes is the increase in deeds-in-lieu of foreclosure (DIL), a document that allows a homeowner/borrower to sign away title and all legal claims to a property to a lender for a return promise not to foreclose.

For all of 2007 the use of DIL increased 153 percent between the first and fourth quarters of the year. Arizona led the way with an increase of more than 1,000 percent, followed by Indiana, Ohio, New York and Nevada. But although the percentage increases are high, the raw number of DIL records remains relatively low, with just 614 reported nationwide in the fourth quarter of 2007, according to RealtyTrac.

Investor and radio talk show host Doug Crowe is not seeing a trend towards walk-aways in the Chicago area. He said that is because the banks are very motivated to keep homeowners in their properties.

“The biggest trend I’ve seen is the bank doesn’t want to do the deed-in-lieu but wants to keep the paper (the mortgage) alive and not get the property back. They just want to work on the payments,” he said.

The Consequences of Walking Away
At the federal level Fannie Mae recently adopted new guidelines in the hopes of deterring frustrated homeowners from simply walking away on properties funded with federally insured loans.

Under the new guidelines, a borrower/homeowner with a foreclosure on his or her credit report will have to wait five years (instead of the previous four years) before being allowed to apply for a new mortgage loan. The only exception is in the case of a borrower who can document that “extenuating circumstances” were present at the time of the foreclosure (such as a job loss, divorce, medical emergency, etc.).

Even after the waiting period is over, however, the borrower will still be required to come up with a 10 percent down payment towards a new mortgage and have a credit score of at least 680 (Fannie Mae previously did not impose a credit score requirement).

Walking away from a home will also damage the homeowner’s credit score. Although it may not be as detrimental as a full-fledged foreclosure, a walk-away can affect the borrower’s chances of applying for rental housing applications and other types of credit.

Real Estate Investors Can Help
Although some estate investors have contributed to the walk-away phenomenon by bailing out of investment properties when the market hit the skids, now real estate investors can come to the rescue of troubled homeowners — and other investors — facing foreclosure.

San Jose-based Realtor and real estate investor Leon Sivils would counsel homeowners considering the walk-away option to instead stay in the house and work with the lender.

“I know there’s a little bit of jingle mail going on, but it’s not that big a deal. None of my clients are doing that. One tried to but I talked him out of it,” Sivils said. “We’re counseling them to back up the truck a little bit and work with the lender.”

One case in point, Sivils told the story of one of his clients who considered walking away but then found out that the lender had made a mistake and there was, in fact, no default. The lender’s attorney ended up sending Sivils’ client a check for $30,000 and restoring his credit.

In other cases, Sivils says he is working out some tremendous deals with lenders for his clients.

“We have deals going on right now where clients are talking to their lenders and the lenders are writing off parts of the mortgages. You don’t know what the lender is going to do for that particular client. It’s a mystery. My guess is I can probably help save him 10 to 30 percent of his mortgage.”

But in some areas that have been decimated by foreclosures, homeowners and lenders are not finding a way to work things out, and homeowners are walking away in droves.

“One of my best friends just walked away from his house near Lake Las Vegas. Almost every house in that neighborhood is being walked away from,” said Henderson, Nev.-based investor Sean Brown, noting that some homeowners who plan to walk away can still end up living in the house for more than a year without making any mortgage payments. “Think about it. You need to be 90 days late to even start the foreclosure process in Nevada. You have 90 more days from the date of the Notice of Default, two weeks more to the Notice of Sale, and two weeks before they come to evict you. Then they do ‘cash for keys’ and give you two more weeks. That is, if the bank is on the ball and is aggressive on the timeline.”

William Bronchick, president of the Colorado Association of Real Estate Investors, said many homeowners are willing to turn over the keys to the house directly to an investor who offers them cash.

“People walk away all the time. We come across a lot of vacant houses where people walk way before the foreclosure is even finished,” he said. “People are willing to walk away for a check of $1,000 or less. Deed over the property and walk away.”

In Southern California’s Inland Empire area, Lobo sees plenty of opportunity for investors to pick up good deals on vacated homes resulting from walk-aways. Investors who have enough cash can come in and purchase a whole batch of properties at a good price, Lobo said.

The increase in walk-aways indicates that both distressed homeowners and foreclosing lenders are reaching the end of their capacity to deal with the flood of foreclosures occurring in many areas of the country. That likely means that investors will find both parties more willing to negotiate a deal — whether that be via a short sale agreement, a bulk purchase of scratch-and-dent REO properties or some other arrangement.

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