Jingle Mail, Jingle Mail, Jingle all the Way...

More homeowners mailing keys to lenders

Owing more than home is worth, recent buyers walk away

by Catherine Reagor - Apr. 21, 2008 12:00 AM
The Arizona Republic

Instead of mailing in their monthly mortgage payment, a growing number of homeowners are sending lenders their keys.
As housing prices fall and rates on some mortgage loans rise, more homeowners are walking away from their homes, according to housing-market watchers.
These typically are people who can afford their mortgage but don't want to pay on a loan that is more than their house is worth. They'll live with the stigma or credit ding from a foreclosure just to get out from under their loan. The growing trend, called "jingle mail," is pushing up foreclosures and alarming market watchers, particularly in metropolitan Phoenix, where home prices have dropped 18 percent in the past year.
Foreclosures across metropolitan Phoenix climbed to a record 2,365 in March, according to the real-estate data firm Information Market. That is more than quadruple the number from a year ago.
Joan Shaffer is turning in the keys of the north Phoenix Tatum Ranch home she bought with her daughter in late 2005. They put nothing down on the home, took out a loan that let them pay less than they owed each month and now their loan is $200,000 more than the house is worth.
"We paid $585,000. It was the peak of the market, but no one told us," said Shaffer, a real-estate agent from Colorado. "We would probably have to spend the next 20 years trying to get right on the mortgage. That's crazy."

Assessing trend
The mortgage industry is struggling to estimate how many homes are going into foreclosure because of people who don't want to pay, rather than because of people who can't afford to pay.
Industry estimates and anecdotes suggest the figure is climbing in the Valley because so many people who bought during the peak are now upside down in their mortgages.
Real-estate agents are hearing it more often from people who can't sell. Mortgage lenders are reporting getting more jingle mail, and now there are businesses advising homeowners how to walk away.
"Even if someone put 5 to 10 percent down but bought in the Valley during '05 or '06, they are likely upside down now," said Brett Barry of the north Phoenix office of Realty Executives. "I don't advise people to walk away, but how do you convince someone to keep paying when they owe so much more than their home is worth? They can't sell, and their lender isn't going to forgive $100,000 in principal. It's not good."
Investors started the walk-away trend, but it has spread to the typical homeowner.
Housing analyst RL Brown said he is hearing about young families who bought during the peak and are now walking away from houses as the interest rates on their loans reset and payments increase.
"Instead of calling it a foreclosure, these couples are saying, 'We're giving it back to the bank,' and then moving a couple of blocks away and renting a home for half their mortgage payment," he said. "These people are finding it easier to walk away."
Businesses are popping up that guide homeowners on the best way to walk away from their mortgage. One firm, Youwalkaway.com, tells unhappy homeowners to ask themselves these questions: Are you stressed out about your mortgage payments? Do you have little or no equity in your home? What if you could live payment-free for up to eight months and walk away without owing a penny?

Avoiding bankruptcy
For the first time, homeowners seem to be more willing to let their houses go into foreclosure to stave off bankruptcy.
In the past, homeowners would file for bankruptcy to keep their houses. Now, mortgage delinquencies have climbed faster and higher than late payments on credit-card and car loans. Economists say that is a sign people are more concerned about their credit than their home.
"Homes have gone from being a place to live to a disposable investment for some," said Jay Butler, director of realty studies at Arizona State University's Polytechnic campus. "It used to be that paying the mortgage was the top priority. Now, it's keeping the credit cards."
He said one reason is some homeowners think that with all the foreclosures, there will be programs to help them when they buy again.
It usually takes three years of perfect credit payments after a bankruptcy before someone's credit score is high enough to buy a home. Recently, people could buy a home again two years after a foreclosure.
Also, the Mortgage Forgiveness Debt Relief Act of 2007 took some of the penalty away from a homeowner filing for foreclosure. Before the act, if a bank sold a foreclosed home for less than the mortgage and forgave the rest of the debt, the borrower had to pay tax on the difference. Now, the Internal Revenue Service is forgiving the difference.

Lenders push back
But now as the number of people walking away is climbing, lenders are working on ways to punish those homeowners.
Earlier this week, mortgage giant Fannie Mae said homeowners who stop making payments and then send their keys back to lenders months later will not be able to get another mortgage through that firm for five years. Freddie Mac also is going after walk-away borrowers, mortgage lenders say.
Neighbors of the people who walk way are already being punished by lower home values due to the foreclosure.
"People should hang in there as long as they can, ask for help and try to work with their lender," said Margie O'Campo De Castillo of Arizona Dream Realty. "Foreclosures are dragging down our housing market, and unnecessary foreclosures are selfish and unfair to the homeowners struggling to pay."

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“It was the peak of the market, and nobody told us”. Ma’am, you’re a real estate agent. I have no sympathy for you.

Things that can go up, can come down.

I don’t follow that many topics in the news anymore, but the foreclosure issue is one that I do follow considering Maricopa County is getting hit fairly bad. Many play the blame game - “Why doesn’t the government prevent these lenders from offering these kinds of mortgages?”; “It’s the borrowers’ fault, they should’ve known better”; “It’s the lenders’ fault, they shouldn’t be scamming people with these mortgages”.

There are many people out there that are in foreclosure status due to unforeseen circumstances, but most of the other people in foreclosure probably aren’t willing to “stoop” to getting a job delivering pizzas to pay their contractual agreements. It would tarnish their “good name” to work for Domino’s (as opposed to tarnishing their good name when they don’t keep their word).

So I ask myself, who is to blame for this mess? After spending 5 years in the mortgage business, both on the underwriting and funding side as well as the broker side, I would say both the banks and the borrowers. Yes, I’m sure some borrowers were duped into signing their names on bad loans. I’m not talking about them here. It’s the banks’ fault because it’s bad business to extend a no down payment adjustable rate mortgage (ARM). The bank has every right to do this, as every business has the “right” to make bad business decisions. It’s the borrowers’ fault, because they signed their names to a note that contractually obligates them to pay an amount to the lender every month until the loan is paid in full. No one is holding an AK-47 to their head at the closing table.

I do not believe that there is anything inherently wrong with “alternative paper loans”, ARMs, B and C paper loans, negative amortization loans, etc... Like I said before, the banks have every right to extend those loans and the borrower has every right to sign their name to something stupid. When I was in the mortgage business, we did not do many ARMs. We tried to steer the borrower clear of those loans if they were uncertain as to how many years they would actually be spending in the house. ARMs are not “predatory” as the media often says. I realize that there is a ream of paperwork to sign at the closing table, but in an ARM closing package, there is a document that CLEARLY states what can happen to the rate. And it does not take a lawyer to figure it out like some of the other paperwork. The document basically states that the rate can go up or down, when it can adjust, how much it can adjust at one time, and how low and how high it can be over the course of the loan. One of the reasons we’re seeing a foreclosure “crisis” is due to the rate adjusting up. What part of the term “adjustable” don’t you understand, people?

We did an ARM loan one time for a guy who was in Phoenix for 2 years on business and was leaving afterwards. He received a stipend from his company for housing. So we did a 2/1 ARM, the market was going up at the time, and he probably made out fine as opposed to renting. He obviously did his homework.

One interesting thing to note is the shift in terminology. Three years ago, when it was apparent that the housing market was going gangbusters, it was mentioned in the media that most people considered purchasing a house an “investment” - some used it for retirement with the assumption that it would increase dramatically in value while some used it to just fulfill their greedy desires (I will insert here that the term “investment“ is subjective, a house is an investment due to the fact that you assume that there will be some kind of return, whether it‘s tangible or intangible). Now, people are losing their homes, their places to live, rear children and their place to host barbeques.

I heard some strange things during the housing market boom. One was, “I’m going to sell my house to tap into all of this equity and go buy another way larger house”. Good one. Sell an overpriced house and buy another (larger) overpriced house in the same area. The only way your equity is worth anything is if you sell, rent, possibly buy something less, and wait for the market to come back down to reasonable levels and buy again (a friend of mine did that - you know who you are and kudos to you). Another was, “That house isn’t worth that much”. The term “worth” is interesting. Think about it for a second. The housing market is not driven by set prices, it is essentially an auction. If there is one buyer in this world that is willing to pay $100,000 for this laptop that I’m typing on, theoretically, it is “worth” that much because there is someone that will pay that much for it. Another one was “I need to buy now”. Why is it when it comes to gas prices and house prices, that a lot of people buy high? Remember the pipeline bursting near Tucson a few years ago - gas prices rose to over $6 per gallon in the Phoenix area and it looked like the gas crisis in the 1970‘s. In a book about Warren Buffet named, “The Making of an American Capitalist”, there are graphs that depict when Buffet bought and when he sold. He didn’t make his billions buying high and selling low.

The reason I stress that the borrower needs to do their own homework is because there’s a lot of bad information out there, and the borrower needs to discern the difference between bad and good advice. Even Suze Orman is guilty of mistakes. I saw an article by her a couple of years ago where she compared and contrasted a 15 year fixed rate loan to a 30 year fixed rate loan and deduced that the 30 year was the best financial decision. She analyzed tax savings among other things. The problem was, she started off on the wrong foot because she assumed the interest rate for the 15 year was the same as the 30 year. This is never the case (at least I’ve never seen otherwise). A 15 year is typically an eighth to a half a point lower than a 30 year - this is assuming one is comparing rates with the same lender. What I would suggest to the borrower is get a real estate calculator (one that does amortization calculations), a homebuyer guide (free) from Fannie Mae, and possibly a real estate dictionary (Barron’s has a good one). And figure it out for yourself. There are many mortgage brokers and lenders out there that don’t educate the borrower on their options. However, with the advent of the information superhighway, ie the internet, there is no excuse for a potential borrower to not educate themselves concerning the largest purchase of their lives (for most people, anyways).

The government is in the midst of a bailout (remember how well the airline bailout worked?). It is our money they’re playing with, the taxpayers’ money. Your money. It’s delaying the inevitable - it will keep paying bank CEOs inflated salaries for a few more years rather than just a couple more years. If someone walked away from their house because they didn’t feel like paying, and their lender asked me to help bail them out, I wouldn’t give them a red cent. Would you? Not my problem. People that are foreclosed on should take a bigger hit on their credit to the extent that it’s not impossible for them to get another mortgage, but make it so getting another mortgage within a certain timeframe would not be a financially prudent decision on their part. Let the banks take the hit, the foreclosed homes are rightfully their property, let them short sell their inventory and take their loss (and their tax deduction) and let the free market economy work itself out. Everyone takes a hit with this foreclosure mess, the responsible get dinged with a decreased house value. It might be painful, but America has seen worse.