The social stigma associated with defaulting on a mortgage seems to be disappearing as the nation’s housing crisis escalates. More homeowners are choosing to freely walk-away from their homes as the values plummet.
New York University Economist Nouriel Roubini was one of the first to warn of the dangers from a major real estate boom, and he believes the number of homeowners walking away from their homes due to foreclosure is increasing at a rapid pace. Roubini says the foreclosure epidemic is evolving into “a tsunami of voluntary defaults.”
“The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion,” said Roubini. “You could have most of the US banking system wiped out, so this is a total disaster.”
Traditionally there’s been a social stigma tied to homeowners who default on mortgages, but as home values decrease as a result of Wall Street and mortgage lenders creative financing that acted to manipulate home prices to new all time highs, the stigma that ached at the heart of the foreclosure crisis is eroding.
Susan Wachter, professor of real estate and finance at Wharton School of Business, says the depth of this crisis shows social attitudes are changing. “This is the kind of conversation that’s going on at cocktail parties, at swimming pools,” Wachter said. “And suddenly this option, which was truly unthinkable in the past, becomes thinkable.”
Studies have not yet been conducted on walk-aways, but the country’s major mortgage lenders and banks acknowledge that walk-a-ways are an increasing part of the foreclosure crisis. Many home owners are choosing to leave their homes to foreclosure instead of paying higher mortgages on adjustable rate loans where they have no equity.
As a result, personal bankruptcy filings are increasing in the majority of states. Home prices in many of the nation’s harshest hit markets have deflated as much as 60% on average in California, Florida, Michigan, Ohio and other pockets scattered across the country from the markets peak. Some 3-million more homes are forecast by Housing Predictor to be foreclosed through 2011 due to the crisis.
There are consequences to walking away from a mortgage and allowing the bank to foreclosure. Foreclosures remain on credit reports for 10 years, but with the re-establishment of good credit in other areas many have been able to obtain a mortgage again as soon as three years after a foreclosure.
However, mortgage experts warn that may not be the case in the future considering changes in federal lending laws, which are expected to experience sweeping changes affecting the entire mortgage system.
Fannie Mae and Freddie Mac, which were regarded as the lender of last resort, now provide nearly 80% of all mortgage funds. Their collapse has been virtually thwarted by the new mortgage rescue package passed by Congress. Combined, both companies own or guarantee $12 trillion in mortgages.