Tuesday, December 30, 2008

"Foreclosure is best option for some owners"

This article from the San Diego Union-Tribune is heresy in a world that believes every home is a castle and a part of the American dream (regardless of price):

Home values have fallen so far that it no longer makes financial sense for some people to keep paying their mortgage, analysts say. Some contend that those who bought at the height of the market, using risky adjustable-rate loans with no money down, may have little to lose but their pride, especially if they have undermined their credit by missing mortgage payments.

Although loan default should be a last resort, homeowners mired in debt “are better off to just get on with it, take their credit hit today and get on with their lives,” said Mark Goldman, a real estate finance instructor at San Diego State University.

“Pull the rip cord and get out now,” Goldman said. “The next step is restoring your credit, and you can't begin the restoration process until you take your hit.
Marc Carpenter, a San Diego real estate agent who handles foreclosures, said it is not unusual to go to a children's soccer game and hear parents debating the merits of foreclosure.

“It has become so commonplace, people are talking about it like it's a normal thing,” Carpenter said. “People are comfortable talking about it.”
Economists say it is too soon to know if the housing market is bottoming out. They question whether modifications that temporarily reduce interest rates without reducing loan principal will help consumers in the long run. Most lenders and servicers are wary of reducing debt principal because they don't want to anger investors who own securities backed by mortgages.

All of these politicians who have spent all of this time working so hard to keep people in their homes by modifying interest rates are not doing any good at all,” said economist Christopher Thornberg. “Is the key to helping them leaving them with a $600,000 debt on a $400,000 house? How many years will that take to crawl out of?”

As long as mortgage modifications lack significant principal reductions and prices continue to fall ruthless foreclosure (the ability to stay in a underwater home but choosing not to do so) will be an attractive option. In going around and reading the mortgage modification forums I am amazed at how happy some home owners are at getting minor rate reduction or a reamortization of the term of the mortgage on homes that are clearly significantly underwater. The mortgage modification "trick" might end up working out well for the lenders if they can prevent the homeowner from walking and continuing to pay on an overpriced asset. How bad things get in bubble areas will be completely dependent on just how many people realize what is in their best interest not those of the banks.

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