Underwater mortgages: If stigma fades, do more borrowers walk away from homes?
In a September report put out by First American CoreLogic, a real estate information company, 46 percent of residential properties in the Tampa Bay area struggled with negative equity. That's 314,183 out of 684,822 homes. In Florida, about 2 million of 4.6 million home mortgages were underwater, for a rate of 45 percent. That's nearly twice the rate of the country overall. Look at this map to better appreciate the pickle we're in.
Anyone who's followed the Florida housing market debacle will not be shocked by these numbers. But they should be. Underwater mortgages pose a huge impediment to any housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market.
But this has become less a financial disaster story than a society disaster story. What happens when close to half of homeowners in a metro region and in an entire state start thinking that home ownership is a rock tied around the neck in rising waters?
We spend way too much time reporting these monthly numbers but never examining the implications to our society of such a dramatic flip-flop of culture: That owning your own home is supposed to be a good thing, that it generates such virtues as pride, personal discipline, stability, motivation, community involvement -- but in reality has half the home owner population asking At what point do I give up and walk away from this house?
As reported by the Canadian newspaper The Globe and Mail, Brent White, an associate professor of law at the University of Arizona, says the number of foreclosures could go much higher once people who are in a negative equity position get over the stigma attached to defaulting. In a recent study, White found that the vast majority of homeowners who are underwater with their mortgage continue making payments because they are afraid to face the shame and guilt of walking away from their property.
Government programs and mortgage lenders exploit this sense of shame by pushing borrowers to stay in their homes, even when the cost of defaulting is less than the cost of making even lower mortgage payments, he said. "Guilt and shame are powerful motivators," he said in the study. Here's The Globe and Mail story.
Another study, noted in this Wall Street Journal story, reminds us that mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. Concludes the study:
"The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that."
What's equally shocking is that the country continues to offer financing of homes that will put many people in jeopardy of losing their home equity. FHA lending, which requires small down payments for homes, is a ticking time bomb as declining home prices in many cases will gnaw away at the small equity stakes in new FHA home buyers. And the $8,000 credit for new home buyers, while admirable in spirit, should not be used to mask buyers who simply are not financially ready to purchase a home. These days, $8,000 worth of down payment or home equity can dissolve in the blink of an eye.
We still have a lot of pain from housing to endure, especially here in Florida.
(Photo: Bill Serne, St. Petersburg Times.)
-- Robert Trigaux, Times Business Columnist