Just Walk Away

More and more American homeowners are in a precarious position where the value of their home is now deep underwater.  And more of them are simply walking away.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

(More after the jump...)

Ahh...but in 30 states, there's a cost to foreclosure.  You see, without cramdown provisions, if the value of the foreclosed home is less than the mortgage you owe, the lender can come after you for the difference.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."

California does not allow such "deficiency judgments"  but Florida, New York, Texas, and 27 other states do.  More and more people in these states are now being nuked with these judgments worth tens of thousands of dollars, completely wiping them out.  Millions more former homeowners are going to find out the hard way that there is no way to just walk away.  And it's going to haunt us for a very long time:

What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers.
 Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

The financial landscape of the next decade will be littered with the craters of stories like this.  America is going to go through a brutal readjustment, and when it's over, the middle class as we knew it will be gone for good.  Trillions in wealth will evaporate from this country.  Our creditors in China and Japan will want their money up front.  And that will mean that for a large majority of us, the American Dream is gone for good.

No wonder the Teabaggers are growing.  The one thing I can understand about them is being angry at being screwed over.  Their reactions are borderline mob insanity...but the anger is real.