Myrtle Beach area home owners flee deficit

More property owners - owing way more on their house or condo than it is worth - are simply walking away.

They leave behind that hefty mortgage balance, allow the bank to foreclose and let their credit score drop dramatically - a strategy that is becoming more popular in the wake of the real estate meltdown.

The number of homeowners nationally willing to let the property go into foreclosure even if they can afford to pay the mortgage increased significantly in the last year, according to a report released last week from the Northwestern University's Kellogg School of Management and the University of Chicago's Booth School of Business' Financial Trust Index.

About 31 percent of foreclosures across the United States were perceived to be strategic in March, compared with 22 percent in March 2009, according to the report.

Most borrowers who chose to default are upside down on their mortgage - in other words, they owe more than the property is worth. The lax lending requirements of the real estate boom didn't require significant down payments, leaving borrowers with little equity in their homes. Combine that with plummeting prices, and more homeowners are finding themselves owing much more than the house is worth. Prices fell 19 percent for single family homes and 34 percent for condos between 2007 and 2009 along the Grand Strand. A growing number of those borrowers are walking away, willing to face the consequences of poor credit, banks trying to recoup losses and social and emotional costs.

In Horry County, there were 655 foreclosures filed in the first three months of the year, which was up about 5.3 percent from the last three months of 2009, but down about 3.1 percent from the same period in 2009, according to Realty Trac, a company that tracks foreclosures across the United States. It's unknown how many of them were homeowners who walked away.

"The problem is very much thecollapse of the real estate market combined with the fact that at the peak of the market people bought with very little equity in the house," said Paola Sapienza, a finance professor at Kellogg and one of the authors of the research. "It will take a while before the value of the real estate market will pick up again so negative equity will stay negative for quite a while ... therefore people just start making decisions in terms of convenience."

About 13.5 percent of borrowers in South Carolina owe more on their mortgage than their property is worth, according to data from First American CoreLogic. An additional 5.8 percent of borrowers are close to being underwater, which is defined as having less than 5 percent equity in their property, according to the research for the last three months of 2009.

"It's probably more prominent [here] because of the heavier investor market," said Tom Maeser, a real estate analyst with the Coastal Carolinas Association of Realtors.

Homeowners are more likely to try to work with the bank and avoid foreclosure through a number of programs when it is their primary residence, but with investment or second home properties, there is less of an emotional tie to the property and it is easier to walk away, he said.

For an investor, choosing to let the bank foreclose is a business decision, Maeser said. With declining values and investment properties earning less through rentals, some property owners find it hard to justify continuing the investment.

While it might be a financially beneficial decision for the borrower, choosing to walk away from a property is not right, said Rhonda Marcum, the executive director of the Mortgage Bankers Association of the Carolinas.

"I just think the consumer that says, 'I'm going to let it go into foreclosure because I can,' is faltering on his own responsibility in the transaction," she said.

The foreclosure does come at a cost - the borrower's credit will be damaged for seven years, the lender may go to court to seek any outstanding debt after it sells the property, and there are moral and social costs.

The negative credit impacts are a major deterrent, according to the Financial Trust Index report, which found that 75 percent of those surveyed said they care very much about not losing their credit.

One reason the trend is growing may be that more borrowers think lenders are not going to try to recover the balance due, Sapienza said. In December average homeowners surveyed said the probability that a lender will go after a borrower is 56 percent, which dropped slightly to 54 percent in March.

The research also found that about 80 percent of homeowners think it is immoral to walk away but as the gap between property value and mortgage costs grows they report they would be increasingly willing to default even though they say it is immoral.

That gap also has a strong bearing on a property owner's decision to walk away, Sapienza said. Those who are only slightly negative typically choose to wait for the market to recover, because of the negative consequences.

For some borrowers, that negative credit impact for seven years doesn't seem that bad as they look at prices that may take 15 years to recover, said Jon Maddux, the chief executive of YouWalkAway.com, a company that helps property owners through the process of purposely defaulting.

"At the end of the day it's a business decision. I've got to do what's right for my family; if I don't I'm just going to be dumping money down a black hole," he said.

Most of the more than 4,000 people the company has worked with tried first to negotiate with the lender but wouldn't qualify for a short sale and didn't want to bring a lot of cash to closing to pay the debt owed to the bank.

There are misconceptions about the process, Maddux said. For example, a borrower's credit will be hurt but it will also recover over time, he said.

As more property owners choose foreclosure and talk to their neighbors and co-workers about it, more people may consider walking away an option, Maddux said.

"Everyone wants to survive. ... It's very depressing to be in a house that is $100,000 or $50,000 underwater," he said. "It makes you feel like you are a slave to the mortgage."

Sapienza said her research supports the idea that the social stigma is reduced if a borrower knows someone who has been through the process and that choosing to default is somewhat contagious in areas where it is prevalent. Those borrowers have more information about the consequences.

Brian Downs of Leesburg, Va., who owned a condo in North Myrtle Beach, said he spoke to many people who were upside down on their mortgages and were able to negotiate short sales before he chose to do the same. A short sale, which is used to avoid foreclosure, is when the lender agrees to a sales price that is less than what the borrower owes.

"You got to think to yourself, do you struggle to keep a house and suffer financially when you really can't make the payments for something that's worth half the price, or is it worth screwing up your credit for a few years," he said, adding that it could be a decade before property values would climb back to that level.

Downs said that while he couldn't pay the bills any longer - his income has been cut in half and the rental units weren't generating as much money as they used to - he would have considered foreclosure even if he was able to pay.

He took out a $520,000 mortgage for his three-bedroom condo when he bought it in 2006, and according to the latest tax assessment in 2008 it is now valued at about $130,400, according to information from Site Tech Systems, a local company that tracks the real estate market.

"It wouldn't be an easy decision," he said. "[But] I can see myself saying forget it, they've screwed this up."

Downs said that while he is not passing off accountability, mortgage lenders who gave loans they shouldn't have and helped cause this situation are also to blame.

There is plenty of blame to go around, but the property owner who chooses to let a property go into foreclosure is not being accountable for his or her decisions, Marcum said.

She said it's disappointing that people will walk away because they believe it will be perceived differently given the tough economic times. While it is possible that a bank will come after a borrower for the deficit balance after it sells the property, it doesn't happen all that frequently. Often, there isn't a way for it to be collected, unless the person tries to do another major transaction such as a mortgage, Marcum said.

"History points in a direction that we will look more leniently at foreclosure because of the vast number of people who have gone through foreclosure," she said. There have been situations in the past where after a community has had a major economic trauma - like the closure of an industry that accounted for most of the jobs - foreclosures were forgiven at a more accelerated rate.

"It's going to continue to hurt financial institutions and hurt them dramatically," she said, adding that it will also hurt neighborhoods and people who are trying to sell their properties and have made all of their payments.

As foreclosures continue - from those who can longer afford a property and those that choose to give it up - the real estate market will continue to see price declines, Maeser said.

Along the Grand Strand, the median price of a single-family home fell from $216,700 at the peak in 2007 to about $175,000 in 2009, a 19.2 percent drop, according to statistics from the Multiple Listing Service. The median condo price dropped from $194,900 at the peak in 2007 to $128,000 in 2009.

"What becomes significant is when it goes into foreclosure or short sale, the values of those properties are going to be severely impacted in a negative direction," Maeser said.