mortgage

Default and rent

Thursday, Dec. 10
Written 9 a.m. EDT

DEFAULT, THEN RENT: If you read only two news articles today, make sure one is my mortgage analysis and that the other is Mark Whitehouse's masterpiece, on Page 1 of The Wall Street Journal, about homeowners who deliberately default on their mortgages, then move to rental properties.

Whitehouse's article is a "talker" -- the kind of story that, if you and three co-workers read it, you'll argue about it for an entire lunch hour. He describes the residents of the 3100 block of Club Rancho Drive in Palmdale, Calif. Some of them strategically defaulted on their home loans, because renting a comparable house is much cheaper.

It's told straight down the middle, with no bias: The guy who walked away from his mortgage but kept his BMW 6 Series, the woman who defaulted on her mortgage and is thinking of defaulting on the loans on two investment properties, and the disgusted neighbor who pays his mortgages because he believes they're a moral obligation.

I don't know if people have a moral obligation to pay mortgages on deeply underwater homes. One family saved so much money by strategically defaulting that they bought season tickets to Disneyland. That might make you angry, but cast members at Disneyland probably appreciate having jobs. And a family or an investor will get to buy the foreclosed house at a low price.

This well-researched, immensely entertaining article is probably the best thing I've read about the housing bust. Read it, pass it along to friends and family, and discuss.

RATES UP: This week's mortgage analysis tells of a small increase in the benchmark 30-year fixed (up 3 basis points, to 5.04 percent), and how the bottoming-out of mortgage rates has led to a surge of refinance applications.

I describe how lenders are stricter about paperwork than they were two or more years ago. For one thing, you'll be required to sign IRS Form 4506-T, which allows the lender to request transcripts of your tax returns directly from the IRS. And the lender will request those tax transcripts. That's a change from a few years ago, when Form 4506-T was required on stated-income loans but few other mortgages, and lenders requested tax transcripts on only a few loans, for quality control.

I also describe which documents you need to have at your fingertips when you apply for a refi.

HAMP REACTION: In yesterday's blog post, "HAMP 'destined to fail,'" I explained that I believe the Home Affordable Modification Program already has failed because it was poorly conceived. "The housing bust is simply something that we have to suffer through. It's like middle school -- a few years of unavoidable misery," I wrote.

"All I can say is wow! You have really missed the mark on this one," a reader named Dave writes. "HAMP as an idea was not destined to fail. Competing interests, accounting rules and its 'voluntary' nature are the root cause of the failure."

He continues:

Yes, HAMP is flawed and will not save the world. I don't believe it was intended to. There is nothing that says we can't try to solve this crisis a little at a time. There is no magic bullet. There are many of us, though, that would be helped by HAMP. But only if we get the servicers to actually embrace the program and truly offer it to everyone who is eligible.

When HAMP was rolled out, unemployment was not 10 percent. Perhaps it may have never reached that level if HAMP was properly embraced and truly given a chance to work. How many small business owners were denied modifications and had to choose between their business or a roof over their heads? Unemployment reports do not necessarily show true numbers. Many of these "unemployed" are in fact working at lower-paying jobs, part-time or off-the-books positions. While they certainly cannot afford the high payments they once were able to, in many instances they would be able to survive and maintain ownership with a modification.

Yes, negative equity is also a factor. While the modification programs cannot fix this issue one also has to understand the personal dynamics involved as well. If the home is affordable to live in, i.e., comparable to market rents in a given area, people will be more inclined to stay in the home, hunker down, retain ownership and wait out the crisis. It is only when people get the sense that they are throwing good money after bad that negative equity will cause people to walk away. If there is a cheaper option that allows them to put food on their table they will do it (rent vs. own). If you level the field as modifications attempt to do, they would be more inclined to stay.

I personally have seen a family member struggle to maintain her home. She applied for a modification with BofA within days of HAMPs announcement. To date she has still not received an answer on whether she qualifies or why she is not being offered a modification. She does. HAMP was tailor-made for someone in her position. Attempts to reach her analyst are fruitless with hold times as long as an hour only to be told that the analyst is then unavailable or it is against policy to forward the call.

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