Owners skulking away from ‘underwater’ US homes

LOS ANGELES, (Reuters) – Ron Barnard is throwing in  the towel. Like a growing number of the 8.3 million American  homeowners who owe more on mortgages than their homes are worth,  he’s ready to just walk away.

Barnard and others like him are starting to worry market  experts and economists, who fret that the growing trend may deal a  blow to an economy on its knees while swelling an already ample  pool of bad loans.

While others persist in draining savings and running up  credit card debt in a last-ditch bid to save their homes, a  growing number see no point in making boom-level mortgage  payments in a bust market — with no bottom in sight.

“People are hurting,” said Barnard, who includes himself in  that group. “They’re scared or they’re angry,”

In California’s Inland Empire east of Los Angeles, where  Barnard lives and sells real estate, median home values have  plunged more than 40 percent in the last year as formerly  sidelined buyers snapped up foreclosed properties.

Those bank-owned homes moved at fire-sale prices that  decimated the value of neighboring homes — many of which are  owned by people who have limited “skin in the game” because  they put little or no money down at purchase.

Deflating home prices thus threaten to accelerate a  negative feedback loop that has sent prices lower, said  economist Ed Leamer, director of the UCLA Anderson Forecast.

“Should the downward spiral in home prices, neighborhood  condition and equity deterioration continue, more and more  mainstream borrowers are likely to walk away from their homes,”  Credit Suisse said in a December report.

Barnard, who already has stopped making payments on five  investment properties purchased in 2005, is on the verge of  giving up on his own home that is now worth roughly half its  $800,000 purchase price.

Others weigh the predictable and relatively short-term  foreclosure-related hit to their credit ratings against the  diminishing likelihood of breaking even on their investments or  even making monthly payments on such severely “underwater” homes.

Market experts say that, while lenders have the right to sue  such borrowers for breach of contract, most will not pursue  charges against “indigent” individuals unless they abandon  mortgage payments for business interests.

Barnard and some financial planners say that, in certain  cases, giving up is the only option.

It can take a year or longer for a bank to seize a home  once the owner ceases payments. While a foreclosure hurts  credit, owners do not have to make mortgage payments as the  process unfolds and can use that saved money to start over.

The prolonged U.S. housing slump prompted President Barack  Obama to unveil a $275 billion housing rescue plan that aims to  arrest a devastating fall in U.S. home prices and help as many  as 9 million families stay in their homes, by reducing mortgage  payments via refinancing or loan modifications.

As lawmakers battle over legislation to help homeowners,  the finance arm of Barnard’s Home Center Realty is testing a  short-pay “refi” program, or short payoff refinance, which  seeks to keep people in their homes by writing down mortgage  principal and then refinancing the smaller outstanding debt.  But some can’t afford to wait. Take working mother Jullisa  Kalish, 39.

As a realtor in the Phoenix area, she rode high on the  property boom. But when the market crumbled over the past three  years, she wound up her business, went through a divorce and  walked away from her five-bedroom home.

Her home value peaked at $674,000 but was recently revalued  at $395,000. Saddled with hundreds of thousands of dollars in  negative equity, she found a two-bedroom apartment to rent for  herself and her two daughters.

“It’s heartbreaking to lose $300,000 worth of equity, over  $300,000 of my most valuable asset,” she said. “It will be 10  years before it even gets back to its $600,000 value.”

“It will just take too long to recoup,” she said.

She’s not alone. More than half of Nevada’s mortgage  holders now owe more on their mortgages than their homes are  worth. Arizona holds second place with 32 percent of homeowners  have negative equity, and Florida and California follow with 30  percent each, according to First American CoreLogic, an  affiliate of property services firm First American Corp.

The total value of U.S. residential properties fell to  $19.1 trillion in December 2008 from $21.5 trillion a year  earlier. California’s losses came to more $1.2 trillion —  roughly half the nationwide decline, the firm said.

“I’m able to keep my head just above water right now,” said  Russ Sweet, 61, who is now living with his son and renting out his  underwater home in Temecula, California, at a loss after an injury  ended his career as an electrical lineman in San Diego.

While he fights to stay afloat, Sweet says some of his  neighbors in Temecula — a haven for commuters who work in more  expensive coastal cities — already have walked away.

In Arizona, Phoenix electrician Alvaro Palacios, 34, called  it quits on the dream home he bought at the top of the market  in late 2006 for $172,000.

Palacios stopped making payments after he was laid off in  December. He took a part-time job as a supermarket delivery  driver to make ends meet and has been waiting for his lender,  Countrywide, to foreclose. His two-bedroom home with a large  yard recently was revalued at $124,000 by the city.

Until he hears from the bank, Palacios is staying put.

“It is a difficult decision, but I don’t really see any  other alternative,” the father of two said. “The house is worth  much less than I paid for it, and it is too much of a  struggle.”

Around the Web