More homeowners than ever may be walking away from their mortgages and leaving their imprint on what promises to be an already significantly different housing and mortgage market going forward.
Economists and executives point out that data on the trend is almost impossible to collect. Who can tell when homeowners default on mortgages because they have to or when they have chosen to default for economic reasons? But there are anecdotal indications from around the country that the numbers of homeowners taking this option may be picking up.
In September 2009, a number of media outlets reported a study conducted by the Oliver Wyman consulting firm and the Experian credit reporting firm on the phenomenon of people defaulting on mortgages while they held jobs. The study concluded that the stigma against walking away from a mortgage obligation appears to be subsiding, among other findings (see sidebar).
And in October of last year, Brent White, an associate law professor at the University of Arizona, published an article in The Arizona Legal News that essentially suggested that many homeowners would benefit from defaulting on mortgages where the amounts of the loans far exceed the property's current market value.
He used as an example a couple living in California with two small children. Both fairly well-paid professionals, they own a three bedroom, 1,380-square-foot house located in Salinas. They bought the house in January 2006 for $585,000, with nothing down and a 6.5% mortgage. With this mortgage, they have a monthly payment of $4,300, which is about 31% of their monthly income.
But with the housing downturn, the family's house is now worth only $187,000, though they still owe $560,000 on it. A house around the corner from them is on sale for $179,000, and for a modest 5% down they would have a monthly mortgage payment of less than $1,200 per month. Or they could rent a similar house for about $1,000 a month.
"Assuming they intend to stay in their home 10 years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1,700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction," White wrote. "The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity-assuming, of course, that they live that long, the market in Salinas has indeed hit bottom and their home appreciates at the historical appreciation rate of 3.5%."
Similar examples have come in from other quarters as well. CNN Money interviewed Will Nelson, a married father of two who outlined why he felt forced into a decision to leave.
"I'm walking," Nelson told money.cnn.com. "I'd love to stay but my house was bought at $500,000 and is now worth $250,000. I offered to meet my bank more than halfway if they lowered the balance to $400,000. They told me flat out they don't do principal reductions. Now, they'll foreclose and take a $250,000 hit right off the top. I got the notice of default in February, and my wife and I and our son will be out by mid-May." He added: "Yes, my credit will be ruined but so a lot of other people's credit is too. I'd rather have bad credit than be completely broke, which is what would happen if I kept making mortgage payments."
But whether or not the trend is increasing, credit union economists and executives believe the strong relationships credit unions forge with their members may be enough to protect them from the most severe impacts of having large numbers of homeowners walk away from their mortgages.
The key CU protective difference, the economist and executives maintained, are their willingness to work with their mortgage holders and the homeowners may feel guiltier about walking away from a credit union mortgage.
"I think most people realize that if they walk away from their mortgage, they are going to stick it to their lenders," commented NAFCU Chief Economist Tun Wai. "I have to believe that most people would feel worse about doing that to a credit union than they would about doing that to a mega-bank."
Robert Dorsa, executive director of the American Credit Union Mortgage Association, agreed. "I believe most credit union members appreciate their credit unions more than most bank customers regard their banks," he said. "I think it would be harder to walk away from a credit union mortgage."
Part of those feelings of affinity, to the extent they exist, might come from the fact that credit unions are willing to help out members who owe more on their homes than they are worth.
In cases like the Nelsons', for example, a credit union might have been willing to reduce the principal or make some other accommodation that would help the family out-or at least broaden its vision to see a point past where they are as tied to that particular property.
"The problem is that the business cycle for real estate is very long and it can he hard for homeowners to find a strategy to ride out a down cycle to a time when property values might be higher," said CUNA Chief Economist Bill Hampel. Strategies could include reducing the monthly mortgage payment as much as possible, possibly reducing part of the principal and lowering the interest rate as much as possible.
And the combination of strategies like these and how CU members feel about their institutions may be having an effect. Joy Audet, political communications coordinator for the Arizona Credit Union League, reported that while a few Arizona credit unions have had members default on their mortgages, most have not had cases of members walking away from their debts while still able to pay.
But even if credit unions face little direct impact from strategic defaults, Dorsa, Hampel and Wai agreed that they will face the broader effects on the market if large numbers of homeowners strategically default on their mortgages.
Dorsa noted that credit unions, which often hold second mortgages or home equity lines of credit, may suffer from the "collateral damage" of having members walk away from mortgages with other lenders, and Hampel predicted that credit unions will not be able to avoid the larger effects if strategic defaults become a trend.
"Certainly, the price of mortgage loans will increase as lenders seek to cover the additional risk that their borrowers might just leave their loans behind," Hampel said. "They will likely also require higher down payments as they try to make sure their borrowers have a greater stake in the loan."