Zywicki in Washington Post: Owners More Likely to Walk When Home is Underwater

Professor Todd Zywicki, a recognized expert in bankruptcy, contracts, and commercial law, told the Washington Post there is little incentive for homeowners whose mortgages greatly exceed their current home values to continue making mortgage payments.

"The more the house is underwater, the more people are likely to walk away from a house and go rent rather than keep money tied up in it," Zywicki said. "The traditional restraint on this has been that people have been concerned about the impact on their credit reports... but with the large number of foreclosures that we have been going through, my guess is that in a couple of years, a foreclosure is not going to look quite as menacing as it does now."

Despite the ability of lenders in states without "nonrecourse" laws to pursue those upon whose homes they have foreclosed for the additional mortgage balance, Zywicki says few lenders appear to be pursuing that course of action. 

"A deficiency judgment may be available but too cumbersome or expensive to obtain," he said. "Or the borrower might not have any assets worth chasing -- as would be especially likely to be the case for subprime borrowers." 

It is estimated that roughly one in five mortgage holders in the country today owns a home for which the home's present value is less than the amount mortgaged.

Walking Away, And What It Leaves Behind, The Washington Post, January 10, 2009. By Alejandro Lazo.

"While there is no precise way to know how many foreclosures are due to people walking away, experts said the practice has become more common as more homeowners owe more money on their mortgage than the home is worth. In some cases, homeowners can afford to keep paying but decide not to because they have little invested in the property or owe so much that they no longer see the value in continuing to pay.

"'The prevailing sentiment over the last five to six years has been that a home is primarily an investment and secondarily a place to live,' said Guy Cecala, the publisher of Inside Mortgage Finance in Bethesda. 'If that is in fact your thinking, it makes it very difficult to make a decision to continue paying your mortgage if you don't think that investment is going to increase over the next five years.'

"The decision to walk away will almost certainly carry serious consequences, real estate experts said. A foreclosure is considered one of the most serious defaults possible on a credit history and will wreak havoc on any score. That could make it difficult to rent an apartment, secure certain jobs, get any line of credit in the immediate future or buy a house for years to come. In many jurisdictions, including Virginia, Maryland, and the District, lenders can legally pursue a walkaway for the balance of the mortgage even after the property is in their hands. And when people abandon their mortgages, that also adds to the number of communities struck by foreclosures and increases the woes of lenders that are left holding the bad loans."

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