Look Whose Walking Away from their Mortgage

Wealthy homeowners can be a cut throat crowd.  They didn’t accumulate their fortunes by conforming to the rules.  For them, real estate is just one more asset on their balance sheet.

Every area of their financial life is calculated in net worth, the difference between assets and liabilities.  And it’s that very same outlook that finds 1 in 7 homeowners in default and facing foreclosure with a mortgage balance above $1 million.

While they receive some of the treatment from lenders that other homeowners do when their behind in their mortgage payments, their ethics are rarely ever bought into question.

So why are middle class homeowners made to feel immoral when they can’t pay their mortgage?

JUMBO Mortgages

The rich purchase property for personal use with a Jumbo mortgage and this form of financing can be used to buy their primary residence, vacation home or a second property in a city they do business in often.

Like everyone else who buys real estate, their interested in acquiring property for as little as possible, using as much other-peoples-money to purchase it, with expectations of it going up in value.

But when reality falls short of their expectations, they’ll cut their losses by taking a different approach.

Strategic Default

Unlike the majority of homeowners, the well heeled crowd view strategic default as an option to use in response to the declining value of their McMansions.  In their view, it’s poor judgement to continue paying a mortgage on a house that’s no longer worth the price paid.

After the housing bust wiped out $8 trillion in home equity, self preservation is wealth preservation, and they sleep well at night having made the decision to stop paying their mortgage.

Fannie Mae’s heavy handed treatment

In response to a growing trend among mortgage borrowers, the Federal National Mortgage Association, or Fannie Mae, handed down their policy on dealing with homeowners that walk away from their mortgage

In a press release dated 6/23/10, they announced;

Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.

In addition, Fannie Mae has proposed these additional measures under certain circumstances:

• ineligible for 4 years if you offer a Deed in Lieu of Foreclosure as a workout alternative
• ineligible for 2 years if your default results in a Foreclosure Sale (non-short sale)

Fannie Mae, combined with Freddie Mac, or the Federal National Mortgage Association, currently own $2.5 Trillion in residential mortgages.

They know that in the near term conventional mortgage lending will only continue as long as the Federal Housing Authority insures residential mortgages that are bought by Fannie Mae and Freddie Mac.

So freezing out homeowners that fail to resolve their mortgage default with a prescribed workout alternative will prove easy.

In a bid to raise the stakes, Fannie Mae, Banks and Government officials are raising the moral argument to borrowers by bringing their children schools, communities and neighborhoods into the discussion.

By pointing out the impact a borrower can have when they walk away from their mortgage, middle class families are left to contend with some difficult questions;

1. Am I to blame for my community’s decline if I walk away?
2. Am I responsible for blight in my neighborhood if I walk away?
3. Am I at fault if my neighbor’s home losses value by walking away?

A difficult position to be in

And terribly unfair to the majority of families that find themselves in this position during the worst economic decline since the Great Depression.

I guess if I were in their shoes and had only one question to ask in response to the New Moral Authority it would be….

How is Goldman Sachs dealing with their mortgage liability?

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Michael A. Corley is a licensed Real Estate Broker and Exec. Vice President at Corley Realty Group.  Born and raised in Bedford Stuyvesant, he now resides in Crown Heights with his wife and children