To cut losses, homeowners consider default
Some struggling homeowners are being tempted to default on purpose in order to qualify for mortgage relief from the federal government or their lenders.
More than four in 10 South Florida homeowners who bought in the last five years owe more on their mortgages than their homes are worth.
For those who bought in 2006 -- the year prices peaked -- the situation is even worse. A startling 76 percent of those homeowners are ''under water,'' meaning their mortgage debt exceeds their property's market value.
The statistics, compiled from sales and mortgage data by Zillow.com, illustrate the fragility of South Florida's real estate market. Plunging prices have started to lure buyers off the sidelines and sales have ticked upward.
But the market is still flooded by foreclosed homes that banks want to unload, and the volume of underwater mortgages suggest many more are coming. Homeowners in a pinch either can't sell for enough to pay off the debt or they walk away, thinking it's better to abandon the property than invest in a sinkhole.
Some homeowners find themselves wondering if they'd be better off if they did default. They are frustrated because they can't take advantage of lender programs to cut interest rates and, sometimes, principal balances to keep people in their homes. To qualify, homeowners usually must be in default or in foreclosure.
Among the frustrated is Amy Kaye, 74, who described herself as ''ridiculously'' upside down on the one-bedroom condo conversion she bought in 2005 near The Falls in South Miami-Dade for about $160,000. Kaye said she was denied help from Countrywide because she was paying on time.
''Ultimately, I'm going to have to game the system and stop making payments because the only relief applies to people who are not paying,'' Kaye said. ``How can you honestly blame [people for doing it] when they are in a situation where their property is outrageously overpriced?''
The median negative equity of borrowers who bought at the market's peak is $38,321 for buyers who put down the median 10 percent, according to Zillow.com. Median is the midpoint at which half the values are more and half are less.
Two years ago, Justin Miller paid $600,000 for a Fort Lauderdale condo, which he estimates has slipped $100,000 to $150,000 since, based on recent sales in his building.
''It's going to take 10 years to recover that money,'' said Miller, 28, a mortgage broker. ``The purpose of buying a home is tax deductions and building equity, and when you are $100,000 behind you're throwing that money in the toilet.''
Miller is working on a rate freeze with his lender, Saxon Mortgage. The company, he said, made him submit the pay stubs of his live-in girlfriend to apply -- an acknowledgement he can't cover the payments on his own, yet it won't reduce his interest rate or principal because he is current, Miller claimed.
'You have to say, `I pride myself on my credit score,' but at some point, with all things that are happening, you realize you might have to put your pride aside,'' Miller said, adding he would try to pay as long as he was able.
Kaye estimates the value of her condo near The Falls has fallen by almost 50 percent. She still owes about $150,000 on her mortgage, she said.
It could be years before the market recovers enough to give her any real financial stake in the property -- a long time, she said, to continue shelling out nearly half of her modest income to Countrywide each month.
Kaye said she tried to refinance last week after learning about a Countywide settlement with the attorney general. To resolve allegations of widespread abusive lending, the company, now owned by Bank of America, said it would refinance some 51,000 Florida borrowers into affordable fixed-rate loans with, in some cases, interest rates of as low as 2.5 percent and even reductions to the principal.
The $300 billion, federally sponsored Hope for Homeowners program, which took effect Oct. 1, also refinances homeowners at risk of default or in foreclosure into more affordable loans.
To participate, lenders must agree to write down the loan to 90 percent of the home's current market value, giving delinquent homeowners instant equity -- something current homeowners may not see for more than a decade.
William Hardin, director of real estate programs at Florida International University, said he fears such incentives will tempt boom-era buyers to choose to fall behind, even when they have the means to pay.
''That is the scariest scenario,'' Hardin said. ``Our whole economy is based on people fulfilling their contractual obligations. And, for an individual to arbitrarily choose not to fulfill their obligations when they can, to me creates a big problem in our system.''
Miller compared mortgage relief programs to writing down the balance of the guy who falls behind on his income taxes.
''The people who don't pay settle for 10 cents on the dollar, and people who do have to pay in full every year,'' Miller said.
But just as tax evasion is a crime, some borrowers who try to beat the system may also face penalties. The Hope for Homeowners program carries up to five years of jail time and hefty fines for people who fall behind on purpose.
However, the dubious defaults would be hard to prove, some have said -- especially in places like South Florida where so many homeowners are already on the financial edge.
''When you have people paying above 50 percent of their income on their mortgages, I don't know how they would view it if somebody goes out and just starts buying a ton of crap and then can't make their payment,'' Miller said.
Rather than default and ruin their credit, Hardin said people who can make their payments are better off hanging on, since, as with other investments, they will probably come out ahead in the long run. Additionally, many borrowers put no money down, making their eventual return potentially more handsome than others who did.
''If you are upside down now and hold for 15 years, you'll make a return that is competitive. There is almost no scenario where if you held for seven to eight years you would still be under water,'' Hardin said.
In normal market conditions, homeowners usually break even after the third or fourth year of ownership, after counting closing costs and commissions, Hardin said. Typical appreciation usually runs between 5 and 7 percent a year.
Deerfield Beach real estate consultant Jack McCabe projects home prices will drop another 15 percent, bottoming out in 2010 and staying there for another year or two.
It's bad news, but McCabe also urges able borrowers to stay current.
''Once you have a foreclosure on your record, it makes it almost impossible to get other credit at affordable rates,'' McCabe said. ``Home loans, car loans, credit cards are going to be at a much higher rate if you have a lower credit score.''
On the other hand, if deliberately defaulting is the only alternative, ''your family has to come first and that's a decision you may find is in your best interest,'' McCabe said. ``The banks are going to hate me for saying that.''
To cut losses, homeowners consider default | MiamiHerald.com