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 Underwater? Professor suggests you bail out 
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Post Underwater? Professor suggests you bail out
Underwater? Professor suggests you bail out | In a new paper, he says some homeowners can save money by walking away from payments and renting

By Rachel Beck

The Associated Press

source: http://www.registerguard.com/csp/cms/si ... /story.csp

Appeared in print: Saturday, Dec 5, 2009

NEW YORK ­ Stop paying your mortgage.

At least that’s the message from a University of Arizona law professor. Brent White’s new paper argues just this tactic, and it is hitting a nerve as the nation’s housing crisis enters its fourth year.

White is hardly first to talkabout the idea of walking awayfrom a mortgage that is biggerthan the value of a home. Nonetheless, his suggestions have gone viral and are popping up online, in newspapers and on television.

It’s a move that can save some people money, but at the expense of their credit.

The topic is central to what’s crippling the housing market: About one in four homeowners, or 10.7 million Americans, are considered underwater, meaning that their mortgage exceeds their home value, according to real estate information company First American CoreLogic.

In the markets hit hardest by the nation’s housing bust ­ Florida, Arizona, California, Michigan and Nevada ­ the share of homeowners who are underwater is 40 percent.

“Millions of Americans would be better off financially if they did walk away,” says White, who wrote the paper “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”

What White is saying goes against everything that we’ve been taught about contracts. If you make a mortgage commitment, most people think, you have a responsibility to pay.

On top of that, White suggests that those who walk away should consider getting a new car or house before they default on their mortgage, which will constrain their credit.

Imagine if everyone who is underwater walked away. It could cause economic havoc. Home prices would plunge even more. Banks would have even more bad loans on their books, which would lead them to make fewer loans to consumers and businesses.

There are personal financial risks too. A foreclosure shows up on a credit report for seven years, which will make it hard to get any loans during that time, according to John Ulzheimer, president of consumer education at Credit.com.

People who go into foreclosure but otherwise have good credit might escape in less time if they continue to pay their other bills on time. There is no magic number for how long that could take.

Mortgage lender Fannie Mae won’t back another loan for five years for someone who was involved in a foreclosure, except when the default occurred because of an extreme circumstance such as an illness or unemployment.

“Walking away undermines the basis tenets of mortgage lending,” said Brian Faith, a spokesman for the government-controlled Fannie Mae.

Despite all that, White’s views resonate because he highlights a double standard in the home lending industry.

Banks and other lenders doled out mortgages during the boom, often without demanding down payments or checking to see whether borrowers had enough income. After the housing crash, many of these same lenders took billions in taxpayer money, yet now are slow to modify troubled mortgages.

Government efforts to fix this mess haven’t worked. The Obama administration acknowledged Monday that it has struggled to get lenders to permanently modify interest rates on home loans.

The government’s plan now is toshame lenders into modifying mortgages. The latest strategy: Publish a list of those companies participating in the $75 billion effort to stem foreclosures that are lagging on the modifications.

“Wall Street gets to maximize profits and minimize losses irrespective of concerns about morality, while Main Street is told to keep their promises,” White says.

For those living in the most distressed markets, it could take years for home values to rebound to peak levels ­ if they ever do. Those who bought high and put relatively little cash down might be able to save money by walking away and renting, White says.

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Sat Dec 05, 2009 10:26 pm
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