Falling home prices have brought a new worry for lenders: borrowers who might walk away from their loans,not because they can’t pay, but because they don’t want to.
The fear is some borrowers may be more willing to damage their credit than to keep paying on loans for homes that have lost value.
With a record number of borrowers estimated to be “upside down”,or paying for loans that are worth more than their homes,lenders fear a looming shift in borrower psychology.
“This is unchartered territory,” said Scott Anderson, a senior economist with San Francisco-based Wells Fargo & Co., the second-largest bank operating in Orange County after Bank of America Corp. “We’ve never had this many households in this situation.”
Fifteen million to 20 million homeowners across the county could be upside down on their loans next year, according to Anderson.
Walk-away borrowers would make things more difficult for lenders in OC, including the local operations of big banks as well as locally based players such as Newport Beach’s Downey Financial Corp.
Home prices in the county are down on average 16% from a year earlier and off 19% from their peak in last June, according to La Jolla-based market tracker DataQuick Information Systems, a unit of Canada’s MacDonald Dettwiler and Associates.
“They’re likely to fall further,” Anderson said.
Local mortgage defaults for January and February were up 146% from a year earlier to 4,091, according to DataQuick.
It’s unclear exactly how many foreclosed homeowners opted to stop paying or whether they no longer could afford the payment, Anderson said.
“It’s not easy to get data on it,” he said. “The problem is: Half of those who stop paying don’t communicate with lenders.”
Most lenders report losing contact with delinquent borrowers, according to John Robbins, a spokesman and former chairman of the Mortgage Bankers Association in Washington, D.C.
“People are mistaken that the bank wants the house,” he said.
Bank of America and Wachovia Corp., both based in Charlotte, N.C., say they have seen some borrowers opt to walk away from loans, but not enough to call it a trend.
Others, including San Francisco-based Union Bank of California NA, don’t expect to see a lot of defaults.
“We haven’t had a reason to fear people walking out,” said Scott Connella, Orange County market president. “We’ve got a really clean sheet.”
The risk of homeowners walking away could be higher with borrowers who put little or no money down on their homes, the Mortgage Bankers Association’s Robbins said.
When prices were rising, people were confident they could sell their homes for a profit. But when they began to fall, it changed the way they saw the homes, he said.
“They don’t have any poker chips on the table,” Robbins said. “It’s very irresponsible. It’s an integrity issue.”
In the early 1990s, local homeowners walked away from their houses largely because they had lost work during the aerospace downturn and ensuing recession.
Others were able to hold onto their homes and see them gain in value starting in the late 1990s.
“They ultimately will be rewarded,” Robbins said of homeowners who stick it out.
But the housing boom of the past few years was driven in part by speculative buyers who hoped to cash in on rising home prices. They may be unwilling to hold houses until the market im-proves, he said.
Lenders have been trying to reach out to troubled borrowers to renegotiate terms and avoid foreclosures. Savings and loan operator Downey, for one, has modified some of its adjustable rate loans to quell rising defaults.
Project Lifeline, a government-backed program to put normal foreclosure proceedings on hold for 90 days, aims to give delinquent borrowers a chance to renegotiate loans.
“The idea is to contact people you think are in trouble,” Anderson said.
Six lenders in the program, Bank of America, JPMorgan Chase & Co., Citigroup Inc., Countrywide Financial Corp., Washington Mutual Inc. and Wells Fargo, hope to salvage what they can from troubled loans.
Help Walking Away
At the other end of the spectrum is You Walk Away LLC in Carlsbad. The startup company offers to help people walk away from their homes.
The company’s Web site says it will help delinquent borrowers by getting lenders to stop calling and by getting them “off the hook from owing anything on the property.”
“People are realizing it’s not that bad,” said Chad Ruyle, a founder of the company and a lawyer for five years.
For about $1,000, You Walk Away sells kits to people across the country, counseling them on their foreclosure options.
This month, the company said it did $300,000 in sales with business increasing each week since You Walk Away started in January.
The majority of customers probably could pay their mortgages, but it’s “way too much” for them, Ruyle said.
“They’re not deadbeats,” he said. “They have jobs.”
People who walk away from their homes get their credit scores lowered but don’t always have to file for bankruptcy, according to Ruyle.
Customers typically find they can stay in their homes for about eight months during foreclosure, which is longer than they thought, he said.
“Some people could be taking advantage of this, but we’re not here to judge customers,” Ruyle said.
Local Indictments
Some who’ve reached out to troubled borrowers have been accused of fraud.
Last month, federal officials accused 19 people, including eight in OC, of scamming $13 million from 115 homeowners across the country.
The accused are alleged to have targeted homeowners having trouble with their mortgages with offers of help.
The plan called for getting homeowners to add the alleged scammers to their home’s title. In exchange, the homeowner paid rent to the scammer.
Once titles were changed, the scammers are alleged to have taken out cash from the homes by getting new mortgages.
Charles Head, 33, of La Habra is accused as a ringleader in the fraud, operating through Head Financial Services Inc., Creative Loans LLC and Loan Foreclosure Help Inc.
