February 25, 2010

Loan Mod Limbo

Filed under: Loan Modification

ProPublica – About 97,000 homeowners in the government’s mortgage modification program have been stuck in a trial period for over six months. Most of them, about 60,000, have their mortgages with a single mortgage servicer, JPMorgan Chase.

Trial periods are designed to last only three months, after which mortgage servicers are supposed to either give homeowners a permanent modification or drop them from the program. According to a ProPublica analysis, about 475,000 homeowners have been in a trial modification for longer than three months.

While the Treasury Department has so far allowed servicers to stretch the trials without repercussions, the government issued little-noticed guidelines in late December, warning that lenience will end at the end of this month. Servicers will have to clear out their backlogs, and those that don’t abide by the guidelines could face “financial penalties,” said a Treasury spokeswoman. But Treasury has been vague on how big those penalties will be.

Although homeowners in the trial modifications have had the benefit of seeing their monthly payments drop (by an average of $522), there are adverse consequences when a trial drags on. A homeowner’s credit score can take a hit. Because a homeowner is not making a full payment, the balance of the mortgage grows during the trial period, putting someone who was behind when the trial began even further behind if it fails. The homeowner can be in worse shape if the modification fails since she’s been making the trial payments instead of saving for the possibility of foreclosure. And last but certainly not least, those homeowners suffer the stress and fear of not knowing whether they’ll be able to keep their homes.

Some homeowners have been in limbo for as long as 10 months – since the launch of the program. Recently, we at ProPublica asked readers to help us find who’d been in a trial period for the longest time. We heard from hundreds of frustrated homeowners, many who’d begun trials last summer. Among them were two — Marlene Colon of Tinton Falls, N.J., and Deb Franklin of Airville, Pa. – who had begun trials last May and were still waiting. Chase Home Finance, a subsidiary of JPMorgan Chase, serviced both their mortgages.

Since the first servicers signed up last April, about 1 million homeowners have been put into trial loan mods. Only 116,297 have emerged with a lasting modification. That number will undoubtedly go up next month, though given the scale of the foreclosure crisis, it will remain disappointingly low. However, if the servicers succeed in reducing their backlogs, an even larger number of homeowners might find themselves dropped from the program and facing the possibility of foreclosure.

Colon, the New Jersey homeowner, and her fiancé sought a modification from Chase last spring after she lost her job and ongoing health issues prevented her from working elsewhere. Although she was glad to see her payment drop from about $1,600 per month to $965, she said it has been a struggle to get any answers since then. “I think they do it to wear us down so we throw our hands up in the air and say we give up,” she said.

She and her fiancé were current on their payments when the trial began and had a high credit score, she said, but they’ve since seen their credit card limits cut. Treasury instructed servicers to report the trial payments as a reduced payment plan to the credit reporting agencies, which can result in a significant lowering of credit scores.

It’s unclear when she’ll get a final answer. Recently, Chase asked for updated copies of her fiancé’s pay stubs, she said, which she says she promptly sent in.

Christine Holevas, a spokeswoman with Chase, said in a statement that Colon’s case was “under review,” but did not give more detail.

As for the tens of thousands of other homeowners in limbo, Holevas said that Chase is “working through its inventory according to U.S. Treasury Department guidelines” and “trying to help struggling borrowers stay in their homes whenever we can.”

She emphasized that “we need the homeowners to get us all the required documents.” As ProPublica has reported, servicers (not just Chase) have a poor track record of handling documents. Homeowners in the program routinely complain about servicers losing paperwork and asking again and again for the same documents.

Colon says her problem has always been getting information from Chase, not the other way around. “I can’t imagine that someone who’s in a bind wouldn’t comply,” she said. “We’ve done everything that they’ve asked of us.”

No other servicer has near as many homeowners in limbo as Chase. A smaller servicer, Saxon Mortgage Services, a subsidiary of Morgan Stanley, has a similar proportion of lingering trial mods – about one-third of its homeowners in trials have been in one for more than six months. But it services relatively few mortgages over all, and has only about 13,000 mortgages in trial modifications. A spokeswoman said that Saxon had “launched a number of proactive programs to work with borrowers to collect all of the documentation required.” Bank of America, by far the largest servicer, has about 12,000 homeowners in a similar position. A spokesman said that the bank was gaining “momentum” in providing permanent modifications. (You can see how all the servicers match up in our interactive chart.)

A Surge in Denials?

Banks and servicers have not only been slow to approve homeowners for permanent modifications, there have also been surprisingly few homeowners dropped from the program – only about 61,481 as of January. Borrowers can be dropped for missing payments, failing to send in documents or simply proving ineligible.

Part of the reason for the trial backlog are the Treasury guidelines. In late December, Treasury initiated a “review period” during which servicers were prohibited from dropping homeowners from the program if they were still in the home. Servicers were supposed to take the opportunity to let homeowners know this was their last chance to send in missing documents or payments. The grace period extended through January.

That means the number of denials should surge this month, which is why many observers, like the blog Calculated Risk, think February’s numbers will be particularly revealing of the modification program’s success.

About two-thirds of homeowners in trials are current on their payments, according to Treasury. That means that roughly 275,000 homeowners are not. However, that doesn’t necessarily mean they will all be dropped from the program – homeowners who stopped making the trial payments after the expiration of the three-month trial period are still eligible for a permanent modification.

Treasury is also pressuring the servicers to make final decisions about homeowners in cases where no documents or payments are said to be missing. About the same time that Treasury launched the review period, it also instructed servicers that they must make a determination about such homeowners by the end of February.

“We have been working very closely with servicers and are confident that they will meet the February deadline for making determinations on borrowers in the trial phase,” said a Treasury spokeswoman.

February 24, 2010

Consumers Paying Credit Cards Over Mortgages

Housing Wire – In what it is calling a historic trend reversal, credit score provider FICO, is seeing more borrowers with a high credit score preferring to pay their monthly credit card bill over their mortgage.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO, in a statement. “Economic instability is creating unknown risk in lenders’ credit portfolios as well as counter-intuitive trends in consumer behavior.”

The shift to a consumer preference to stay current on unsecured debt, as opposed to secured debt, began last year. In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on credit cards. In 2005, credit card delinquency risk was three times greater than today. In 2008, the lower to credit cards being just 1.6 times more likely to become 90 days delinquent than were mortgage loans.

The results echo data released by credit info provider, TransUnion, earlier this month. That study from earlier this month, found the share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108). At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%.

February 22, 2010

Bank of America Loan Modifications

Filed under: Loan Modification

TampaBay.com – In 2008, Southwest Airlines flight attendant Kevin Parker slammed his shoulder so hard during severe turbulence that he was out of work for months.

His lender, Bank of America, allowed him to skip payments on his St. Petersburg home for 90 days. But when Parker sought a permanent loan modification, he began a journey as bumpy as anything he had encountered in the air.

“I sent the first e-mail probably last February and didn’t get a response, so I started e-mailing every other day trying to talk to someone,” Parker says. “Then it seemed like every time I called them, I was turned over to another caseworker who didn’t have the information I had sent.”

Five months and some 40 e-mails and phone calls later, Parker got the bank to reduce his payments by about $126 a month. But there was a big tradeoff: His late payments were tacked onto the balance, increasing the amount he owes to $157,805 — $10,300 more than he originally borrowed.

“I’m back to work but I’m paying more for the house than it’s worth now and they (Bank of America) weren’t willing to just pick back on the principal.”

Parker’s laments are not unusual among customers of Bank of America, the nation’s biggest bank.

A year ago, the Treasury Department announced the Home Affordable Modification Program, aimed at helping up to 4 million at-risk homeowners avoid foreclosure by reducing their monthly payments. Banks receive $1,000 for each modification and up to $1,000 a year, for as many as three years, as long as the borrower remains current on payments.

Even with those incentives, Bank of America has ranked near the bottom when it comes to modifying loans for homeowners delinquent at least 60 days. Through January, 22 percent of the bank’s eligible borrowers had received permanent or three-month trial modifications, compared to 38 percent for J.P. Morgan Chase and 50 percent for GMAC and CitiMortgage.

The Florida Attorney General’s Office says it has fielded 486 complains about Bank of America and a company it took over, Countrywide — more than it has about any other lender. Many of the gripes are from homeowners who have been unable to get modifications despite repeated contact with customer service reps who lose paperwork, give conflicting information or ignore them altogether.

But even those like Parker who get help could be worse off in the long run because the amount they owe has grown while property values continue to fall. With no equity in their homes, many people may just walk away, critics warn.

“Modifications that work are a permanent reduction in principal and interest, and some lenders are doing those but Bank of America is not,” says Alan M. White, a professor at Valparaiso University School of Law and an expert on housing issues.

“It’s pretty clear that Bank of America and Countrywide, now one entity, are just unwilling to do modifications on the scale that’s needed. Somehow they’re hoping against hope that property values will suddenly come back.”

Bank of America, which had a $6.3 billion profit last year, says it has found that reducing interest and extending the life of the loan are the most effective ways to make payments affordable.

It also says that the volume of Florida complaints is misleading because many probably came from homeowners whose loans originated with Countrywide, once a leader in particularly risky forms of loans.

“When you hear Bank of America complaints, it’s really hard to decipher if it’s against a Bank of America-originated loan or a Countrywide loan,” says Jumana Bauwens, a bank spokesperson.

• • •

During the real estate mania, Bank of America itself was a major lender in Florida, including the Tampa Bay area. Thousands of those loans have gone into default, though very few bay area homeowners have obtained relief through modifications, court records show.

From 2005 to 2008, the bank issued 62,000 mortgage loans in Pinellas and Hillsborough counties. Since then, it has started foreclosing on more than 4,000 loans.

Last year, though, the bank recorded modifications on only about 50 home mortgages in the two counties.

Not every delinquent homeowner was eligible for a modification. But for those who were, patience and perseverance often proved essential.

In 2006, Martha Kramer borrowed $116,000 from the bank to buy a Largo condo. After losing her property manager’s job and missing three payments, she asked for a modification.

“Every time I called, I talked to four or five people. I was on the phone two hours at a time, getting transferred to another department, repeating the whole story again. People were very nice but they were clueless. The right hand didn’t know what the left was doing.”

Kramer says it was” easily a year later” — April 2009 — before she got a modification that reduced the interest rate and almost halved her base payment to $525 a month. “I can deal with it,” says Kramer, who is still unemployed.

But the new terms will make it even harder for her to build equity. The bank tacked part of the late fees onto the principal, meaning she now owes $116,880 on a condo worth about $100,000. And to keep the payments relatively low, the loan is for 40 years, not the once-typical 30 years.

“If they stretch it out further, that’s sort of helping you in that it reduces the monthly burden,” says Arnold Heggestad, a University of Florida finance professor. “But unless housing prices start coming back, it’s not going to do much good in the long run.”

Through January, lenders reported that 28 percent of eligible homeowners nationwide had received permanent or trial modifications in which interest rates were lowered, terms extended or — more rarely — the principal reduced. Bank of America and other lenders have been criticized for stinginess in reducing loan balances, a move that could give homeowners instant equity and more incentive to keep making payments.

By some estimates, 20 percent of American homeowners now owe more than their property is worth.

Bank of America says it is considering “principal forgiveness” for certain types of loans, especially those inherited from Countrywide in which payments rose even as housing prices plunged.

Under an agreement with the Florida Attorney General’s Office, the bank has modified more than 12,700 of the Countrywide loans in Florida. It has also increased the number of customer service representatives in the state.

Given his hassles getting a modification, Parker, the fight attendant, says he probably would have let Bank of America foreclose if he hadn’t put so much time and money into restoring his 1920 Mediterranean-style bungalow. Though his payments dropped, he owes the bank more than he used to. And the interest rate, while lower than before, will climb from the current 4.5 percent to 5.625 percent next year.

“Basically, they were happy with me foreclosing, but it was more a pride thing for me. I took a debt and took responsibility for the mortgage and I don’t think I could walk away from that. That’s what I tried to let them know.”

February 19, 2010

Love in the Time of Foreclosure

Filed under: Foreclosure,Short Sale

LATimes – Nineteen months ago, the recession took Bob Walker’s job. Then, creditors lined up to take the three-bedroom hilltop home that the computer consultant shared with his wife, Stephanie, a playwright still looking for her first break.

Avoiding the stigma and financial fallout of foreclosure became an obsession for the Walkers. They talked to the banks, found multiple jobs, put their Silver Lake house on the market and tried to stitch together a plan to repay their debts. Finally, they turned to a short sale, chronicled in a popular blog: Love in the Time of Foreclosure.

“We really thought that, worst-case scenario, we will sell the house and break even,” Stephanie Walker said. “But it didn’t work. We went into great losses.”

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn’t worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts — but they don’t get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government’s $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.

Many economists view short sales as a way to address a problem that mortgage relief hasn’t fixed: properties that are “under water,” carrying more debt than the home is worth.

“Making short sales easier would go a long way to freeing up the market,” said Richard Green, director of the Lusk Center for Real Estate. “Right now, if people are under water on their house, they are really stuck.”

Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors.

The Walkers faced some of these challenges. The couple paid $799,000 for their home in 2006, taking out loans from Countrywide Financial Corp. and National City Corp.

They spent most of their savings and ran up big credit card balances to redo their kitchen and landscaping. Even with her husband’s $240,000 yearly salary, they were stretched thin making combined mortgage payments of $5,000 a month, Stephanie Walker said.

When Bob Walker’s consulting contract was canceled, the couple fell behind on their house payments. They found jobs but their income suffered.

They listed the home for $875,000 but found no buyers. A foreclosure notice arrived. They were offered a three-month payment reduction from Bank of America but couldn’t afford it. A short sale looked attractive.

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.

“The bank or the investor is going to lose money on a short sale or a foreclosure,” said J.K. Huey, senior vice president of Wells Fargo Home Mortgage. “You don’t lose as much if you sell the property when it is occupied.”

Representatives of Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. said their companies had assigned more employees to handle short sales. But the sheer volume of requests has made it difficult to keep up.

“I wouldn’t call it overwhelmed,” said Matt Vernon, the executive in charge of short sales and bank-owned properties for Bank of America Home Loans. “But the volume has certainly stressed our current process.”

Then there’s the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

“Those junior liens make short sales much more difficult and they make modification much more difficult,” said Michael LaCour-Little, a finance professor at Cal State Fullerton who has studied the issue. The different banks “often have no incentive to cooperate.”

Sally Quinn’s second mortgage has complicated her short-sale attempts.

She is facing foreclosure on a Glendora town house that she bought as an investment property. Quinn said she has tried to arrange a short sale four times through her lenders, Bank of America and JPMorgan. Buyers, tired of waiting months for an answer from the banks, walked away on three occasions, and the banks rejected an offer from a fourth as too low, she said. She lined up a fifth buyer, she said, but BofA balked.

“It all came crashing down,” she said.

The Walkers also found the short-sale process to be emotionally wrenching. Weighed down with debt and fearful they would be pursued by the bank that held their second mortgage, they filed for bankruptcy protection last summer.

In her blog, Stephanie Walker wrote that the struggle helped them focus on what was important: their love for each other.

As the blog grew in popularity, Walker hosted online question-and-answer sessions and the couple were featured in media reports. The attention helped the Walkers secure a plan for the future. A reader hired them as caretakers of a home in Washington state’s San Juan Islands.

Last month, Walker retired the blog to focus on her next project, a baby due in July, posting: “I don’t want my life to be forever tied to our foreclosure story. It’s just time for me to move on.”

February 15, 2010

Florida Foreclosure Procedures Cancelling Sale

Filed under: Florida,Foreclosure

HousingWire – A new rule adopted by the Florida Supreme Court would require lenders to explain “last minute” cancellations of foreclosure sales and request a rescheduling by the court.

Before the New Year, the Florida Supreme Court adopted a foreclosure mediation program to reach out to borrowers facing foreclosure and possibly clear up the backlog of foreclosure cases in the court system. The Task Force on Residential Mortgage Foreclosure Cases launched in March 2009 in response to the nation’s third highest delinquency rate and its worst foreclosure inventory at the time.

Florida has the fourth highest foreclosure rate in the country through January 2010, according to RealtyTrac. There, one in every 187 homes received a foreclosure notice.

The Task Force proposed the motion and recommended the adoption of the forms. In its proposal, the Task Force stated that many foreclosures set by the final judgment and handled by the clerks of court are “vague last minute” motions to reschedule sales without an explanation.

“It is important to know why sales are being reset so as to determine when they can properly be reset, or whether the sales process is being abused,” according to the Task Force proposal.

The new rule aims to clear up and accelerate a foreclosure process clogged with government incentive programs and civil cases. The Task Force wrote in an August report that the foreclosure pipeline resembled a traffic-jammed highway out of a town under hurricane evaluation.

“Again, this is designed at promoting effective case management and keeping properties out of extended limbo between final judgment and sale,” according to the Task Force proposal of the new rule.

February 8, 2010

HAMP Permanent Modifications Picking Up

Filed under: Loan Modification

HousingWire – Modification rates picked up over December and January as servicers converted more trials into permanent modifications under the Home Affordable Modification Program (HAMP), according to a report from Barclays Capital.

The US Treasury Department launched HAMP in March 2009 to allocate capped incentives to servicers for the modification of loans on the verge of foreclosure. According to the latest HAMP progress report from the Treasury, servicers provided more than 66,000 permanent modifications through December. Participating servicers receive more than $35bn in total capped incentives, but the program could reach as high as $50bn.

Modification rates “turned a corner” in October 2009, according to BarCap analysts, congruent with the rise in HAMP permanent conversion rates. The Treasury recently changed document guidelines for the servicers that go into effect June 1, 2010. After that date, borrowers seeking help through the program must provide certain documentation to enter into a trial modification. At the start of the program, servicers collected the documents during the three-month trial plan, creating a lag time in the permanent conversion rate.

Out of the more than 1m borrowers in HAMP trials, 34% have been on private-label securitized loans – meaning the loans are not held by Fannie Mae (FNM: 0.97 0.00%), Freddie Mac (FRE: 1.16 0.00%) or Ginnie Mae. After assuming a similar conversion rate for non-agency loans, analysts found 22,600 non-agency permanent modifications under HAMP.

“This ties in closely with the 25,000 loans modified in past two months that we see using our custom logic on Loan Performance. A higher number based on our logic also makes sense to us as some servicers have non-HAMP modification programs,” according to the report.

Barclays confirmed the numbers by looking at the independent servicer Ocwen Financial Corp., which has a large portion of its portfolio in non-agency deals. Ocwen provided 5,332 permanent modifications through December, or 71.7% of the more than 7,000 loans in HAMP trials, according to the Treasury report.

Servicers are modifying more modifications for delinquent borrowers, according to the report. In the past, modifications went to more current borrowers. Under HAMP, current borrowers in imminent default are not eligible for the program, but servicers might be migrating toward those loans as pressure intensifies to reach the 3-to-4m borrowers targeted for HAMP, according to the report. Fannie Mae recently released new guidelines to servicers to begin gauging imminent default risk for HAMP.

“The rise in modification rates due to HAMP trial-to-permanent conversions has been restricted to a few smaller servicers so far. We expect mod rates to further increase in the coming months as the bigger servicers start converting the large chunk of loans in trial mods,” according to the report.

February 3, 2010

Jingle Mail

Filed under: Foreclosure

NYTimes – In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said.

The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.

Some experts argue that walking away from mortgages is more discussed than done. People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt. Doubters cite a Federal Reserve study using historical data from Massachusetts that concludes there were relatively few walk-aways during the 1991 bust.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American.

Using government money to do that would be seen as unfair by many taxpayers, Mr. Barr said. On the other hand, doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy.

“It’s not an easy area,” he said.

Walking away — also called “jingle mail,” because of the notion that homeowners just mail their keys to the bank, setting off foreclosure proceedings — began in the Southwest during the 1980s oil collapse, though it has never been clear how widespread it was.

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.” (Wachovia failed nine months later and was bought by Wells Fargo. )

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Walking away, he knows, is not without peril. At minimum, it would ruin his credit score. Mr. Koellmann would like to attend graduate school. If an admission dean sees a dismal credit record, would that count against him? How about a new employer?

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.

Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.

Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does not hear much sympathy from lenders for their underwater customers.

“The banks tell me that a lot of people who are complaining were the ones who refinanced and took all the equity out any time there was any appreciation,” he said. “The banks are damned if they will help.”

Joe Figliola has heard that message. He bought his house in Elgin, Ill., in 2004, then refinanced twice to get better terms. He pulled out a little money both times to cover the closing costs and other expenses. Now his place is underwater while his salary as circulation manager for the local newspaper has been cut.

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

Back to Broken Credit Blog