"Walk Away" Foreclosures Sign Of Times?

As long as there have been mortgages, there have been foreclosures. In times past, the unfortunate or unexpected would happen, and the unlucky homeowner would find themselves on the street. This occurrence, however, was an anomaly. According to research from the FDIC, foreclosure rates on conventional loans from 1951 to 1979 hovered in the lower end of a 0.04% to 0.78% range. Rates grew through the 1980’s and reached a plateau of around 1% in the 1990’s and into the 2000’s.

Now with the bursting of the housing bubble in the last couple of years, we see rates spiking, with, according to Realty Trac, Q1 2008 numbers up 112% on a year-over-year basis.

So why were foreclosure rates so low years ago? And maybe more importantly, how did we get where we are today?

Simply stated, lenders used to apply stricter lending standards and required borrowers to have more equity in their homes. Logically, a homeowner with significant “skin in the game” is less likely to go bad on their loan. It would usually take a spark such as divorce or job loss to trigger a default. As lenders loosened their guidelines, as Loan-to-Value ratios (LTVs) rose, homeowners had less equity and less to lose which beget rising rates. Throw in the “cooling off” of the real estate market in the last couple of years, voila spiking rates!

So rising foreclosure rates can be chalked up to poor lending decisions; but how do we explain a growing trend of homeowners “walking away” or abandoning their homes? Realty Trac found that in March 2008, default notices were up 54%, bank repos were up 129%, but that auction notices were up only 32% “indicating that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender”.

No simply stating this trend; no unequivocally laying this at the feet of the mortgage industry.  Walking away, in the eyes of this solitary Realtor®, is a symptom of a society that is “less attached”.

Ironically, as we have grown more “connected” (via the Internet, blogging, social networking sites, etc.) we have become less “attached”. We live in neighborhoods where we do not know our neighbors names. We chat with virtual friends and our kids even have virtual pets. In this Information Age, we know more details of each other’s lives and less about one another.

Contrast that with the past where I imagine the financially distressed homeowner of the 1950’s was not only attached to his home, he was a part of his neighborhood and his community. He was on a first name basis with the banker who held his mortgage. Losing his home meant more than losing a house; it damaged his reputation with his neighbors, impacted his standing in the community, and brought harm to his local banker. That struggling homeowner risked violating societal mores and that was a powerful deterrent that only the most extreme event could trigger.

Only recently, are we like the frog who has suddenly felt the heat of the boiling water. Reform, in one shape or another, is on the way for the mortgage industry. We’ll not be returning to the 50’s, but eventually better lending decisions will stem the tide of this current foreclosure crisis.

In the meantime, I think I’ll “walk towards” my neighbor and find out his name.