The current administration continues to attempt a myriad of policies aimed at bringing about a recovery in the housing industry. It is not their belief in the importance of homeownership that drives this policy. This administration has openly questioned whether the government should continue to support homeownership as an American ideal. Every policy had one purpose in mind: that stabilizing home prices would help stabilize the economy.

The purpose of the original stimulus package (the homebuyers’ tax credits, the lowering of interest rates by purchasing mortgage-back-securities, different modification programs) was to stabilize housing prices. It had nothing to do with getting families into homes or keeping families in their current homes. The government realized very early on that a recovery in housing would require a stabilization of values. Why? Because a large percentage of homeowners ‘walk away’ from their homes once they fall into a negative equity situation (where their home is worth less than the mortgage on the home). That would create more foreclosures and continue the cycle below:

The administration had to stop home prices from falling. Their ability to control prices would be determined by the theory of ‘supply and demand’. At first, they attempted to increase demand by lowering interest rates and providing tax incentives. They attempted to influence supply by controlling the flow of distressed properties coming to the market with an assortment of loan modification programs. These policies had a short-term positive impact on pricing. However, supply is again skyrocketing and demand seems to be plummeting.

The administration realizes that another drop in house prices will create a new group of homeowners who will fall further into a ‘negative equity’ position. That is why they have introduced the new FHA Short Refinance Option today. The purpose:

The FHA offers help to qualifying non-FHA borrowers who are “underwater” on their home loans. The FHA Short Refinance option is open to those who are current on their existing mortgage—but the lender must agree to forgive at least 10% of the unpaid principal on the original note.

The program’s intent is to prevent homeowners falling further into a negative equity. The Wall Street Journal posted frequently asked questions here.

Bottom Line

Will the program help families? We’re sure it will. If you qualify, jump on it. Will it help enough families to turn the housing market around?  We doubt it.

We reported (see below) on a Reuters article saying there was a rumor spreading from ‘Washington to Wall Street’ that the government was considering major cramdowns on the mortgages of ‘underwater’ homeowners.

The World Street Journal reports that the rumor is just that – a rumor.

Obama administration officials knocked down rumors on Thursday about any plan for new programs–dubbed an “August Surprise” –to streamline refinancing or cut mortgage balances for homeowners in a bid to stimulate the economy without asking Congress for money ahead of the midterm elections.

Speculation has intensified over the past week as some economists have proposed that the government put cash in more Americans’ pockets by making it easier to refinance. A news report on Thursday suggested that such stimulus might also include a plan to lower mortgage balances for some homeowners.

These reports have worried mortgage investors, sending prices down. But elements of the so-called surprise programs already exist in far more modest forms and there are no plans expand them, administration officials said. The Obama administration said in March that it would create a pair of programs later this year that would allow mortgage servicers and investors to voluntarily reduce loans balances.

One of those programs—which hasn’t been finalized yet but will be soon—will allow mortgage investors to refinance current homeowners who are underwater, or owe more than their homes are worth, into loans backed by the Federal Housing Administration if investors are willing to take a haircut. (*see FHA Short Refinance Option below)

And it already has had for more than one year a separate program that allows some homeowners to refinance underwater loans. That initiative—called Home Affordable Refinance Program, or HARP—has fallen short of its initial goals.

Calculated Risk on the key points from the *FHA Short Refinance Option:

In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values.
…
Today, FHA published a mortgagee letter to provide guidance to lenders on how to implement this new enhancement. Participation in FHA’s refinance program is voluntary and requires the consent of all lien holders. To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner’s primary residence. And the borrower’s existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower’s combined loan-to-value ratio to no greater than 115%.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

And, CR had strong commentary on those, like us, that reported the original rumor:

Note: this has nothing to do with that nonsense rumor yesterday about a government principal reduction program. This was previously announced in March.

Ouch! We’re just reporting what we hear (and we did stress that it was a rumor).

—————————————————————————————————————————————————————

Oringinal Post

There is some interesting talk about how far the administration is willing to go to bring back the housing market. The original stimulus package included the purchasing of mortgage-backed-securities (to lower interest rates), home buyer tax credits (to spur demand) and a comprehensive foreclosure prevention program (to help keep families in their homes). Though these programs initially stopped the freefall in prices, it seems their impact is already waning.

Interest rates are still at historic lows but demand contracted as soon as the tax credit expired. The administration has helped over 300,000 families avoid foreclosure but that number is less than 10% of the families in jeopardy. The ‘shadow inventory’ of distressed properties is beginning to be introduced to the market. It seems the market might be headed for another dip down in prices.

What comes next? It seems the administration is headed toward a very dramatic conclusion: if we don’t lower the principle on people’s mortgages, the market will continue to falter. Let’s look at this issue:

The Challenge

As prices continue to fall, more and more families are falling into negative equity (where their mortgage is greater than the value of the house). There were 14 million people with negative equity at the beginning of 2010. Deutsche Bank just projected that number could jump to over 20 million by 2012.

The reason this is troubling is that when people fall into negative equity the chances of them not paying their mortgage increases dramatically. Housing Wire quotes the Deutsche report:

“Many existing academic studies model homeowners’ default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower’s house has negative equity. Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.”

If the people in negative equity started to ‘walk away’ in large numbers, the housing market might collapse.

The Talk

As reported by Calculated Risk, the Federal Reserve Bank of Cleveland provides new research that supports residential mortgage cram downs:

“[One proposal is] to revise Chapter 13 of the bankruptcy code to allow judges to modify mortgages on primary residences. The type of loan modification under consideration is known as a loan cramdown or loan stripdown because the judge would reduce the balance of the secured claim to the current market value of the house, turning the remaining balance of the mortgage into an unsecured claim (which would receive the same proportionate payout as other unsecured debts included in the bankruptcy petition).”

The Fed is actually saying that forgiving mortgage debt in certain situations makes sense. The theory is, if we forgive debt, we would avoid a negative equity situation.

The Rumor (remember, we said RUMOR)

Reuters, in a blog post yesterday, said:

“Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth … The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.”

Wow! It will be interesting to see if the administration actually pays-off some of the balance of people’s mortgages. We’ll keep you abreast of all developments.

Many lending institutions are beginning to take action against those who decide to walk away. Fannie Mae, according to an article in Housing Wire, announced:

Borrowers who are determined to have the ability to make their monthly payments but walk away from their homes will not be able to secure a Fannie Mae backed mortgage for seven years after the foreclosure.

Fannie Mae will also take legal action against borrowers who strategically default in order to recoup mortgage debt.

The actual Fannie Mae announcement quotes Terence Edwards, executive vice president for credit portfolio management at Fannie:

“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

In a subsequent article it was reported:

If Fannie Mae determines someone strategically defaulted, then they say they will hold the borrower accountable for all associated costs of getting the house back on the market, in areas that lawfully allow deficiency judgments.

Often when a home forecloses, Fannie Mae brokers and contractors discover vandalism and missing appliances and fixtures when they ready the home for resale. The cost of making those repairs and replacements will be included in the determination of the deficiency amount, a Fannie Mae spokesperson said, in addition to the difference in the mortgage balance and the proceeds from the foreclosure sale.

What does this mean to you?

Considering a strategic default? Know the ramifications before ‘walking away’ from your mortgage obligation.

I recently had an email conversation with a well respected real estate professional about the difference between strategic defaults and short sales. We both agreed that we needed to share our conversation with the readers of this blog.

Original Question:

I have heard that a short sale might be better than a strategic default. However, they are painfully slow and I’m really not sure they have any “different” effect on surrounding homeowners: it’s still a massive loss of value in the area.

Whether they short-sell or not, aren’t they going to be penalized by future lenders anyway? I’m not entirely sure there’s much of a different in the “outcome” at the end of the day – short sell or walk away, they are going to suffer in creditworthiness.

And don’t short sales actually harm the bank “more” than the borrower (perhaps) because it drags out the timeframe before the asset can be put on the market, where as a walk-away can put that home on the market right away – at TODAY’s possible sales price – rather than weeks more of declining value.

Steve:

I can fully understand your overall point. However, as always, the devil is in the details.

1.) There are VERY HEFTY penalties to a strategic defaulter vs. a person who short sales (ex. Fannie Mae has decided that they will “lock out” any strategic defaulter from getting a mortgage for a minimum of seven years and will also charge them with EVERY expense incurred during the foreclosure process).

2.) The average short sale sells for 85.3% of full value. Foreclosures sell for an average of 66% of full value. Every time a house goes to foreclosure vs. a short sale the neighborhood loses that 19.3% equity difference when these homes are used as comps.

Again, I understand your overall point. I am just worried about future ramifications.

Follow-up Question:

First, I didn’t know the data on short sale vs foreclosure; my point was the “time to market” was sooner – so one thing I’d love to see in the data would be “85% of what number” because if a short sale takes 16 weeks, but a strategic default could be moved into a rental in 4 weeks and the home put on auction on week 5, I wonder which would yield a higher amount.

As for Fannie/Freddie, that’s an entire other Pandora’s Box. On one hand, I’d love to say “who cares” but we know they are fueling the market right now (just like they fueled the problem years ago). I think of it like bankruptcy – you’re “supposed” to be locked out of credit for 7 years after bankruptcy, but PRIVATE lenders start sending you credit cards right away. Yes, at higher rates, but you ARE a higher credit risk. So, will “Fannie” penalties really be so bad? Plus, once the “political sob stories” hit the streets, do you think Fannie/Freddie policies will really be enforced?

Steve:

Actually, the average length of a short sale is 6 months not 4 months. The average length of a foreclosure is 438 days or 15.6 months. So it is the opposite of what many perceive it to be.

The only thing I can think is that you are actually talking about a deed-in-lieu in which case your argument is correct. But, a deed-in-lieu is nothing like a strategic default. People who strategically default STAY in their house and force the bank to foreclose.

Regarding penalties, you have to do some reading on that. For example, in most states there is a deficiency judgment for strategic defaulters while in most short sales, and in some deed-in-lieu cases, it is waived.

Follow-up:

Ok – that surprises me – is it the bank’s fault or regulators that it takes so long to foreclose? If it’s the banks’ fault, then it’s a problem of their own making. Once the owner decides to stop paying, they should get them out asap in order to sell the asset asap.

As for deficiency judgment, maybe the owners should do a strategic default and bankruptcy at the same time. I’m not saying it’s pretty, but it’s an option. If you credit is going to take a hit – AND you’re going to lose ANY savings you might have had as equity in your home (and even that’s an assumption!) then why not just clean it all up.

Steve:

The bank has to go through a legal process to foreclose. The laws definitely favor the borrower as they should. That is why it takes as long as it does. And most courts are backed-up. The bank can’t just make the person leave.

People made uninformed decisions five years ago that are haunting them now. I just want to make sure they are not making decisions now that will haunt them in five years.

I’ve done a tremendous amount of research on this point. I firmly believe, in most cases, a strategic default is a short term solution with devastating long term ramifications. People should be advised of these ramifications before moving forward.

Follow-up:

We should post this thread online. This is the kind of stuff people need to hear!

————————————————————————————————————————————————

You can find more information on the negative ramifications to the borrower here.

You can find information on the impact defaults have on surrounding homeowners here.

There is a growing trend in this country of people walking away from their mortgage obligations. The definition of a ‘walk away’ borrower is one who has the financial means to continue to make their mortgage payment but decides not to. This situation is also called strategic default.

The incidence of people taking this path is growing dramatically. A study done by The Chicago Booth/Kellogg School Financial Trust Index reported:

The number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.

In a news release announcing the report Paola Sapienza, professor of finance at the Kellogg School of Management at Northwestern University and co-author of the report said:

“With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.”

Strategically defaulting on your mortgage has been supported by many main stream players such as a law professor at the University of Arizona, the New York Times and the Wall Street Journal which said in a blog post that:

Whether we like it or not, walking away from debts is as American as apple pie.

What impact does this have on the housing market?

PRICES

House prices are determined by supply and demand. The supply of distressed (discounted) properties lowers the values of all the homes in the area. These foreclosures are added to the mix of comparables used by appraisers to establish value on homes sold. If a  borrower decided to short sale instead of walk away, the property would sell for approximately 86.9% of full value while a foreclosure sells for only 57.3% of full value (according to First American Core Logic’s Distressed Property Report).

Freddie Mac in a news release probably said it best:

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected. Indeed, Economy.com, the analytic firm, recently said that more strategic defaults could tip a fragile housing market back into one of further price declines. Even more families harmed.

As prices fall, more borrowers fall into a position of negative equity (their house is worth less than the mortgage). This is the number one reason people ‘walk away’.

This past week a Seeking Alpha article entitled Housing: Could Strategic Default Turn into a Full Blown Movement? reported:

Many homeowners are unlikely to sit idly by while their neighbors walk away from their underwater mortgages. But one thing is certain: if strategic default becomes a widespread trend then a double dip in housing prices has moved a lot closer to becoming a done deal.

LENDING GUIDELINES

Banks are trying to deal with this new phenomenon of ‘walking away’. No one could blame them if they started to price into mortgages the risk to which they are now being subjected.  

Freddie Mac, in the same news release mentioned above, discusses this exact point:

Should strategic defaults become more common, mortgage guarantors and investors, including Freddie Mac, would need to factor this risk more prominently into their credit policies and prices. The likely impact on future homebuyers: the cost of a mortgage will go up and credit terms will be less flexible. Thus, the impact of strategic defaulters on still more families might be more expensive mortgages and loans that are more difficult to obtain. The strategic defaulter does not usually consider these costs.

What does this mean to you?

The value of your home is being adversely impacted by those that walk away. The cost of your next mortgage may also be affected.

The number of people ‘walking away’ from their mortgage obligations has reached epidemic proportions in this country. Strategic defaults account for 31% of all mortgage defaults. Walking away from an underwater house may seem like the easiest way out of the financial burden created by your monthly mortgage payment. And it looked as though there was no real downside to doing it.

That has now changed. The FHA and mortgage lenders are starting to let borrowers know that you will pay a price when you try to re-enter the housing market in the future if you walk away today.

The Los Angeles Times in an editorial on strategic defaults reported:   

During debate last week on a bill (HR 5072) to shore up the Federal Housing Administration’s mortgage insurance program, the House decided to crack down on such “strategic defaults.” Lawmakers agreed to a proposal by Rep. Christopher Lee (R-N.Y.) to make those who strategically default ineligible for new FHA-insured loans.

CNN Money reported two weeks ago:

While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.

“It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

So lenders may look at applications from one-time strategic defaulters and say, “Yes, they walked away but it’s a whole different market now,” according to Keith Gumbinger, of the mortgage information publisher HSH Associates.

Even so, lenders may require more from borrowers who walked away than those who didn’t. “To the extent they could get a mortgage,” said Brinkmann, “they can count on needing a heavy down payment.” The lenders may ask for 30% down or more. That would provide enough collateral cushion that the bank could get all or most of its money back in a foreclosure. Strategic defaulters might also be charged higher interest rates, even above the levels other borrowers with similar credit scores would receive.

Before walking away, a borrower should get counsel from an expert to find out what future price they will pay for doing so.

There is more and more conversation regarding strategic defaults. And that only makes sense since the number of borrowers deciding to take this path is increasing exponentially.

What is a strategic default?

Let’s first define strategic default in simple terms. According to Wikipedia:

A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.

This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house’s price such that the debt owed is (considerably) greater than the value of the property – the property negative equity or “underwater” – and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called “walkaways.”

This definition itself help serves as the explanation as to why people will default.

Why do people strategically default?

There is a feeling which is growing among many borrowers that once their house falls in value so that it is no longer worth the amount of the mortgage(s) on the house, it might make sense to walk away from the obligation of paying the mortgage(s).

This way of thinking has been supported by many main stream players such as a law professor at the University of Arizona, the New York Times and the Wall Street Journal which said in a blog post that:

Whether we like it or not, walking away from debts is as American as apple pie.

Who are the people who choose this method?

Many are surprised to find out that all different types of borrowers have decided to walk away from what many feel is a moral obligation to pay your debts.

In a recent study, Amherst Securities reported that all categories of loans are being impacted. Here is a graph from that study:

Here is an explanation of the graph from a Reuters’ article on the subject:

The x-axis measures combined loan to value ratios (CLTV). In other words, combine the balance of all mortgages attached to a property (e.g.: a first mortgage + a home equity loan) and compare that to the property’s value. CLTV over 100% means more is owed on the house than it is worth. Yes, there’s a higher default rate for more poorly written mortgages (lower FICOs, low/no documentation), but even those that are well-underwritten (high FICOs and verified income) show spiking strategic defaults as equity goes negative. In other words, more folks who could pay their mortgage are choosing not to.

We can see that all categories of purchasers are picking this option as they fall deeper into negative equity.

How long will this practice of walking away last?

As long as housing prices continue to fall, there will be more and more families choosing this option. We are currently trapped in a vicious cycle which will continue to force people to make a decision. Below is a simple visual depicting the issue:

What does this mean to you?

It depends on whether you are a buyer or seller or if you are in a negative equity position or not. All we know for sure is that more people are deciding to walk.

Yesterday I posted on the latest Negative Equity Report from First American Core Logic. In that post, I quoted the report as saying that one of the ramifications of negative equity is that it is:

a major factor in changing homeowners’ default behavior.

That change in behavior could take on many different forms. One of the most alarming is the concept of ‘walking away’. By that I mean the borrower just decides to no longer make mortgage payments whether they have the financial where-with-all to pay or not. We have posted on this before.

In those posts, we followed the evolution of the concept from its beginnings in the blog-o-sphere, to the creation of a web site (www.YouWalkAway.com), to the main street media covering the issue. We then reported on how a law professor at the University of Arizona wrote a paper supporting the idea.

Then something strange happened. Main stream media started to not just report on the concept but instead actually started to support a person’s right to walk away from their mortgage obligation. The New York Times in an article in January said:

“Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property…The borrower isn’t escaping the consequences; he is suffering them.”

A few days later, in their blog, The New York Times went further by giving step-by-step directions on how to walk away.

That brings us to last week. Brett Arends of The Wall Street Journal wrote in Market Watch, which is part of WSJ’s digital network, an article suggesting you may be stupid for not walking away. Here are a few excerpts from that article:

Millions of Americans are now deeply underwater on their mortgage. If you’re among them, you need to stop living in a dream world and give serious thought to walking away from the debt…No, you shouldn’t feel bad about it, and you shouldn’t feel guilty.

Stop trying to chase your lost equity. That money is gone. Don’t think like the gambler who blows more and more cash trying to win back his losses. That’s how a lot of people turn a small loss into a big one.

If you are reluctant to give up on “your” home, realize that it isn’t “yours.” If you are in negative equity, it’s the bank’s home. You’re just renting it. And right now you may be paying way above market rates. You need to be ruthless about your cash flow.

Still, when it comes to the idea of walking away from debts, many people are held back by a sense of morality. They feel it’s wrong to abandon their obligations. They don’t want to be a deadbeat. Your instincts, while honorable, are leading you astray. The economy is fundamentally amoral.

Whether we like it or not, walking away from debts is as American as apple pie.

Wow! The Wall Street Journal is telling people to walk away. I’m not here to say that advice is correct or incorrect. I’m just shocked they are saying it.

What does this mean to you?

If you are hoping that the housing market will recover soon, read the following thoughts from Professor Robert Shiller, founder of the Case Shiller Index and one of the leading experts on housing in this country:

“The market has shown a lot of momentum,” Mr. Shiller said. “What trend are we seeing now? It’s very ambiguous.” Mr. Shiller said that one of his greatest worries about the housing market are so-called strategic defaults, where borrowers who owe more than their homes are worth and can afford their monthly payments choose to default anyway.

Where did I read Mr. Shiller’s remarks? The Wall Street Journal. Two days before the Brent Arends article.

The Homebuyers’ Tax Credit, in many ways, has done exactly what it was suppose to do – stimulate the economy. Notice I didn’t say increase home ownership. The tax credit was never really about buyers. It was about keeping home values stable so the housing sector would not have another wave of foreclosures that would cause a further deterioration of the economy.

The administration realized early on that the number one cause of foreclosures was an increase in ‘negative equity’. Negative equity occurs when the value of a home is less than the mortgage balances on that home. Other terms for this situation are being ‘underwater’ or ‘upside down’ on your mortgage.

Studies have shown that once a borrower falls into this situation they are much more likely to stop paying the mortgage. An article in the Los Angeles times addresses this issue:

Research by three academics suggests that the willingness of people to default depends largely on just how far underwater they are. Or, as the study’s authors put it, “People default because of the size of their negative equity, not just because they cannot afford to pay.”

The administration realized that if they didn’t stop prices from falling, more and more homeowners would fall into negative equity and eventually into foreclosure. So what did they do? They artificially increased demand for housing by keeping mortgage rates low and incenting people to buy homes with the tax credit.

You might ask – “How do you know this?” Let’s hear it directly from the administration itself. In the TARP Quarterly Report to Congress which was released this past Saturday, it was stated:

Supporting home prices is an explicit policy goal of the Government. As the White House stated in the announcement of HAMP for example, “President Obama’s programs to prevent foreclosures will help bolster home prices.” In general, housing obeys the laws of supply and demand: higher demand leads to higher prices. Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices. The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and MBS. Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income. Similarly, the Administration is boosting home prices by encouraging bank lending (such as through TARP) and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices.

The government has been and continues to be in the business of ‘bolstering home prices’ in this country. I am not arguing that was the incorrect thing to do. Perhaps, it needed to be done to save the overall economy.

However, if the actions the Fed is taking are propping up prices, what happens when they terminate those programs? I believe it is logical to conclude that prices will again feel downward pressure.

And I am not the only one feeling this way. Here are some examples:

From The Wall Street Journal:

“A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%,” said Ronald Temple, portfolio manager at Lazard Asset Management

From Reuters:

A recent decline of home sales is swelling the supply of houses and may push prices down, adding to losses from an earlier three-year slide, said rating agency Standard & Poor’s in a statement on Friday.

“While home prices have been trending up since spring 2009, existing, new and pending home sales are waning, which suggests that lower prices are on the horizon,” said the statement.

From Housing Wire:

Moody’s does not expect a bottoming of house prices before Q310, with another 11% national decline likely before the worst is over.

From the New York Times:

“I’m worried. Everyone’s worried,” said Karl E. Case, the Wellesley College economist who helped design the housing index that provided fresh cause for alarm on Tuesday. “If prices sink 15 percent from here, which is a possibility, and the 2008 and 2009 loans go bad, then we’re back where we were before — in a nightmare.” Mr. Case, who chided himself for his optimism over the summer, said he now believed “the probability is very high of a serious double dip.”

The Fed has already announced that they are exiting the mortgage-backed-securities market on March 30th and the tax credit requires a buyer to be in contract by April 30th. If demand falls off after that, won’t prices fall?

From The TARP Report:

“In general, housing obeys the laws of supply and demand: higher demand leads to higher prices.”

We must realize the opposite is also true.

There is a very interesting cultural change taking place throughout the country. And it is the direct result of the current challenges in the housing sector. It seems that there is a wave of support for the concept of walking away from your financial obligations in regard to your mortgage. The stigma attached to those who become delinquent on their house payments has now almost become a badge of honor.

And we are not just talking about some fringe element calling for the big banks to get what’s coming to them. Main stream media and college law professors are joining in on pronouncing this new behavior, if nothing else, quite reasonable.

The New York Times in an article in January stated:

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property … The borrower isn’t escaping the consequences; he is suffering them.

Brent White, a professor at the University of Arizona’s James E. Rogers College of Law, is actually suggesting that it makes no sense not to walk away! In his extensive report he says:

Home owners should be walking away in droves…The real mystery is not why large numbers of home owners are walking away, but why, given the percentage of underwater mortgages, more home owners are not.

And just this week, The New York Times in their blog actually gave step-by-step instructions on how to determine if it makes financial sense to walk away and where to go to get the proper coaching.

However, there are costs to walking away that should at least be considered. The banks are starting to get tougher about going after people who default on their loan. Bloomberg this week ran an article reporting how banks are getting deficiency judgments at record numbers:

While there are no statistics on the number of deficiency judgments approved by courts, the Federal Deposit Insurance Corp. tracks the amount banks collect after defaulted loans were written off.

These mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period, according to the Washington-based regulator.

And the person the bank is most likely to go after is the borrower who could afford to pay, but decided not to.

The likeliest candidates for deficiency judgments are so- called rational defaults, said Larry Tolchinsky, a real estate attorney in Hallandale Beach, Florida. In those cases, people who are current on their mortgages decide to walk away from a property because its value has sunk so far below their loan balance they have no hope of recouping the loss.

Will this slow down the number of people walking? We will continue to follow this situation closely because if it doesn’t slow down it will definitely impact housing prices this year.