Facing foreclosure, some just walk away.

Moving out and letting the house go to sheriff's sale becomes a popular option.
This article was originally written by LESLIE A. PAPPAS • The News Journal • March 9, 2008

Debbie Chase never imagined she would find herself in foreclosure.

In the spring of 2006, when the paralegal's parents retired and decided to move to Delaware to be closer to their grandchildren, buying a bigger home for the entire family seemed like a sensible thing to do.

The collapse of the housing market ruined that plan.

After moving into a bigger house but failing to sell the old one, Chase and her husband now find themselves with two mortgages -- and they can't pay both. The family has since moved back into the smaller house and has completely stopped making payments on the big one.

"We really don't want to go through a foreclosure, but in this market we know we won't get what we need to pay off the house," said Chase, who is still trying to sell. "We are really heartbroken over this whole mess. We honestly don't know what to do next."

For Chase and a growing number of the 938,000-plus Americans in foreclosure, the next step is coming into focus: just walk away.

Let the house go to sheriff's sale and pick up the pieces later.

"A homeowner with a mortgage that exceeds the value of his house has a strong incentive to default." Martin Feldstein, chairman of the Council of Economic Advisors under President Reagan and now a Harvard professor, wrote in a Wall Street Journal editorial Friday. "Optimists note that homeowners with negative equity have generally been reluctant to default in past years. That was sensible when house prices were rising. But with house prices falling, defaulting on the mortgage is the rational thing to do."

It's a choice banks and lenders don't want borrowers to make. Taking a home through the foreclosure process costs the lender $49,000 per property on average. And in a down housing market, managing a bundle of empty properties becomes a costly hassle. That's a growing concern in Delaware, where more than 3,300 mortgage holders have slipped into foreclosure and 10,000 are past due on their mortgage payments.

"Banks don't want houses, they want customers", says Greg Koseluk, spokesman for the Delaware Bankers Association.

But for homeowners, the choice to voluntarily walk away is becoming ever-more popular as prices fall and equity dwindles.

Last week, the Federal Reserve reported the percentage of equity Americans hold in their homes fell below 50 percent -- in other words, their debt exceeded their equity -- for the first time on record since 1945.

For some homeowners, especially those who put little money down or bought in markets that saw a huge run-up in home prices, walking away becomes the only logical thing to do.

"No loan modification out there is going to help a school teacher with a $600,000 mortgage." says Jon Maddux, co-founder and principal of YouWalkAway.com, a San Diego California based company that collects a $995 fee to hold a borrower's hand and guide them through the foreclosure process.

Most people who are facing foreclosure are not bad people, Maddux says. "The problem is, they bought a house that turned on them."

"Just about everyone we talk to has no equity in their house. They've tried to sell it. They've tried to do a short sale. They've tried to talk to their bank." Maddux says. "There's so many people who are going through it..... the stigma is kind of falling away."

Chase's family tried to do things right.

When her parents moved from New York in June 2006, they squeezed into the family's three-bedroom home in Newark, which had already been put up for sale. Four months of cramped living later, the family received their only offer: a rent-to-own agreement. The buyers promised to make monthly payments and go to full settlement a year later, in November 2007.

"It looked like a good offer at the time," Chase said. "We never expected it would happen the way it did."

They signed a Lease to Purchase Agreement with the buyers in October 2006.

A month later, the family moved into a four-bedroom home in Bear, financing 100 percent of the $469,000 property with an 80/20, no-documentation loan.

"We didn't put anything down," Chase said. "They told us that when we sold the first house we could refinance and get a better interest rate."

Then the buyers stopped making monthly payments. By the time Chase evicted them and put the property back on the market, it was June 2007. The housing bubble had burst. Nobody was buying, and the family couldn't find a credit-worthy person to rent. Her husband, a graphic designer, picked up extra jobs teaching one night a week and working for a retail store. Still, it wasn't enough to make payments on both loans.

In January, Chase and her husband packed up and moved their children back into the smaller house. This week, her parents are moving out of the big one into a rental apartment. She continues to try to work out a payment plan with her lender, but has been unable to come up with the $2,300 good-faith deposit, and is now falling behind on her car payments.

She stopped making payments on the new home in January.

"Our plan was to start getting the new one back on track," she says. "Now we're just trying to unload it. ... If the first house had sold, we never would have been in this position."