Home prices have plunged. Mortgage payments are set to jump. And now this: more and more homeowners are walking away from their mortgages, returning the keys to lenders rather than trying to keep up with rising payments on deteriorating assets.
The hard choice is occurring often enough that an old phrase has resurfaced to describe it, one last heard circa the early 1990s during the savings-and-loan crisis and ensuing real estate debacle. "Jingle mail."
This is a new and disturbing twist for lenders in a housing market reeling from the failure of the subprime mortgage market, freewheeling credit decisions and rampant investor speculation that sent home prices soaring.
Collection industry insiders are closely watching the developments and ongoing weakness in the housing market. Many predict more placements and lower recovery rates in all credit classes, possibly for another two years – or as long as the housing market struggles.
"There is fierce competition for dollars among creditors. Traditionally, there had been a 'food chain' of debt, where the perceived critical debts are paid first," says Peter DeForest, managing partner at Portfolio Defense Consulting Group, a credit risk management consulting company that builds predictive models. "This has always meant the mortgage was first. But this doesn't hold true as much as it used to."
Why Now?
Walking away from a mortgage without question is a drastic step that will ruin an individual's credit rating for years. So why take the hit?
Many put next to nothing or zero money down and find themselves with little stake in their houses as the values dip below the amount of money left to pay back on their mortgages. They see little incentive to continue making payments – moral obligations notwithstanding. Often, they chose hybrid adjustable rate mortgages with low initial payments and when the interest rates reset higher after a few years, they counted on the increased value of their homes to refinance into affordable, fixed-rate loans.
Now, they are left waxing nostalgic for the early 2000s. Many will take the credit-rating strike and saddle their lenders. With lenders often willingly extending the creative loan the homeowner believes started the problem, the homeowner feels less obliged to fulfill the mortgage commitment.
In the vernacular, this is called "sticking it to the man."
"A sense of personal responsibility has diminished," says Stan Kantrowitz, a Los Angeles-based attorney and mortgage industry consultant. "These borrowers view themselves as victims and have convinced themselves that they would be chumps if they stayed. They see rapacious corporate fat cats as the only losers."
There is no hard data available on jingle mail but Jay Brinkman, an economist with the Mortgage Bankers Association, believes investors who flooded the market in the past decade are mostly to blame. Still, without question families are doing it too, he adds. "If they have to stretch to make mortgage payments for a home that will not recover its value, then yes, they may walk away," he says.
As far as the domino effect on other credit markets, it does not really matter who is committing the act. The end result is the same.
Jingle mail is a classic example of a "negative-feedback loop," the term used by economists to describe when one problem creates a broad set of behaviors that only makes the initial problem worse. And therein lies the rub: Homeowners who abandon their homes put downward pressure on home prices, drawing more households into the loop.
In January, the number of homes facing foreclosure jumped 57% compared to a year ago, with lenders increasingly forced to take possession of homes they could not unload at auctions, according to mortgage research firm RealtyTrac.
Nationwide, some 233,001 homes received at least one notice in January related to overdue payments, compared with 148,425 a year earlier. Nearly half involved first-time default notices.
The housing situation has worsened despite efforts by many lenders to help borrowers manage their payments by modifying loan terms and working out long-term repayment plans.
Collections Impact
The housing crisis is contributing to a rise in charge-offs and delinquencies across the lending spectrum, harming the ability of many companies to collect. The damage is bleeding far beyond subprime mortgages, where the pool of available dollars is empty and consumers' options are gone. Prime mortgages, auto loans and credit cards are affected as consumers struggle with rising prices from health care to gasoline to home heating costs.
Richard DeKaser, chief economist for National City Corp., notes that while all credit metrics are deteriorating, mortgage delinquencies are rising disproportionately, which he says makes sense with homeowners choosing to walk away.
Stacey Schacter, president of OSI Portfolio Services, a Duluth, Ga.-based accounts receivable management company, predicts an overall negative impact on collections.
"Where I previously thought overall collections could be down by as much as 10 percent, I would not be surprised if that number may not be closer to 15 percent, especially if we include the impact of the [debt-buying] resale market on overall collection rates," he says.
Homeowners increasingly are forced to prioritize their bills by building a "delinquency budget" to pick which get paid, according to a survey by Online Resources Corp., a provider of Web-based financial services, which polled 1,000 households and billers about the effect of the mortgage crisis on bill payment and collections.
Some statistics indicate there are strapped homeowners who actually are deliberately courting foreclosure. An analysis by Experian, a consumer credit rating agency, reports many borrowers are choosing to pay off card and other consumer debt before paying the mortgage.
Wachovia Corp. CEO Ken Thompson, during a recent earnings call, confirmed this is a challenge and singled out California as a trouble spot. "[There are] people who have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties."
To wit: a Los Angeles Times story in January quoted one Leandro Hernandez on the subject of what he would tell his lender if the company does not agree to modify his loan. "Foreclose me.... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."
Payment Priorities
There is another school of thought countering the naysaying and fears that all credit markets will be negatively hit for the foreseeable future by jingle mail and the greater housing crunch.
"In all past economic cycles," says Kantrowitz, mortgage industry consultant, "stressed consumers' efforts to save their homes were paramount. With this cycle, many borrowers will make calculated decisions that they can more readily maintain their lifestyle by keeping their credit card and car payments on track, but dumping their now-overpriced houses. They can rent someone else's discarded home before they default. The math is compelling."
Brian S. Glass, director of acquisitions for Streamline Capital Partners, a debt buyer in Lincolnwood, Ill., says many debtors in foreclosure who are no longer paying inflated mortgage rates will use that large chunk of money for other debts.
"As people give up their homes and are forced to rent and pay down their debts in order to possibly become homeowners again someday, we will see the types of credit and lending corrections this country desperately needs," he says. "Overall, collections of delinquent receivables will increase as consumers struggle to protect their credit ratings."
Streamline Capital, which buys credit card charge-offs, has moved into other areas too, including defaulted mortgages.
Debtor Location
Nowadays collectors bucking for their share of the shrinking wallet must consider debtors' payment patterns, their psyche as well as the varying economic situations based on where they live.
"Some people are keeping up payments on their auto loan and letting their mortgage lapse; others are taking cash advances from their credit cards and keeping them current in order to pay other debts. Bankruptcy was to be avoided. Now bankruptcy is embraced. It's becoming a bit topsy-turvy and [collections] analytic tools need to be updated to reflect these different consumer behaviors."
Adds DeForest, the risk management consultant, "There are cities with very high foreclosure densities where a high percentage of homes are in distress. The effect of vacant homes, dropping property values and unemployment rates will vary greatly by geography. Traditional collection efforts did not take this into account in the past."
Lasting Impact
Perhaps an even greater possible problem resulting from jingle mail, especially if the trend becomes pervasive and gains mainstream acceptance, is that "the pattern feeds on itself as what was once heretical becomes commonplace," says DeForest.
Schacter, with OSI, says this could cause long-lasting harm to both the financial world and society in general. "If consumers begin to think of turning in their keys as an acceptable way to avoid their obligations, then the attached stigma of not paying ones' debts may be eased – thereby allowing people to feel OK about walking away from other obligations as well," he says. "We certainly don't want a society that condones this except as an absolute last resort to spare extreme hardship on a family."
