Some who can afford mortgages prefer to walk

LOS ANGELES Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert, Calif., home, even though she could afford the payments.

Bloch paid $385,000 for the two-bedroom in 2006 when prices were still surging. Comparable homes are now selling in the low $200,000s. At 66, the retired psychologist doubted she'd see her investment rebound in her lifetime. Plus, she said, she was duped into an expensive loan.

The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.

There was not a chance that house was ever going to be worth anywhere near what my mortgage was, said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. I haven't cheated or stolen.

Time was when Americans would do almost anything to hang on to their homes. But that commitment appears to be fraying as more people fall behind on their loans, while watching the banks and lenders that helped trigger the financial crisis return to prosperity.

Underwater'

Nearly one-quarter of U.S. mortgages, or about 11 million home loans, are underwater, with buyers' houses worth less than their loans. While home values are regaining ground, they remain far below their 2007 peak.

Many homeowners are just now coming to grips with the idea that prices will take years to reach the pre-crash peak: as long as 14 years in California, according to economist Chris Thornberg.

Stuck with properties whose negative equity won't recover for years feeling betrayed by financial institutions that bankrolled the frenzy some homeowners are concluding it's smarter to walk away than to stick it out.

There is a growing sense of anger, a growing recognition that there is a double standard if it's OK for financial institutions to look after themselves, but not OK for homeowners, said Brent T. White, a law professor at the University of Arizona who wrote a paper on the subject.

Just how many are walking away isn't clear. But some researchers are convinced that the numbers are growing. So-called strategic defaults accounted for about 35 percent of defaults by U.S. homeowners in December 2009, up from 23 percent in March of 2009, according to Luigi Zingales, a professor at the University of Chicago's Booth School of Business.

He and colleagues at Northwestern University's Kellogg School of Management reached that conclusion by surveying homeowners about their attitudes and experience with loan defaults. They found that borrowers were more willing to walk away if someone they knew had done it, and that the greater a homeowner's negative equity the more likely they were to default, even if they had could make the monthly payment.

Strategically defaulting'

Similarly, an analysis released last year by credit bureau Experian and consulting firm Oliver Wyman estimated that walkaways accounted for nearly one in five homeowners who were seriously delinquent on their mortgages in the last three months of 2008.

The fact that people are strategically defaulting there is no question, Zingales said. The risk that the number of people doing this might explode is significant.

A flood of walkaways could damage the nation's fledgling housing recovery by swamping the market with foreclosed properties. Still, some experts are dubious that millions of underwater homeowners will pull the plug like Bloch did. Home ownership remains the cornerstone of the American dream. Moving is a hassle. And the stigma associated with a foreclosure is likely to keep many hanging on for a recovery.

The biggest surprise is that so many underwater homeowners continue to pay, according to White, the Arizona law professor. He's convinced that personal shame, as well as moral suasion by the government and financial institutions, has kept many homeowners from walking away, even when they'd be better off financially to dump their homes.

But real estate veterans said old taboos are eroding fast. Jon Maddux, a former real estate investor who founded You Walk Away, a for-profit company that guides homeowners through the process of default in 2007, said his earliest customers struggled with emotional ties to their homes as well as remorse about reneging on an obligation. That's changed as more homeowners have concluded that the housing market isn't going to rebound quickly and they'd be better off cutting their losses.

Maddux and other experts said average Americans are fed up with hearing how they're supposed to honor their debts while businesses operate by another set of rules.

There are consequences to walking away. A default will knock down a credit score by at least 100 points, said Craig Watts, a spokesman for FICO, the company that developed credit scores. That could make it tough to borrow money, rent an apartment or get a job since many employers now routinely check credit histories of potential hires.

To some, it's a small price to pay to gain a measure of revenge against the financial institutions whose loose money helped to fuel the crisis. Joseph Shull, a marketing professor, said he's planning on walking away from the town house he bought in Moorpark, Calif., in 2006.

A lot of angry people

I'm angry, and there are a lot of people like me who are angry, he said.

He purchased the home for $410,000 and spent $30,000 renovating. Now the house is worth around $225,000.

Shull, 68, admits he overpaid for his property. But he said it fell in value in part because of regulatory mismanagement.

The bank stabbed me, but at least I got in a pinprick back, he said. This is the new economy. The old rules don't apply anymore.