Underwater: Walking away from your mortgage

Published: Sunday, Nov. 27 2011 11:03 p.m. MST

Alan Smith decided to stay in his West Jordan home despite being in bankruptcy and being way underwater in his mortgage.

Laura Seitz, Deseret News

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WEST JORDAN — If being underwater in a home mortgage were literal, Alan Smith would be stranded on the roof by the flood, water lapping around his ankles. And if the whop-whop-whop of a rescue helicopter's spinning blades hovered above him, Smith would just wave them off.

Come heck or high water, Smith and his family are staying put.

Fortunately being underwater in a home isn't literal. Being underwater simply means you owe more on your home mortgage than the house is worth — what realtors call "negative equity."

At least Smith, a realtor with Coldwell Banker Residential, is not alone in his pain.

CoreLogic, a business analytics website, released second quarter 2011 data that showed 10.9 million residential properties were underwater. And of those underwater, nearly three-quarters paid above-market interest on their mortgages. By the third quarter Zillow, a website for real estate statistics, estimated that 28.6 percent of all single-family homes were underwater.

Dave Anderton, a spokesman for the Salt Lake Board of Realtors, said about 20 percent of homes in Utah are underwater. One in five, whether they know it or not. And that doesn't even touch the worst states' figures. CoreLogic reported Arizona mortgages at 49 percent underwater, Florida was at 45 percent, Michigan at 36 percent and California at 30 percent. The worst was Nevada at 60 percent. A study by the Nevada Association of Realtors found that 23 percent of the state's foreclosures were from people who just walked away from their underwater homes. And the impact of negative equity across the country threatens property values in neighborhoods and contributes to the sluggishness of a recovering economy.

For individuals in that situation, it can destroy retirement and education plans. It makes it appear options are limited and shakes moral certainty. Should you keep your promise to the bank and stick it out? Or should you look to your own financial interests and walk away?

Deluge

Smith was doing fine before the Great Recession hit. In 2007 he and his wife took out a second mortgage on their home in West Jordan, around $35,000 to convert their scrapbooking store at Gardner Village into a shoe store. "The store went gangbusters for about six months," Smith said.

But the recession took them down and a few years later they had to declare bankruptcy. They were left in a home that he says is worth about $220,000 but on which they owe about $245,000. "I literally could have walked away from the home because of the bankruptcy," he said, "and it wouldn't have affected my credit any differently."

But they stayed.

Brent T. White's interest in the plight of those stuck in negative equity situations began when he looked at the large numbers of people underwater who, like Smith, did not walk away. White is a University of Arizona law professor and author of "Underwater Home: What Should You Do if You Owe More on Your Home than It's Worth?" He noticed people would stay in their situation — even in Arizona where lenders can't sue the homeowner for the outstanding amount on the mortgage after the lender sells the home.

"A lot of people are sitting in houses that are underwater and they have an absolute legal right to walk away and hand the house back to the lender without recourse. But they weren't doing so," White said. "The question is, 'Why would they make a bad financial decision and forego a legally available option?'"

Why stay?

White said people stay in their homes because they are either unintentionally keeping their heads in the sand or are underestimating how underwater they really are. But many people understand their situation and still won't default.

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