Ethics

Record Low Rates
Record-low mortgage rates are proving to be nothing more than a big tease for many homeowners who would like to refinance, but can’t.

As rates have fallen virtually every week for the past two months, requests for refinancing have increased – Up to 78 percent of all applications last week, from 59 percent back in April. But many of those applications are being rejected. The Mortgage Bankers Association doesn’t keep track of rejections, but anecdotally, mortgage brokers say many applicants are falling short of the mark, because they are less secure in their jobs as they once were, or their credit scores are no longer high enough to make the grade.

In addition, banks will not refinance mortgages that are worth more than the homes they helped purchase, and with an estimated one in five mortgages now underwater, there are many homeowners who see refinancing as an elusive “golden ring”.

And then there’s the matter of home prices. They have, in fact, benefited quite a bit from the tax credit, because the program helped to clean out millions of foreclosures in the past year, and that has allowed prices to begin to stabilize. You’ll recall that just last week; we told you the national median price for a single family home – 177-thousand dollars – had risen 27-hundred dollars from the previous year. That is just a percent-and-a-half, and it doesn’t sound like much, but remember – we’re talking about a national median, here. To pull together all of the wildly fluctuating markets across the country into one figure, and to see that figure increase, year-to-year, tells us that prices are heading in the right direction.

We’ll have to see what Tuesday’s report tells us, of course, but anecdotally, we are seeing an interesting trend developing in a couple of markets where figures have already been released for July. In Dallas, for example, sales have dropped off as expected, but prices for non-bank owned properties in July jumped to their highest level in more than a year. We’ve seen a similar trend in Northern Virginia, just outside of DC, where prices last month averaged 50 thousand dollars more than for July of last year, even as sales dropped by nearly 20 percent in the same period.

Again, it’s only a snapshot of two markets, but they tell us that while bargain shoppers have headed back to the sidelines, buyers looking for quality homes are still out there, and they are willing to pay to get what they want.

Next week, we’ll dig deep into those July existing-home sales numbers for you, and get a better idea of how markets across the country are faring in the post-tax credit world

Essentially, homeowners who see little hope for regaining the original value of their homes are using their good credit to buy second homes, and then walking away from the first. According to Morgan Stanley, about one out of every 8 defaulted home loans these days is strategic – homeowners intentionally stop making payments, even though they can afford them. That’s up from one in 25 bad mortgages just three years ago.

Some people who figure they’ll never recoup their losses rationalize instead that walking away from their responsibilities is a better decision. But taking that step is akin to stealing from lenders, who must then increase the cost of loans because they are assuming more risk. And with more risk, that also makes it tougher for honest borrowers to obtain mortgages. The time it takes to close on a loan application is also growing as lenders try to weed out possible fraud. Loans that recently took 30 days to finish, now often take two or three times as long to close.

What’s even more shameful about “Buy and bail” is that the people committing the crime are those who can actually afford to weather an underwater loan. They earn enough money and have good enough credit to own two homes, at least initially. Between record-low interest rates and attractive home prices that are still far below their peak, the temptation to use “buy-and-bail” as some sort of escape clause may be tempting.
But here’s why it shouldn’t be. It’s wrong. It’s unethical, and in most places, it’s illegal, too.

First of all, if you lie about your existing home when you apply for a loan on a second home, you are committing criminal fraud. The FBI is currently pursuing more than 3-thousand mortgage fraud cases, nearly twice as many as a year ago.

And most states – about two-thirds of them – will allow lenders to place a lien on the new homes of borrowers who try to “buy and bail” their way out of a bad loan on their original homes, even after foreclosure.

In addition, Fannie Mae and Freddie Mac, the government’s twin mortgage giants, have made it much tougher for borrowers to get mortgages for two homes at the same time. In most cases, for example, borrowers now need to provide proof they have cash reserves equal to at least six months of loan payments for both properties.

But still – if there’s a will, there is often a way to “buy-and-bail”. Having lots of cash on hand helps, because it settles the nerves of lenders. Most mortgage companies do try to steer clear of the practice, because they know that they could be the next victim. But there are, indeed, some who will turn a blind eye – agreeing to make a buck off of you, and allowing others to be taken advantage of – as long as they’re not the ones left holding the short end of the stick.

If you’re tempted to buy-and-bail, you can rationalize all you want that you’re protecting your future. But by helping yourself, you’re hurting many others. And there’s no way of turning that wrong into a right.

What if the homeowner loses his job, or has his bank account drained by uncovered medical expenses? If we have a moral and ethical obligation to pay that mortgage, does that rise above our obligation to our families? Is saving your home the right thing to do if it means exposing yourself and your loved ones to even greater financial hardship and – potentially, ironically – homelessness?

There are millions of Americans facing these challenging questions every day. The government has launched several programs to try and help, and we could spend years debating how effective those efforts have been. But at least there’s been some attempt at showing compassion for these struggling homeowners.

At the same time, while many are worthy of compassion, there are others who some might say are more deserving of contempt. It’s one thing to stop paying on your mortgage because you have mouths to feed. It’s quite another to walk away simply because you don’t like the way things have turned out.

There’s no doubt, the number of homeowners who walk away by choice, rather than necessity – is on the rise. Their reasons vary widely. Some just want to cut their losses. Others fear they’ll be trapped with a loan they can’t afford if they do lose their jobs. And still others see opportunity knocking elsewhere, another home to buy for less money at a lower rate.

Some of these borrowers argue that lenders are to blame for creating the mortgage crisis to begin with, because they spent years giving loans to anyone who could sign their names on a contract, but that argument has a “two wrongs make a right”-sounding rationality to it.

Who knows? Perhaps it’s not an issue of black or white, right or wrong, at all. These strategic defaulters may be freeing themselves of underwater mortgages, but they are also saddling themselves with years of bad credit, as well as possible exposure to lawsuits and liens on their cars and other property.

So maybe, it’s just karma.