U.S. Banks WILL BE ‘Toast’ If Struggling Homeowners Keep Walking Away (VIDEO)

Huffington Post | Sherry Shen First Posted: 06- 2-10 05:11 PM | Updated: 06- 2-10 05:11 PM

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Reuters blogger Felix Salmon believes that if more and more struggling homeowners continue walking away from their homes, U.S. banks could be “toast.”

As strategically defaults continue to rise, some homeowners are using their inability to pay their mortgage to live rent free — often for more than a year, the New York Times reported.

“Trying to renegotiate your mortgage is not a morally reprehensible thing to do,” Salmon said, pointing out that mainstream media organization’s like the New York Times magazine has been publishing columns about this trend and how it makes so much “financial sense.” Corporations walk away from commercial mortgages, Salmon said. “It’s not clear to me why an individual should behave any different,” Salmon said.

Wells Fargo is most exposed to the trend, affecting the bank’s livelihood. “Sand state” banks such as those in Florida and California are also far more exposed. Here’s more from Salmon:

“From the bank’s point of view, if this catches on, there’s a very large number of banks in this country who are just toast. And in hindsight they were just much better off dealing in a realistic way with these borrowers a year ago or two years ago when the problem first reeled its head instead of extending and pretending. Now they are in a pickle.”

“If this trend continues, then the banking system is probably insolvent,” he said.

RUN DON’T WALK AWAY! THE BANKS ARE BEGINNING TO FEEL IT!

If they had listened to us from the very beginning they would not have this problem. The FACT is that they suck and they don’t give a whoots ass about it’s customers. So one has to stand up to them and tell them… We are sick entired of being sick entired!

Maybe this will make you think twice about approving short sales and modifications much faster in the future. Regardless people READ what they put in front of you and DO NOT sign away any waiver to sue!

BofA: Mortgage Walkaways Have Huge Incentive

Published: Wednesday, 2 Jun 2010 | 1:14 PM ET

By: Diana Olick
CNBC Real Estate Reporter

This morning executives at Bank of America [BAC  15.90   0.46  (+2.98%)   ] rolled out their new “Principal Reduction Enhancement” program, which is an earned principal forgiveness plan for borrowers behind on their mortgages and whose loans are at least 20 percent underwater in value.

The plan is in conjunction with the government’s Home Affordable Modification Program, but the government’s principal reduction plan isn’t in place yet.

What makes BofA’s plan so proactive is that it employs, “a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages — ahead of lowering the interest rate and extending the term.”

Why are they getting more aggressive on modifications?

Because more borrowers are walking away. Yes, I know we’ve talked about this forever on this blog and on CNBC, and the New York Times did a piece yesterday on it, and 60 Minutes did a piece on it a few weeks ago. The fact of the matter is it’s getting worse, and B of A execs are acknowledging that openly.

On the conference call to announce the program this morning, BofA’s credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters (those who can pay their loans but opt not to) are “more than we have ever experienced before.” He went on to say, “there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers.”

Schakett says the foreclosure process is still taking 13 to 14 months (and by my estimates that’s an optimistic assessment), and so there’s over a year of free rent. While the banks are trying to improve the time, they’re just not there yet. DinSFLA: Perhaps because the longer it takes, the more the servicer makes! Even longer to have had a short sale approved.

31 percent of foreclosures in March were deemed to be “strategic default” by researchers at University of Chicago and Northwestern University.

That’s up from 22 percent in March of 2009.

We already know that mortgage walkaways are more prevalent among borrowers whose neighbors or friends have done the same thing.

We also learn from those same researchers that the likelihood of walking away increases by 23 percent when homeowners learn that a neighbor got some principal forgiveness.

I’ll let you all argue that one.

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