Loan Modifications and the Jingle Mail Revolution

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February 26th, 2010

Few subjects have created as much debate as the issue of walking away from of your home when there does not seem to be any financial sense in staying. Walking away from your home when it is worth less than the balance on your mortgage seems like the sensible thing to do for many. Research shows that when homes drop in value by over 25% owners start to think seriously about letting their homes go.

Many ask themselves, “why not let the home go in default and rent a better place for less?

It is worth noting that we are talking about people who can afford their mortgages but simply decide to let their home go as a financial strategic calculation. The difference between truly troubled homeowners that would like to keep their homes and those that are defaulting on a mortgage to save money can be separated by a very thin line. But the evidence points to a growing number of borrowers that simply do not want to live under what many are calling “house arrest”.

Some experts are pointing out that around 17% of those that defaulted in 2008, over half a million homeowners, did so because of a strategic calculation and not due to a lack of income to pay the loan.

It does seem like we are at the turning point in society’s psyche, a kind of revolution. People are not as attached to their property. Mortgage brokers are advising many to walk way, and a lot of them are listening. Something that has become common again is for homeowners to simply mail their house keys to the lender as a way of setting off a foreclosure, what is also called jingle mail.

There is nothing new to this reaction; previous recessions and crisis were also characterized by homeowners walking away from their homes. However what is different is the scale of the number of foreclosures. Four years ago, a handful of people had negative equity on their mortgage, now there are over 4.5 million homeowners whose house is worth less than 75% of the balance of their mortgage. The Real Estate is not doing any favors to the economy and is stalling again; causing experts to estimate that by June the number will climb to 5.1 million in June. That is simply a huge figure, it will mean that 1 out of every 10 homes in the United States will be going through a foreclosure.

Still many believe that this so called jingle mail revolution is the product of the media’s imagination. Something that is talked about but not actually carried out. The figures seem to say otherwise, but it is true that people generally do not want to move. They do not enjoying moving neighborhood, or their children’s school, which is what keeps so many underwater homeowners in their homes.

The eternal question is what the government should do about the whole matter. According to one estimate it would cost around $745 billion to bail out all underwater borrowers in the US. This is a little more than what it cost to bail out the banks in 2008. Most of us think it would be silly and wrong to bail out every troubled homeowner, but if the government does nothing it could cause even more homeowners to walk away, further crippling an already fragile economy.

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