State - Detroit Michigan faces growing home mortgage default woes

DETROIT (AP) -- With the economy still struggling, a growing number of people in Michigan are walking away from homes that are worth less than what they still owe on them. The number of Michigan residents who have engaged in such strategic defaults more than tripled between 2005 and 2008 -- from 5,100 to 17,250, according to a report by Experian-Oliver Wyman, a credit reporting and consulting firm. Mark Zandi, chief economist for Moody's Economy.com, said he expects the problem to get worse this year and next. "As people struggle to make ends meet, they will say, this just doesn't make sense" about continuing to make payments, he told the Detroit Free Press. The trend of homeowners walking away from their homes and their mortgages is being fueled by the large number of underwater mortgages -- those where the bank is owed more than what a sale might net a homeowner. Michigan ranks fourth in the nation in underwater mortgages, with 38.5 percent of homeowners -- or 532,774 of them -- owing more on their mortgages than the homes are worth. For people who want to stay put and can afford their mortgage, an underwater mortgage might not be a problem. But it's trapping those who want to move for a new job, have lost income or want to downsize. Those who walk away often do so after failing to negotiate a loan modification or a short sale. Southfield real estate attorney John E. Jacobs said that with the economy struggling the stigma of defaulting on a mortgage -- even if a person can still pay -- is fading. "When things are that bad, your moral compass, and the obligation to make payments that most people feel, has to give," Jacobs said. Sondra Malone, 35, is one Michigan resident who has walked away from a home. She bought a house in Eastpointe in 2005 with an adjustable-rate mortgage. But the $1,200-a-month payment on the house, along with high heating bills, an expensive SUV payment and other family expenses, quickly buried her in debt. And when the bottom dropped out of the housing market with record foreclosures that pulled down values, Malone was soon underwater on her mortgage. She owed $116,000 on a house she listed for $99,000 in 2007. After trying to work out a lower payment with her bank, and trying to sell her house, Malone rented a condo and walked away from her house in 2007. "I didn't know what else to do," said Malone, a social worker. "I'm embarrassed." As strategic defaults rise, so do foreclosures and the number of vacant homes, causing property values to fall farther. That in turn is leading many communities to slash services and lay off employees to make up for lower tax bases. "There is no easy way to deal with it," said Warren Mayor Jim Fouts. Warren, which is proposing a 20 percent pay cut for union workers, saw home prices last year fall 9.8 percent, according to Real Estate One data. If the walkaway problem continues to grow, it could be calculated into the formulas that set mortgage rates, said Charles Ed Haldeman Jr., CEO of Freddie Mac. "If it becomes a widespread problem, I think we can all expect to pay the price of higher mortgages in the future with less availability," he said. Published: Tue, Mar 9, 2010

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