Are Increasing Numbers of Homeowners Withholding Their Mortgage Payments?

RISMEDIA, June 9, 2009-One of the reasons that it is hard to get a handle on the depths of the foreclosure crisis is that much of the information is hidden beneath the surface, like an iceberg. We are seeing only a small part of what may turn out to be a much bigger disaster than ever imagined because so much is hidden from view. And so, we are left to wonder-is the worst yet to come?

There is, for example, wide speculation that banks have been holding back significant numbers of REO properties in order not to flood the market.

A cursory review of local tax records suggests that there are far more properties in default than there are in either the auction or bank owned phase. Are these temporary defaults that will ultimately be cured, or are these the first waves of what alarmists like to call the Tsunami? Are the majority of these early stage defaults inevitably going to make their way to auction?

If homeowner equity was rising, the majority of defaults would likely be cured before auction. Now, the only options are to sell or forfeit the home. But, a hard target search of specific defaulted property sold between 2005 and 2007 revealed that most are not listed through the local MLS which suggests that they are not really trying to sell and most appear to be well maintained.

And, if lenders fearful of flooding the market are delaying auctions, why not further limit the damage by not recording the notice of default? That way there is no public record for people like me to uncover and question.

Trying to read the tea leaves may reveal many things but, perhaps, no definitive answer to where we are headed.

The uncertainty about the future of the economy is threatening even those jobs once thought to be recession proof and has caused many people to adopt an almost survivalist approach to short term life planning. If your job goes away, what would you wish you had more of, cash, or the good will of the mortgage company?

People who can pay their mortgages have stopped, and their number is growing. Among probable reasons are the following:

- The decreasing stigma of such an action compared to the widespread fraud underlying our economic collapse. When GM is synonymous with bankruptcy, it’s clear that the game has changed.
- The uncertainty of the revival of the economy and the corresponding fear of loss of income if the recession deepens or lengthens has many people waiting for a signal regarding the economy in general or the security of their job in particular.
- Belief that, if they are current, they will not qualify for a mortgage modification.
- Chaos theory is yet another reason that some aren’t paying their mortgages. There has been a persistent rumor that behind the bank bailouts and the bankruptcies, the Federal Government is working on a plan B for dealing with a complete economic collapse and the ensuing anarchy.

People who believe this argue that there wouldn’t be anyone coming to see about the mortgage. And, if everyone who had a mortgage began to withhold their payments, that could happen. Those working short sales and REOs have discovered that the banks and servicing companies are already overwhelmed.

And, because the revenue stream of mortgage servicers is entirely dependent on collecting mortgage payments, when those stop coming, they won’t be able to make payroll or keep the lights on. And, it will be lights out for the banks next. Unlike GM, they don’t have many assets and make nothing.

The government can only bailout so many things with our money before we hit a tipping point. California is facing an unprecedented financial crisis, and other states are facing similar revenue shortfalls. If the choice comes down to saving the banks or saving our neighborhoods, the politicians need voters more than they need banks. Or, so say the chaos theorists.

There are many different reasons why certain homeowners might be withholding their mortgage payments to preserve their cash. Fear of job loss or economic collapse, loathing for the high-flying financiers who are getting bailout funds, the lessoning stigma associated with bankruptcy and default, or to qualify for a mortgage modification.

Some are fully intending to make up the payments and pay the late fees if the economy shows signs of improving soon. Others think that banks might make concessions so why not wait and see what happens? But, as the number of non-payers grows, whether by choice or necessity, they further imperil the survival of many financial institutions.

George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.

By George W. Mantor