Why Some Homeowners Hope For Foreclosure

In the days before the housing crisis, the idea of a bank foreclosure filled any homeowner's mind with dread and shame. Now, with so many Americans owing more on their homes than they're worth, some people are taking a whole new approach: essentially saying, "Foreclose on me, please." It's more technically known as a "strategic default."

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RENEE MONTAGNE, host:

Next, some signs that the foreclosure crisis might be entering a new phase - a topsy turvy new phase in which homeowners welcome foreclosure while lenders try to avoid it.

Planet Money's Alex Blumberg has our report.

ALEX BLUMBERG: Mary Kindsley(ph) is an attorney in Tempe, Arizona who works at a telephone helpline that provides legal services to people with real estate questions. And in the old days of the housing crisis, the questions used to be wrenching and emotional. How can I save my home from foreclosure?

Ms. MARY KINDSLEY: Now, it's almost a reverse. I am speaking to people, for the most part, who are - who want to know how can I make the bank foreclose on this faster. They're not taking it fast enough.

BLUMBERG: And these are people who could continue to pay their mortgage.

Ms. KINDSLEY: Yes.

BLUMBERG: Is that illegal to just, even if you can't pay, refusing not to pay.

Ms. KINDSLEY: No.

BLUMBERG: So, imagine, you buy your house for 400 grand; now, it's worth 200. You might decide to stop paying your mortgage and simply buy another house, similar to the one you already own but for half the price. The old house: the bank can have it.

In many states, if you do make that decision, the bank can't come after you for the balance that you owe. They can't touch your wages or your car; they only get your house. So, from an underwater homeowner's perspective, it's a strict cost benefit analysis. You suffer a blow to your credit score on the one hand, but you get a far cheaper house on the other.

But a recent report from the University of Arizona says that from a strict cost benefit analysis point of view, this should be happening far more than it actually is. Right now, a third - a third - of all people with mortgages owe more than their houses are actually worth and yet the vast majority choose to stay and keep paying.

The reason might be that more of us are motivated by shame than math - at least when it comes to homeownership. Another recent study found that four out of five people think it is immoral to default on a mortgage. And this tension between foreclosure as a business decision and foreclosure as an immoral act -it runs deep.

Mary Kinsley sees it in her office all the time.

Ms. KINSLEY: There are attorneys who think it is not ethical, who think that people should honor their debts and pay them if they're at all able to.

BLUMBERG: Do you come down on the side of whether this should be...I don't want to put you on the spot but, I mean...

Ms. KINSLEY: But you are.

BLUMBERG: I am.

(Soundbite of laughter)

Ms. KINSLEY: You know, in law school, when you take contracts, they tell you there are no punitive damages available for breach of contract because breaching a contract is an economic decision. And I think that we as a society have sort of attached some shame to defaulting on your mortgage, when in reality, it's an economic decision.

BLUMBERG: At least in Mary Kinsley's small sample, the moral stigma might be fading. Like divorce, another breach of contract that used to be judged more harshly, foreclosures are becoming commonplace.

Ms. KINSLEY: There are neighborhoods here, where half or more of the neighborhood - the properties have been foreclosed. And, I mean, I know that there is social pressure and some people still feel some shame about it, but there is a point, I think, where, in whose eyes are you shamed?

BLUMBERG: It's possible the social barrier to foreclosure might be holding back a wave of defaults, and if the social barrier crumbles, there's no telling what it could do to an already weakened financial sector. Estimates are that by the middle of next year, nearly half of all mortgage holders will be underwater.

Mary Kinsley says the banks are already starting to fight back - through bureaucratic lethargy. She says in the old days if you didn't pay your mortgage bill for three months, the bank would start foreclosure proceedings against you. Now, she says, people are in default for six months, nine months, a year before the bank takes any action. And, she says, this is also perfectly legal. If the bank doesn't want your house, there's nothing you can do to make them take it.

For NPR's Planet Money, I'm Alex Blumberg.

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