Foreclosure Nation: When Walking Away is a Choice
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LOS ANGELES -- Do some homeowners simply choose foreclosure? Simply make an economic decision that it’s not worth making the payments any more, and just move out? That’s the intriguing theory offered by Sean O’Toole, founder of the soon-to-lauch tracking service www.foreclosureradar.com. It was also a theme of Kim Christensen’s front-page story Tuesday about the real estate crunch in the Antelope Valley.
It’s an intriguing theory because it runs counter to the media’s frequent portrayal of the unfortunate ‘victims’ of foreclosure -- tragic figures who dreamed of home ownership, took out sub-prime mortgages, didn’t see the big reset coming, couldn’t make the payments, and then slid against their will into default and bankruptcy.
O’Toole’s theory is that many homeowners choose the option of default and foreclosure based on an economic calculation, not desperation. He notes that foreclosure rates tend to be highest in California in areas where new homebuilding was most active during the boom. (Foreclosure rates are notably high in Riverside and San Bernardino Counties, by the way). Now consider the hypothetical new development where houses initially sold for $500,000, but were later discounted to $450,000 as the market softened. The sub-prime borrower who got 100% financing and bought at $500,000 now has a choice to make: do I continue to pay $50,000 more than this house is worth? Or do I cut my losses, hold on to my money, drop off the keys, and walk away?
‘When you’re looking at that kind of a loss, and hearing all the negative views of housing, and if you didn’t have perfect credit already, it may be tempting to simply walk away,’ O’Toole says. ‘It’s still got to be a heart-wrenching decision for homeowners, to lose the dream of home ownership, and to have a foreclosure on your record. But at the moment, in certain markets, it’s coming down to that choice.’
What do you think? How common is this kind of thinking? Use the comment button, or send your thoughts and story leads to lalandblog@yahoo.com