America is a debt society. There is no way around it. Most people “afford” their lifestyle through the crutch of debt. This is not to say that their lifestyle is one of luxury. Instead, it is one of simple necessity, such as food, clothing, gas, utilities and other such basic costs. People have grown accustom to focusing not on the whole number of the debt but instead the “payment.”
One example of an industry that focuses all its effort on this is the auto industry. An example can be found on the www.Lexus.Com website. The advertisement screams that you could “afford” a Lexus IS 350 for payments as low as $399 on a lease. Well, $399 sounds like a very affordable payment. However, the price of the vehicle is around $40,000! Not including the car fees and taxes. Which sounds better to a car buyer, that you “purchased” a $50,000 vehicle or that your payments are only $399? The same logic can be applied to the psychology of the housing market.
Homeowners would be less likely to “walk away” from their mortgage obligation if the payments become affordable, even if they were underwater. A recent article in the Public News Service discusses that most people who leave their home do so because they have run through their savings and have not received help from their lenders to reduce their payments. Also, according to a Pew Research Center survey, two-thirds of the people who responded felt it was unacceptable to stop making house payments. They why leave?
Many homeowners are walking away, simply because they cannot afford their mortgage payment. Loss of income, jobs, or replacement employment is not enough to continue paying the house. The problem then snowballs into creating entire ghost towns of communities where empty homes give rise to crime and a deterioration of the city. Some cities are so badly decimated it may take years for them to return back to “normalcy”. The reality is had the HAMP program reduced the payments of these homeowners, the devastation could have been avoided.
Last year I had told the story of one homeowner, Mr. Davis, who was in the mist of fighting with OneWest Bank to get a HAMP modification. He faced at one time foreclosure as OneWest Bank dragged its feet, he drained his savings account and finally did receive a HAMP modification after over one year of fighting. I spoke to Mr.Davis recently to find out how things were going. “My home has gone down in value to where I probably owed about $30-50K more than what the house is worth, but I am not walking away,” he told me. I asked him if would consider it and he stated, ‘Why? My house payment is what I could afford finally. I love the home and my family and I enjoy living here and being part of the community. Even if I left the home and rented, I would never find a place like what I have now for the payment I am making.”
Mr. Davis also told me that he to believes if payments were reduced to an affordable amount for homeowners, a huge percentage of them would not leave. “if you purchased your primary residence as an investment, then you may consider walking away. Your not attached. But I think most homeowners, especially families, want to stay. They have ties to where they live which far outweighs the financial aspect. Besides, it is expensive to move, rent and then reestablish yourself somewhere else. What kind of a place could you rent with a foreclosure on your credit? Or Bankruptcy? Then you are at the whim of the landlord. What happens if the landlord decides to raise the rent? Or sell the property? Then again you are forced to leave. I don’t want to put my family through that. Besides, I plan on staying here for the next 20 years. That was the mindset I had when I purchased this home. The reality for most people is that we are back to living like our grandparents. Unless you really have to leave your home, you won’t. People have to plan that they are “stuck” living in their home for at least the next ten years or longer,” Mr. Davis told me as he pulled out the weeds in his yard.
He points to the home three doors down, a foreclosure for the past 18 months. ” That was a great family living in that home. They came over all the time for BBQ. The lender refused to work with them, so they left. Now the house sits there. They have reduced the price a bunch of times. Two contracts that fell through. Shame, no one wins with that. I have to say I am lucky though, that is the only foreclosure in this community. Most of the families here are way underwater more than I am, but they aren’t moving or walking away.”
Mr. Davis is a prime example of how the Obama HAMP program should have worked. The psychology of it was correct. Reduce payments to an affordable amount for homeowners, and the concern of being underwater would not be the main issue. Mr. Davis payments are now equivalent to a payment for half the home he has now. He says that walking away, ruining the rest of his credit, with the possibility of having to go bankrupt simply doesn’t make financial sense. His focus now is on rebuilding the damage done to his credit. This is what the Obama program was to accomplish. Had the wheels turned faster and more efficient, the housing market combined with the housing tax credit, would have moved into the direction of recovery. Simply put, the stem of foreclosures would have been reduced along with the inventory of homes available on the market.
The Home Affordable Modification Program has picked up speed and is showing signs of working, but again not at the pace that was needed to make a dent in the housing market. The program itself is not a failure, as much as the lack of proper implementation along with a combination of other options to enhance it. Until we move in the direction of changing the “payments” associated with the homes, homeowners will continue to walk away as they place the debt obligation above the “unaffordable” monthly cost. Foreclosures will continue their steady pace for years to come, and the beat will go on.