More in foreclosure choose to walk away

Standing is a living room full of packed boxes, Army Sgt. first class, Nicklaus Skaggs, his daughter, Madisyn Skaggs,6 months, is debating a voluntary foreclosure on his home of 3 years Vacaville, Calif., on Thursday, Mar. 13, 2008. The Skagg family bought their for home for $455,000. Now faced with rising mortgage payments, they figure their property is worth $160,000 less than they paid for it. As their other debts grow they are ready to walk away in order to save themselves from complete financial disaster. Photo by Mike Kepka / San Francisco Chronicle Ran on: 03-16-2008 Nicklaus Skaggs holds his daughter Madisyn in the Vacaville home that his family is walking away from in a foreclosure. Ran on: 03-16-2008 Nicklaus Skaggs holds his daughter Madisyn in the Vacaville home that his family is walking away from in a foreclosure. less Standing is a living room full of packed boxes, Army Sgt. first class, Nicklaus Skaggs, his daughter, Madisyn Skaggs,6 months, is debating a voluntary foreclosure on his home of 3 years Vacaville, Calif., on ... more Photo: Mike Kepka Photo: Mike Kepka Image 1 of / 1 Caption Close More in foreclosure choose to walk away 1 / 1 Back to Gallery

Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But as the subprime lending crisis sweeps up millions of borrowers nationwide, some are deliberately choosing foreclosure as an early option.

As their home values tumble and their mortgages rise, these "walk away homeowners" decide to cede their houses to their lenders.

"It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.

The couple paid $455,000 for their Vacaville home almost three years ago, shortly after Nicklaus Skaggs returned from a year in Iraq. Now the home's value has dropped to $290,000. Their adjustable-rate mortgage, which started at about $3,000 a month, has reset twice, climbing to about $4,000.

They have no regrets about their decision.

"I feel like the pressure has lifted off my shoulders; before I was trapped," said Nicklaus Skaggs, 40, an earnest man who plans to retire from the Army in two years, after completing 20 years of service.

"If we keep paying the mortgage, we would really sink ourselves," added Tishara Skaggs, 35, who was an Army specialist driving heavy-wheel trucks until her lupus led to a medical discharge in 2002. The Skaggses have two daughters, Tabitha, 7, and Madisyn, 6 months.

No skin in the game

Walk-aways represent a profound shift in American attitudes toward homeownership - a shift that may have begun with the no-money-down subprime loans. People who don't have "skin in the game" - their own cash on the line - feel less attachment to their homes. People who bought homes expecting rapid appreciation may be quicker to dump them when they don't perform as expected.

The walk-away phenomenon is common enough that mailing in one's keys to the lender has earned its own nickname: jingle mail.

In California, purchase mortgages on residences are "nonrecourse," which means lenders cannot pursue foreclosed homeowners for additional money.

It is clear that many borrowers cede their homes without asking their lender for a break. More than half of foreclosures involve people who never spoke to their bank, studies show.

Housing counseling agencies said they would never advise clients to surrender to foreclosure without exploring other options.

"It never makes sense to literally just walk away," said Martin Eichner, director of the HUD program at Project Sentinel in Sunnyvale. "Even if you're hopelessly underwater, you should at least try to negotiate a short sale or deed in lieu of foreclosure where you give it back voluntarily. The worst thing to do is to let it go to foreclosure because it goes on your credit report as a black mark that follows you for years to come."

But some financial experts, such as "mad man of Wall Street" Jim Cramer, say walking away makes economic sense.

"When your house drops 20 percent in value ... it's better to walk away, even if you're wealthy," he said on TheStreet.com TV last summer. "Because you don't want to lose your credit card and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away."

New company offers help

You Walk Away (youwalkaway.com), based in San Diego, began in January to assist homeowners who want to let their homes go into foreclosure.

"What if you could live payment free for up to 8 months or more and walk away without owing a penny?" its Web site asks prospective customers. "Unshackle yourself today from a losing investment and use our proven method to Walk Away."

While going into foreclosure is free - you just stop paying your mortgage - Jon Maddox, co-founder and senior advocate at You Walk Away, said the company provides emotional, practical and legal advice that makes the process more palatable.

Customers pay $995 for an advocate to answer questions via phone and e-mail, a letter to their lender to stop dunning phone calls, consultations with a real estate attorney and a CPA, and assistance cleaning up their credit after foreclosure.

You Walk Away has served slightly more than 500 people in its 2 1/2 months of operation, Maddox said.

Maddox said 70 percent of his customers are financially floundering, while 30 percent made an economic decision to walk away.

"They don't care about their house anymore," he said. "It's a big weight around their neck. They're trying to get out of it and get their heads above water again. They're paying too much for the title of homeowner."

You Walk Away operates in California, Nevada, Arizona, Washington, Oregon, Colorado and Florida and is working to set up services for six other states. Maddox said the 13-employee staff will triple within a few months.

What about downsides?Foreclosure carries a range of financial negatives, but some are not as drastic as people imagine. Homeowners do not have to declare bankruptcy in a foreclosure (although some people do so because it temporarily halts the process, giving them more time in their homes).

An oft-cited fact is that a foreclosure stays on one's credit report for seven years. Many people assume they could not buy another house during that time.

But even the company that crunches numbers to produce credit scores says a foreclosure is not that devastating.

Jennifer Crawford, senior director of product support for Fair Isaac Corp. in San Rafael, said she would tell a homeowner being foreclosed upon: "All is not lost for the long term. Do not panic. You can absolutely take a structured approach to getting back in good credit standing. All other things being equal, in one or two years you can quickly build back up your credit standing."

The three major credit bureaus all use Fair Isaac's algorithms to calculate credit scores.

While a foreclosure does stay on a credit report for seven years, its impact declines over time, Crawford said.

"Let's take a scenario where you have a foreclosure but every other aspect of your credit profile is current - you've made all payments and have no other derogatories," she said. "If that is the situation, probably within a couple of years, you could be back in the high 600s or low 700s" - considered good credit scores.

Crawford said the impact of other steps short of foreclosure - missing payments, arranging a short sale, or returning the house as a deed in lieu of foreclosure - all depends on whether and how the lender reports them to the credit bureaus.

Tax consequences are another downside. Ordinarily, "canceled debt" such as a foreclosed mortgage is taxed as income. However, a law passed late last year mitigates this at the federal level until 2009.

Playing hardball with the bank

Some homeowners are sufficiently savvy - and brash - to try to turn the housing meltdown to their advantage.

A Discovery Bay man who asked not to be identified said he is "upside down" on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

"I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool," he said. "Now I've got this fabulous pool and fabulous house, but it's not worth anything. Why shouldn't I be building equity over the next four to five years instead of playing catch-up?"

The man said he has not made a mortgage payment for five months.

"I'm playing the bank game," he said. "I'm playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I'm really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I'd love (to have it) lopped down to a $450,000 basis rather than $710,000."

If the bank won't negotiate, he'll walk away, the man said.

That kind of story sends chills down bankers' spines. To date, most loan modifications have involved freezing interest rates or repayment plans for arrears.

But no less an authority than Ben Bernanke, the chairman of the Federal Reserve, is now urging lenders to reduce mortgage principals so homeowners won't walk away.

"Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," he said in a speech this month.

Not deadbeats

From their online research, the Skaggses know that bloggers have a lot of vitriol for walk-away borrowers, calling them irresponsible and worse. The couple say they have always paid their bills on time and feel they were given poor advice about both their mortgage and the housing market. Now they are in limbo, living among unpacked boxes. They returned a few months ago from a temporary posting to Fort Bliss, Texas, and stopped unpacking when they realized how high their mortgage would soar. They tried to contact their lender for a loan modification, but found the experience frustrating and their lender unresponsive.

Nicklaus Skaggs will be redeployed this summer, possibly to Iraq again. After he retires from the Army, they hope to buy a house in his hometown of Louisville, Ky. In preparation for that shift, he's studying for a bachelor's degree via correspondence school and then plans to pursue an MBA.

With no housing expenses during the eight-month-plus foreclosure process, they can save for a down payment, they said. Since so many people are now swept up in foreclosures, they hope that lenders will extend some grace to people like them, they said.

"In the long run, I think this is the best financial solution," Nicklaus Skaggs said. "I have to do what's right for my family. I don't care if someone judges me. I certainly wouldn't put my family in a position to lose $150,000 if I can help it."