Underwater homeowners leave behind mortgages, but lenders can still come calling


There's a rumbling in Las Vegas and it's growing louder every day.

It's an uprising of distressed homeowners who feel betrayed by their government and frustrated by the financial system.

People are walking away from their mortgages by the thousands, making a financial decision that it's better to take the hit on their credit score than try to recover $300,000 of negative equity on a $600,000 home purchased at the peak of the housing bubble. They're called "strategic defaults."

Some of them are so far "underwater," owing more than their home is worth, they can't see the light of day.

"It's surprising that more homeowners haven't defaulted," Tisha Black-Chernine of the Black Lobello law firm in Las Vegas said. "They're not walking because of the desire to avoid shame or overblown fears of harm to credit ratings. I think we're at the tipping point for a lot of people."

Bill and Lynn Jerbis reached that point six months ago. They haven't paid their $2,400 monthly mortgage payment since October after failing to get a loan modification. Both have taken cuts in income. Meanwhile, the value of their home has dropped from $429,000 to about $142,000.

"We can't afford to pay this and live," Bill Jerbis said. "I would just be using the savings I had built up. We are not leaving, unless they physically come take us out of the home."

Defaulting on a home that's lost 50 percent of its value may seem like a smart move these days, but borrowers need to be aware of financial consequences.

As a recourse state, Nevada leaves the door open for lenders and collection agencies to pursue homeowners with deficiency judgments, going after assets and income years after a foreclosure or short sale, or bank-approved sale for less than the mortgage owed.

Homeowners who feel relieved to have the burden of debt lifted may be surprised to receive a letter from a collection agency two or three years down the road demanding payment on their old mortgage.

While homeowners may not have jobs or assets today, time is on the lender's side.

"I hear (lender) attorneys say they'll put a clock of one or two years on the debt, so the person can get a new job and back on their feet. Then they'll start wage garnishment," bankruptcy attorney Philip Goldstein said. "It's a very cruel economy right now."

Lienholders not involved in foreclosure action have six years to collect, and that time can be extended once a judgment against the debtor is rendered, he said.

Black-Chernine said the core issue is that borrowers don't escape unharmed. Mortgage holders sign a promissory note and the contract explicitly details the penalty for nonpayment, which is surrender of the property. That will also affect their credit rating.

She said people tried to get a loan modification and when that didn't work, they opted for the short sale. Now they just don't want to pay their mortgage.

"They're going to look at strategic default with a keener eye," Black-Chernine said. "We're at 60 percent negative equity position in some houses. They're starting to realize it's throwing money in the hole."

Two-thirds of homeowners in Las Vegas owe more than their home is worth. Despite President Barack Obama's $75 billion Home Affordable Mortgage Plan, implemented to stop the bleeding of foreclosures, default filings increased 15 percent in January from a year ago, Irvine, Calif.-based RealtyTrac reports.

Homeowners have become frustrated with banks that are unwilling or reluctant to modify loans, especially when it comes to reducing mortgage principal.

Some are staying in their homes in hopes that values will return. That won't happen anytime soon, housing analyst Larry Murphy of Las Vegas-based SalesTraq said.

After double-digit appreciation from 2003 to 2006, home prices have plummeted in Las Vegas with some areas dropping by 50 percent and 60 percent in 2009 alone, SalesTraq reported.

"Here's the predicament we find ourselves in," Murphy said. "While some of our neighbors are negotiating a short sale or a loan modification or simply walking away from their home, others who elect to stay in their homes and continue making payments feel a sense of desperation and betrayal.

"Why? Because your neighbor who paid $240,000 on his home and put 5 percent down now owes $225,000 on a home worth $95,000. His equity in the home is negative $130,000. Even if his home appreciates at 3 percent a year for the next 25 years, it will only be worth $198,000.

"So your neighbor vacates his home, which goes into foreclosure, sits empty, deteriorates, taxes don't get paid, homeowners association fees don't get paid, the value declines, which in turn causes all the homes in the neighborhood to decline.

"Now your neighbor no longer has negative $130,000 equity. Instead, he has zero equity. Now which equity would you rather have in a home? Zero or negative $130,000?"

Murphy said this scenario will likely repeat itself for another two years before things start to return to normal. It will take legitimate loan modifications with principal reductions -- a major sticking point for banks -- to keep foreclosures under 25,000 this year in Las Vegas.

The rise in negative equity is closely tied to increases in preforeclosure activity and is a major factor in changing homeowner default behavior.

Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors, a report from real estate analytics company First American Core Logic found.

Moral and social variables play a significant role in predicting strategic defaults, according to a research paper by Paola Sapienza of Kellogg School of Management at Northwestern University and Luigi Zingales of University of Chicago Booth School of Business.

People surveyed who said it was immoral to default were 77 percent less likely to declare their intention to do so, while people who know someone who defaulted were 82 percent more likely to say they would default themselves.

"The most important barriers to strategic default seem to be both moral and social," Zingales said. "Our research showed there is a 'multiplication effect' where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically. In fact, the predisposition to default increases with the number of foreclosures in the same ZIP code."

Age, location, political affiliation and attitudes toward government intervention also figured in responses to the morality of strategic default, he added.

Deficiency judgments against mortgage walkers are like a ticking time bomb. State laws vary, but generally the first-mortgage noteholder has six months to file for judgment, while the second lienholder has up to six years to file and 10 years to collect.

Until recently, Las Vegas attorney Dorothy Bunce said she had never seen a first-mortgage lender sue to collect the difference between what's owed on a foreclosure home and its fair market value.

"A short sale is an extremely different scenario," she said. "It's a contract to release the lien, but it does not release the underlying debt. It doesn't prevent the holder of the first (note) from suing. In terms of foreclosure, I believe the lender has a much shorter period of time to go after the borrower."

A Chase Bank loan officer who spoke on condition of anonymity said she's hearing about cases in which the agent presents a short sale offer with an addendum requesting nonrecourse on the deficiency.

As far as deficiency judgments, she said: "I don't know that I've seen that happen. They're going to do it in blatant cases, someone who has $300,000 in a 401(k) (retirement account) or they're making $10,000 a month and now they're driving a Land Rover. I'm not saying they're right or wrong."

Lenders are selling deficiency judgments to collection agencies for pennies on the dollar, said Marta Jones-Carmody, a Realtor with Coldwell Premier Realty. These agencies may wait two to three years until the defaulted borrower has recovered financially.

"A lot of this is just playing out as people get into it," she said. "We didn't hear about what they're doing with deficiency judgments until two or three months ago. There definitely are ramifications. Unless they negotiate a waiver, you really do need to be advised by an attorney and actually an accountant to see what your liabilities will be."

A subsidiary of Goldman Sachs Group filed more than 50 lawsuits against Las Vegas homeowners in one month last year. Some experts say the litigation could signal the beginning of a Wall Street backlash against defaulting borrowers.

Goldstein expects short-sellers to face a flood of collection actions in the coming few years. Second-mortgage lenders, especially, are aggressively pursuing borrowers.

"We expect the next wave of bankruptcies to come from people writing off the second mortgage in a short sale," he said. "The second lienholder almost always gets ignored in a short sale."

What's the solution? What happens next?

"I don't know," housing analyst Murphy said. "There is no magic silver bullet that will fix this problem. Instead, we will have to grind it out through a combination of short sales, loan modifications, defaults, mediation and foreclosures.

"In the meantime, my advice to homeowners is 'Hope for the best, prepare for the worst and do whatever you've gotta do.' Incidentally, this is the same advice I'd give to lenders."

Banks are doing everything they can to keep people in their homes, the Chase loan officer said.

CitiMortgage, one of the nation's larger mortgage lenders, recently announced a plan to allow distressed borrowers to stay in their home for six months by signing a deed in lieu of foreclosure, which transfers ownership to the lender.

Another company, Loan Value Group of Rumson, N.J., is proposing to pay a "monetary reward" to at-risk homeowners if they stay current on payments without changing terms of the original mortgage or reducing the principal.

Lynn Jerbis knows one thing is certain -- no remedy exists that will make her home whole.

"At 59 years old, we don't have the time for this home to come back in value," she said. "We will die before we see equity."

Contact reporter Hubble Smith at hsmith@review journal.com or 702-383-0491. Contact reporter Valerie Miller at vmiller@lvbusinesspress.com or 702-387-5286.