Strategic Default: Walking Away from Mortgages
Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.
Banks, with the help of the government, are offering some relief to homeowners who've lost jobs and just can't meet their payments.
But there's a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.
It's called "strategic default." People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders - the banks - as zookeepers of an ever-growing parade of white elephants.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.
Full Segment: Mortgages - Walking Away
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Among them Chris Deaner and his wife Dana of Sun City, Ariz.
West Foothill Drive has become a street of shattered dreams. "Amazingly, 16 out of the 44 houses on this street have foreclosed over the last year," Deaner told "60 Minutes" correspondent Morley Safer.
Deaner says his own home will become number 17 on that foreclosure list.
When Deaner, an auditor for a local university, bought his three bedroom house in 2006 for $262,000, he thought he got a bargain.
"You know, first time homebuyers, we don't know houses are overvalued. We just know we need to get in before it keeps going up, and up, and up," he explained.
But then the balloon burst. So how much does he think he could get for that $262,000 house today?
"Right now, about $142,000," Deaner said. "Big drop, over 43 percent."
Deaner and his house were, as they say, "underwater." With a mortgage of about a quarter of a million dollars on a home worth less than $150,000, he has one very expensive lemon. He says he tried to talk his bank into renegotiating his mortgage, but because he earns enough to keep paying, the bank said no deal.
"They refused to. They said it was gonna affect my credit, and they were gonna take my house. And I pretty much said, 'Go for it,'" Deaner told Safer.
Deaner said he could afford to stay in the home. But he chose not to. He is walking away. That lemon of a house is now the bank's problem.
"It's almost like the 'in thing' to do right now, it seems like," he said.
And because Deaner, like many Americans, only made a 10 percent down payment on his home, "taking a hike" is a lot easier. By law in Arizona and nine other states, the bank cannot go after any of his other assets. But his credit rating will suffer.
"Aren't you fearful that you're gonna get a reputation as being a deadbeat?" Safer asked.
"Yeah. But with the money savings that I will have in four to six years, I'm confident I'll have money to buy my way into a house if I want to," he replied.
Asked if he doesn't even feel a twinge of guilt, Deaner told Safer, "No, especially after dealing with my lender, trying to contact them. None at all.
Web Extra: The Case for Walking Away From Your Mortgage
Neither do Jean Ellen Schulik and Danny Kuehn. They bought their Phoenix bungalow three years ago for nearly $400,000. The bank now values it at $85,000.
Even though they can afford the mortgage payments, they felt they were trying to bail out an ocean with a bucket.
"No logical business person would do anything other than walk away. And so, there was a lot of soul searching. And I did a lot of crying, 'cause I'm in love with this house. And every day I would redo the math and think, 'Maybe we missed something,'" Schulik said. "This just can't be right."
But it was: the value of their house was dropping anywhere from five to eight thousand dollars a month, so Schulik and Kuehn just felt it was time to walk away.
"I don't think we're villains. We fulfilled the parts of our contract that we have with the bank. We've let them know what we're doing. It's all legal. It's not anything I ever expected I would be doing. And it sure doesn't feel good. But it seems like it's the right thing to do," Schulik said.
"What do your neighbors make of it?" Safer asked. "Another empty house breaks down the value of everyone's house."
"And we've seen that here. I think they will be upset, and I understand that," Kuehn replied.
"But you're hardly alone in Phoenix right now, correct?" Safer asked.
"Yes, it's interesting the number of my coworkers who have approached me to say, 'How are you doing this? Because I need to do it,'" Kuehn explained.
The Southwest has become an inland ocean of bad mortgage debt. In Arizona, a full 50 percent of houses are underwater, and in Nevada it's even worse: 65 percent of houses there are drowning and the rivers are rising.
And it's not just the Southwest: according to CoreLogic, more than 11 million homeowners across the country are underwater. It's estimated that number could double in the next year, which means nearly half of all American mortgage holders will owe more on their homes than those homes are currently worth.
"We've been through an event that none of us have ever experienced in this country since the Depression," David Stevens, the commissioner of the Federal Housing Administration, told Safer.
To try and stem the tide of foreclosures, Stevens says the Obama administration has set aside billions to give banks incentive to help struggling and underwater borrowers with their mortgages. But banks have been slow to modify the terms of those loans.
"The fact of the matter is these programs are designed to affect those who are most at risk who are unable to make their payments. And it does require the investor, the servicer to participate," Stevens explained.
"The decision to walk away from the sinking home, by people who can afford to pay, is spreading like a virus. Because if one person in the street does it, the next door neighbor says, 'What am I doing? Why am I putting all this money into this almost worthless house?'" Safer remarked.
"The concern has to be for someone who's gonna take that move is that they have to be so deeply in negative equity that they're willing to damage their credit, damage their financial reputation going forward. If you get foreclosed on in your home, you walk away from your mortgage when you could have afforded it particularly, that's gonna follow that family for years to come," Stevens said.
But Chad Ruyle, co-founder of a new business called youwalkaway.com, says fears of the consequences are overblown.
"People think that, if they're late on their payment or they defaulted that a sheriff is gonna come the next day and rip them out of the home. What we do is offer people a piece of mind right away that they know that's not going to happen," Ruyle said.
The website urges underwater homeowners to "unshackle themselves" from their mortgage obligations and, for a price, walks them through the process of walking away.
Ruyle says his greatest challenge is convincing people that they are not immoral.
"The biggest concern people have, our customers have, is the stigma of foreclosing, and what will the neighbors think. But as more and more people are foreclosing, that stigma is wearing off," he explained. "People are realizing now that there isn't shame in defaulting. The banks don't feel shame by foreclosing on a person's home."
"So, you're saying we should all be acting like bankers?" Safer asked.
"Sure. I mean, it's a business transaction," Ruyle said.
Web Extra: YouWalkAway.com
Brent White, a law professor at the University of Arizona, says the moral issue is besides the point.
In a controversial academic paper he wrote that government and the banks exploit people's sense of shame to keep them from defaulting. White says more people should be walking.
"You won't find a time in history where this many Americans were underwater on their mortgage. You won't find a time where this many people's homes are worth half of what they paid for their homes. These are unique times, and things are different," White said.
"As a child of the Depression, let me tell you that the most shameful thing that could happen to you was to lose your house," Safer remarked.
"My argument is that, in fact, that people feel too shameful about letting go of their home. And in fact, people might be better off making economic decisions, rational decisions in their best interest," White said.
He says big businesses make such bottom-line decisions all the time. Morgan Stanley walked away from five San Francisco office buildings they bought at the height of the boom.
And real estate developer Tishman Speyer defaulted on the huge $5.4 billion Stuyvesant Town apartment complex in New York City earlier this year when its value fell by nearly half, making it one of the biggest walkaways in real estate history.
It's a trend the banks fear could catch on with average homeowners. Already the CEO of Citibank's mortgage unit estimates that one in five borrowers who default on their mortgages are able to pay. If that number rises, it could jeopardize any economic recovery.
No bank we contacted would talk publicly about strategic defaults but all indicated they would be unwilling in most cases to help underwater homeowners who can afford to keep up their payments.
And Commissioner Stevens agrees with the banks. "To simply allow anybody who just decides they don't want to home anymore, who signed a contract to purchase a home to walk away and get some sort of write off with a program backed by a administration or a financial institution creates a whole new set of standards that will live with us for years to come. The question is, 'Who pays that bill?'" he asked.
For now, that bill is being paid by people like businessman Tom Hansen of Scottsdale, Ariz. He bought his dream house on Gold Dust Avenue five years ago. Much of the gold has evaporated, and he is left with a pile of dust.
Hansen paid $1.2 million for the home; today, he says it's worth $850,000, if you can sell it.
While his friends are urging him to unload that monkey on his back, Hansen just can't bring himself to do it - yet.
"I just would not be comfortable walkin' away. And so, you know, maybe at some point in time, I will walk away. But right now, I'm not," he told Safer.
Asked if it really comes down to a conscience, Hansen said, "I think it does."
"You could probably rent a pretty grand house at a lower…," Safer remarked.
"Absolutely could. Probably half," Hansen acknowledged.
But he told Safer he's attached to the home. "I love the house. So, I'd have to go find a house that I liked better."
"This is an expensive love affair," Safer remarked.
"Aren't they all?" Hansen asked.
But the Deaners, who stopped paying their mortgage five months ago, plan to stay in their house for free until the bank forecloses in July. Then, with all the money they save, they plan to rent a nicer, cheaper house for a few years while his credit recovers.
"You know, there are people saying if everybody did what you're doing, the country would be in even bigger, deeper trouble than it is right now," Safer remarked.
"If that's starts happening, then that's for the professionals to figure out," Deaner said.
Asked how he used to feel about people who walked away, Deaner said, "I thought, initially, it was immoral. My family raised me to believe that you should take care of your contract liabilities and your debt. That's how I was brought up to be."
"Live within your means?" Safer asked.
"Live within your means, yeah. And that's what I've done," he replied.
Asked if he doesn't feel any responsibility for it, Deaner said, "Unfortunately, no, I don't."
Web Extra: Are Mortgage Walkaways Going Viral?
Produced by Deirdre Naphin and Katy Textor