Sandra and Thomas Floyd figured they'd live in the north Minneapolis home they've owned for 23 years until the day they died. But now they're joining the ranks of homeowners across the country who are keeping their credit cards and the keys to their car, but letting the house go.
"Who wants to pay the mortgage company and still have nothing to show for it?" said Thomas Floyd, whose loan now far outweighs the value of his house.
Foreclosure used to be considered a last resort. Fearful of the financial and social stain that came with losing a house, homeowners did whatever they could to make payments.
But falling home values combined with costly subprime loans are forcing an increasing number of cash-strapped homeowners to question their priorities. Scrape together monthly payments on a house that's now worth less than the mortgage, or skip that payment but remain current on credit card debt and other bills and try to start anew?
"They're using their credit cards to pay groceries and gas," said DJ Enga, a financial counselor with Auriton Solutions in Roseville. That cushion is the one they're unwilling to give up.
Federal Reserve data show that credit card defaults, while slowly rising, are still far below the numbers during the last recession. But a record 2 percent of all U.S. home loans were in foreclosure at the end of 2007, and delinquencies have climbed to nearly 6 percent, according to a report this month by the Mortgage Bankers Association.
Meanwhile, Americans have less equity, on average, in their homes than at any time since the end of World War II, according to the Federal Reserve.
Nothing left to lose
This didn't happen when borrowers routinely made 20 percent down payments. Last year that down-payment average was 9 percent, according to the National Association of Realtors; 29 percent put down no money at all. At the same time, trillions of dollars worth of home equity have been tapped to make home improvements, buy second homes and pay off credit cards.
But with double-digit housing price declines, adjustable-rate-mortgages resets and tougher refinancing standards, the bottom is falling out for some homeowners and real estate speculators. Their equity already gone, they lose little, if any, of their own money by walking away.
Lenders first noticed the change in homeowner priorities about six months ago. Since then, Minneapolis-based credit scoring company Fair Isaac said its banking clients were reporting "a historical change" -- strapped borrowers shifting their payment priorities from their mortgage to unsecured debt and car loans.
The Center for Responsible Lending estimates that almost 39,000 homes will be lost to foreclosure in Minnesota in 2008 and 2009. Homeowners aren't the only ones affected. The 545,773 homes near the foreclosed properties will see average price declines of $4,129, the group says. Several bills at the Legislature aim to ease the foreclosure pain, and Federal Reserve Chairman Ben Bernanke called on lenders this month to consider reducing mortgages for borrowers who are behind.
Some financial counselors say the help is too little, too late. And a growing chorus of economists and analysts is saying that foreclosure help will simply postpone the inevitable, because many homeowners are stuck with a loan that they ultimately cannot afford.
Nouriel Roubini, an economist with the research firm RGE Monitor who is known for his pessimism, predicts foreclosure-related losses of $1 trillion to $2 trillion. "Ten to 15 million households will end up in negative equity territory and will be likely to default on their homes and walk away from them," he recently wrote.
But housing counselors resist the notion that a breed of callous consumers has emerged who are ready to willingly abandon their homes. "People don't walk away; they are pushed off a cliff," said Mark Ireland, attorney for the St. Paul-based Foreclosure Relief Law Project.
He said 90 percent of his clients experience a job loss or medical emergency that causes them to fall behind on mortgage payments by a month or two. Refinancing has been sold as a way to cope with debt difficulties, but the problem is that people "just kept refinancing and refinancing."
Too many refinancings
That's what did in the Floyds. The couple first refinanced their $59,000 mortgage in 1999. They refinanced twice in 2006, using the money for home repairs, renovations and credit card bills.
Everything was fine until Sandra, 57, lost her job and took a $7-per-hour pay cut. Thomas, 62, who has worked for a rental car company for almost three decades, also fell victim to a fraudulent check scheme that left him cashing bad checks from a supposed sweepstakes win and owing $8,000 to their bank. They tried to refinance again but learned they had a 30-year balloon loan that would require them to pay $142,808 at the end of the term -- when Sandra would be 87 years old and Thomas would be 92. "My mouth just hit the floor," Sandra said.
The Floyds haven't made their $1,770 mortgage payment since May. With monthly income of $2,000, the couple decided to stay current on their credit cards, utilities and car loan instead. They met with counselors and spoke to their lender. But to save their home, they'd have to pay the bank $250,689 -- almost twice the $131,955 average selling price for homes in their north Minneapolis neighborhood last year.
"There's no option, it's too late," Sandra said.
A sheriff's sale is set for April. State law allows the Floyds to stay in the home for six months after the sale, far longer than the 30-day rule in many states.
The Floyds plan to sell their appliances and lawn equipment to help pay for their move. They're packing the coin collections and Betty Boop figurines that filled their living room, and searching for an apartment. Once they're gone, the little gray house will stand empty for the first time in 23 years.
Kara McGuire • 612-673-7293