Voluntary foreclosure may be the next disturbing trend in housing, as homeowners rebel against falling home values and negative home equity.

Home values have been on a downward slide for more than two years. According to data compiled by Zillow.com for the third quarter of 2008, the national average home value of $202,966 is down nearly 13 percent from its recent peak. A dozen markets around the country show home value declines in excess of 40 percent.

Zillow.com also reports that 14.3 percent of homes nationwide have negative home equity. Looking at just those homes that were purchased in the last five years, the underwater percentage is more than double at 29.5 percent.

As home values continue their historic slide, more homeowners are considering the radical strategy of walking away from their existing mortgages. But the consequences can be severe.

Foreclosure prevention costly

Consider a homeowner named Susanna who purchased her home in the Los Angeles metro area at the height of the real estate boom. She's a white collar professional earning a healthy six-figure salary, who borrowed $387,000 in 2006 to purchase a modest, three-bedroom home for $430,000. Today, that home is worth about $220,000, and she owes $365,000 on her mortgage. Her monthly principal and interest payment is $2,452.

From Susanna's perspective, she's losing about $1,500 every month that she makes a mortgage payment. Why? Because if a new owner purchases a home in her neighborhood for $210,000, with an 80 percent mortgage at a fixed rate of 5 percent, she'll end up with a monthly payment of about $900. Since Susanna can't sell the property for anywhere near what she paid, friends have suggested that she avoid those losses by walking away and letting foreclosure run its course.

Experts believe that as home values slide further, more homeowners like Susanna will give up on their clean credit ratings and walk away. It would be another negative turn for the housing market because rising foreclosure inventories will push home values down even further.

Not a clean analysis

If you're in Susanna's position, don't assume that the numbers automatically lean towards foreclosure; unfortunately, the calculation isn't quite that simple. Since a foreclosure wrecks your credit rating for seven years, you'll have to absorb 84 months of higher borrowing costs or lower consumption (if you can't obtain credit). You'll also lose your mortgage interest tax deduction. Finally, there's no telling where home values will be once you're ready to purchase again. If the market recovers, you may not end up saving much, particularly if you consider the money lost to rent in the interim period.

If you can't currently afford your mortgage, however, the analysis gets more complicated. In that case, see if your lender will consider a short sale or loan modification to ease the strain. Walking away may be an option-but only after you've exhausted every other potential solution.

    Published on February 11, 2009