If you currently have a mortgage with Wachovia Bank (Wells Fargo) and are facing a foreclosure, we have information that can help. In most cases, unless you’ve committed some type of Mortgage Fraud, there are extenuating circumstances that have caused you to stop making timely mortgage payments. We understand this can be a difficult time for you and we’re here to help you through the process.

The most common reasons we see for an inpending foreclosure are some of the following: a possible Job loss / loss of unemployment, medical emergency or illness, or a death in the family. Also, excessive debt obligations or a decrease in pay/job demotion might be the cause for your hardship.

One thing we want you to do is to be proactive with Wachovia/Wells Fargo about your situation. Don’t ignore letters, phone calls and emails from them. This will only make matters worse in the long run.

Contact Wachovia/Wells Fargo to prevent Foreclosure

Prevent Foreclosure
We want to help you stay in your home. Let’s work together to see if we can find a solution based on your situation and product. Here are some of the alternatives to foreclosure that our loan specialists may be able to discuss with you.

* Arrange to repay the amount that is past due over a period of time.
* Change the original rate, term, or payment of your loan.
* Sell your property so that a new buyer may be allowed to take over your loan payments.
* Sell your property and pay off your loan for less than the total amount due.

Based upon your state, product, and individual circumstances, some options may not be available to you.

Start Right Now
The sooner you call us, the more options you may have available to you. Call us today or we’ll call you and let us work with you to find ways to help you with your individual situation.

Find a Credit Counselor
Housing and Urban Development (HUD) offers lists of certified counseling agencies available to homeowners and home buyers. To find a HUD-certified housing agency in your area, please call (800) 569-4287.

Your other options to prevent a foreclosure

If Wachovia/Wells Fargo will not work with you to prevent your foreclosure, then you have a few other options:

• Work with a Foreclosure Attorney – we’ve partnered with some of the top foreclosure attorneys in the business that can help with your situation.
• Sell Your Home – companies like House Buyer Network will work with you to get you immediate help with your situation in selling your home fast.
• Consider a possible Short Sale – When you’re out of options, you can go through the process of doing a Short Sale with your house.

We also want to hear from you and your experience with Wachovia and Wells Fargo. Please comment on this page with how they have or haven’t helped your situation.

Contributed by Kevin Chern, Total Attorneys, Inc.

Homeowners facing foreclosure are, understandably, looking for hope. News reports of homeowners successfully asserting the “produce the note” defense to stop foreclosure have sparked that hope in many. It seems only logical that a company commencing a foreclosure action should be required to demonstrate that it is the real party in interest before that action can move forward. But simply demanding that a mortgage servicer produce the note or establish itself as the real party in interest isn’t the magic bullet it sometimes appears in the popular press.

We know mortgage documentation is rife with errors, misrepresentations and missing links. Various studies have estimated the percentage of mortgage claims containing substantial errors between 57% and 80%. Katherine Porter’s 2007 study of mortgage proofs of claim in bankruptcy cases revealed that 52.77% of proofs of claim lacked at least one clearly-required document. What those errors mean for the homeowner depends not only on the nature of the error, but also on the state and jurisdiction in which the claims are prosecuted.

Success Stories

Attorneys in some states have had tremendous success with the defense. In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008-Ohio-4603.)

Although Wells Fargo subsequently acquired the mortgage by assignment, the trial court ruled that this later acquisition did not cure the jurisdictional defect and dismissed with prejudice. The trial court also ordered that the law firm filing the case on behalf of Wells Fargo submit proof that its client was the real party in interest in all future foreclosure actions filed by that firm.

Publicity surrounding Wells Fargo and a handful of other similar cases produced a flurry of real party in interest defenses and optimistic news coverage. A year later, the Ohio Supreme Court declined to review a similar case in Wells Fargo Bank, N.A. v. Jordan, leaving stand an Eighth District Court of Appeals ruling that “If plaintiff has offered no evidence that it owned the note and mortgage when the complaint was filed, it would not be entitled to judgment as a matter of law.”

At the same time, Florida legal aid attorney April Charney and a handful of others began challenging claims supported by affidavits of lost notes. It seemed that in the frenzy to slice, dice, flip and securitize the high-risk loans of the 1990s and early 2000s, many lenders and mortgage servicers had dropped the ball when it came to keeping accurate records. In many cases, the paper trail was broken, non-existent, or simply didn’t conform to legal requirements. Some plaintiffs in mortgage foreclosure cases found their claims dismissed outright for lack of documentation, and some homeowners found themselves in a better position than they’d ever imagined: enormous mortgage debt simply disappeared as it became clear that no proof of ownership of the debt could be produced.

It was heartening to see mortgage servicers taken to task and forced to follow the rules, but even in the oft-cited Byrd case, the real victory was scaled back considerably by the appellate court. While the dismissal was affirmed, the appellate court ruled that it should have been without prejudice; the order that the law firm submit additional documentation in subsequent cases was reversed. Those cases in which demanding the note and dissecting the paper trail resulted in a windfall for the homeowner were few and far between.

The State-by-State Difference

To a layperson, common sense dictates that a plaintiff would have to own the note and mortgage in order to file a complaint based on it; the big surprise is probably not the Ohio rulings above but the fact that the question ever arose. However, that question is far from settled in many states. Consumer attorneys in some states report that their courts are simply declining to entertain defenses like the one successfully raised in Byrd. The most likely explanation for this pattern is simple economy: a case dismissed without prejudice may be re-filed as soon as the defect has been cured, so many courts are apparently reluctant to go through the motions of dismissing a claim on procedural grounds only to have it filed as a new case soon after.

But disparate treatment of this issue by the courts isn’t the only—or even the most significant—difference from state to state. More than half of U.S. states allow for some form of non-judicial foreclosure. That means that the foreclosing party doesn’t have to file a court case in order to foreclose on the property. Non-judicial foreclosure doesn’t render true ownership of the mortgage irrelevant, but it does make it more difficult for the homeowner to pursue the issue.

While the defendant in a judicial foreclosure can simply raise the issue as a defense, the homeowner in a non-judicial foreclosure will typically have to file suit himself to get the issue of mortgage ownership and documentation before the court. That means not only filing fees and service of process, but also a host of procedural hoops unfamiliar to most homeowners. Few will be able to successfully prepare and argue such a claim without an attorney. That isn’t to say that the claim won’t succeed or isn’t worth pursuing in a non-judicial foreclosure state, but the process is far more complex, time-consuming and potentially expensive than the victory stories on television and in news reports might seem to suggest.

The Real Value of Demanding the Note / Questioning the Real Party in Interest

While demanding that the claimant produce the note / arguing that the claimant isn’t the real party in interest and doesn’t have standing to pursue a foreclosure action only occasionally results in a decision that effectively forgives the mortgage debt, the challenge can be a valuable tool for homeowners facing foreclosure. If a claim is dismissed and re-filed, that may buy the homeowner valuable time in which to negotiate or assemble funds to cure the default; the added procedural complications and the possibility that the mortgage servicer or alleged note holder may not be able to establish its claim provide an incentive for the claimant to compromise. Likewise, in a non-judicial foreclosure state, initiating a suit against the claimant may only rarely put an end to a foreclosure action altogether, but may still benefit the homeowner by slowing the proceedings and creating an incentive for the mortgage holder to negotiate a workable settlement.

– Kevin Chern
Total Attorneys, Inc.
25 East Washington Street, Suite 400
Chicago, IL 60602

The following post was contributed by Ken Andrews of the Doan Law Firm in California. Ken also runs a blog called “San Diego Predatory Lending”, where the original of this article is posted. The article discusses a bankruptcy defense based on existing law to dispense with second mortgages.

A lot has been written by me and others about How To Walk Away From Your Home. My blog has become more of a self-help guide to walking away in California. I get at least 25 calls and emails a week from people who want to get out from their underwater homes, but are scared they will be liable for the unpaid mortgage debt. As I previously explained, California homeowners who used 80/20 loans to purchase their homes and have not refinanced the second mortgage

But I also get many folks who have refinanced that second mortgage, or who want to keep their homes, but can’t pay for the adjusted payment on their mortgage, or don’t want to pay on a house that worth substantially less than they owe on it. They have tried to get the bank to work with them, but are frustrated because the bank won’t talk unless they are two payments behind and the only thing the bank will do is freeze their payments or add their arrears to their loan balance. Banks will not reduce the principal amount on loans to fair market value to save a borrower from foreclosure. They just won’t do it.

Once again it’s the 80/20 loan to the rescue. This beautiful piece of financial engineering genius (you really need to click on that link, it’s hilarious!) has found yet another way to help distressed home owners. And not just in California, this trick works all over the United States.

The trick is called a “Chapter 13 Lien Strip” but I like to call it the “Back Door Cram Down.” You may have read about the proposed mortgage “Cram Down” legislation that would allow Chapter 13 judges to reduce or “Cram Down” mortgages balances to fair market value in a Chapter 13 case. This legislation has zero chance of passing until a new election and Congress are seated next January.

Instead, we are “Cramming Down” second mortgages using the old Bankruptcy code section 1322 which states:

“Contents of plan

(b) The plan may–

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”

What’s not obvious about this code section is a loan is not “secured” by your personal residence if there is no value or equity in your home that would go to the lender if the home was sold. That means the loan can be converted to unsecured or the lien “stripped” from the house by “modifying the rights of holders of secured claims.” This turns it into unsecured debt, like credit card debt, which can be discharged!!!! This is why I call it a “Back Door” cram down because we are cramming down the second mortgage to unsecured status.

Here is an example. You bought your home in 2006 for $500k with 100% financing using an 80/20 loan. So your first mortgage is 80% or $400k and your second mortgage is 20% or $100k. The market is down more than 20% from its peak and your house is now only worth $375k. This means if the house was sold, the first mortgage would take all $375k and the second mortgage would get nothing. In this case the second mortgage is “wholly unsecured” and the second clause of section 1322(b) does not apply, so we can modify the rights of the second mortgage holder and turn it into unsecured debt.

What happens to the now unsecured stripped off second mortgage? It gets paid in your Chapter 13 plan but only after your other secured debts are paid. Secured debts are the first mortgage, your property taxes, and your car payments. And because a Chapter 13 plan lasts only 3-5 years (usually 5) a whole lot of that unsecured debt does not get paid. At the end of 5 years, most unsecured debts (not student loans, back income taxes, or family support payments) are discharged so you don’t have to repay them.

So at the end of 5 years, you are left with just your just mortgage payment on your house. Your cars and your back property taxes are paid off, your student loans and back income taxes are paid down, but your second mortgage and your credit card debt is gone! Beautiful isn’t it? God bless the 80/20! It just keeps on giving.

You can read more about Chapter 13 plans here so I’m not go into great detail on them other than to say they are like debt consolidation inside of a bankruptcy, they last 3 to 5 years (usually 5) and you also can included student loans and back income taxes.

So what is the downside? First off, you will have gone “Bankrupt.” Your creditors will report that for 7 years and it will appear as a public record for 10 years on your credit report. Creditors do not really distinguish between a Chapter 7 or a Chapter 13 bankruptcy so your credit will take a beating. But I like to point out to people that if they do nothing, their credit will likely take a beating anyway, so it’s not really any worse.

The other major downside is you must make every plan payment for 3 to 5 years. If you fail, everything goes back to the way it was. You owe all that debt, and the second lien is no longer stripped off. So I always tell my clients to make a budget that will work for 5 years, not just one that looks good to the Bankruptcy Court.

The Bush Administration proposed a new foreclosure relief plan today in response to the mortgage crisis. The plan encourages lenders to write down loans and shift risk to the government-backed FHA program.

Hoping to assist more than 100,000 homeowners, the administration announced their intention to expand the FHASecure program. The expansion will allow the FHA to insure new mortgages for struggling borrowers, including those with ARMs and those who owe more than their homes are worth.

Not everyone will qualify though. High risk borrowers and borrowers who missed more than just a couple of mortgage payments will be turned away. Approval will also depend on a lender’s willingness to write down the mortgage principal owed. The maximum amount that could be borrowed under the expanded program would be either 90 or 97 percent of the home’s value, depending on the borrower’s risk profile.

Democrats are expected to oppose the effort. They are in the midst of writing more aggressive legislation to deal with the foreclosure problem. Although their legislation also calls for expansion of the FHA program, there are a lot of other provisions in the bill.

The FHA’s Financial Woes

Although both Democrats and Republicans are looking to the FHA to rescue homeowners in trouble, there is some question as to whether or not the agency is equipped to deal with the foreclosure crisis.

By its own estimates, the FHA will be operating in the red this year. Congressional officials are projecting a $1.4 billion shortfall in fiscal 2009 for the agency. If this happens, American taxpayers will be forced to subsidize the FHA for the first time in its 74-year history.

Some housing officials are now blaming the bad ink on an FHA program that allows seller-financed down payment loans. Under the program, sellers arrange to cover buyers’ down payments. The seller concessions are generally added to the total cost of the loan.

Only 2 percent of FHA insured loans were seller-financed down payment loans in 2000, but they grew in popularity during the boom and the FHA did nothing to keep the program in check. By 2007, seller-financed down payment loans accounted for a whopping 35 percent of all FHA loans.

The problem with this is that the foreclosure rate on seller-financed down payment loans is two to three times that of other loans, putting the FHA’s portfolio in a very precarious position.

Already, the FHA backs 3.8 million loans worth approximately $365 billion. If Congress and the Bush Administration have their way, the agency will be greatly expanded. Since the FHA has a government insurance fund of only $20 billion, and statistics show that 25 percent of FHA insured borrowers go into default again after a workout, there is almost no doubt the agency will have problems handling all the loans that do end up in foreclosure.

Under pressure from consumer groups and troubled homeowners to prevent further collapse in the housing market, Senate Democrats and Republicans are working together to create a foreclosure relief bill.

Approximately $1.5 million worth of subprime mortgages will reset to higher rates before then end of 2008. And subprime is just the tip of the iceberg. Before the credit bubble has deflated completely, an estimated $1 trillion in defaults and writedowns are expected as bonds, commercial mortgages, leverage loans and other mortgage loans go sour.

Lawmakers are under extreme pressure from some groups to do something to bail out Main Street. Since the bailout of Wall Street firm, Bear Stearns, the pressure has increased considerably.

Although the Democrats have been pushing for broader government intervention for some time now, the Republicans have held firm on their belief that such action might cause more problems than it fixes.  

This week a notable change occurred. The Senate agreed to set partisan differences aside to create legislation that is meant to prevent foreclosures and bolster the ailing housing market. The new consensus is that immediate action must be taken.

On Tuesday, the Senate voted overwhelmingly to move forward with new housing legislation. Late Wednesday, they unveiled the Foreclosure Prevention Act.

Democrats and Republicans have reached a tentative agreement on the core details and will be debating amendments in the coming days. The core of the plan provides:

• A $4 billion fund for local governments to clean up neighborhoods riddled with foreclosed homes.
• $100 billion for mortgage counseling programs.
• $10 billion for federal tax-exempt bonds to help finance and refinance home purchases.
• A $7,000 tax credit to people who purchase newly built homes, foreclosure properties or properties owned by sellers in default.
• A new loan limit for the Federal Housing Administration that will allow borrowers to finance 110 percent of an area’s median home price versus 95 percent.

The Foreclosure Prevention Act also includes special provisions for soldiers. If the bill is signed into law, lenders will not be able to foreclose on a soldier’s home for at least nine months after the soldier returns from active duty. Lenders will also be forced to put a one year rate freeze on mortgages that are held by active-duty soldiers who face a rate reset.

Amendments that are up for debate include a plan that will give bankruptcy judges the power to write down mortgage principal and a plan that will offer tax breaks to homebuilders who have experienced credit losses over the last two years.

If the legislation is approved, it will go before the House of Representatives and eventually President Bush. There is already some doubt as to whether or not it will make it all the way. A White House spokesperson released a statement Wednesday afternoon saying there were “serious concerns about some of the elements.”
 

Presidential candidate Hillary Clinton unveiled a new four-part mortgage relief plan at a speech before 150 elected officials and students at the University of Pennsylvania yesterday. The plan calls for immediate action and direct government intervention.

Senator Hillary Clinton has been proposing ideas to provide foreclosure relief for more than a year now. On Monday, she added to those proposals, calling for $30 billion and government intervention.

Her new four-part plan, which includes some of her previous proposals, is the most aggressive plan floated by a presidential candidate so far. In addition to interest rate freezes and a foreclosure moratorium, Clinton wants to see a $30 billion fund that will allow cities and states to improve neighborhoods by buying foreclosed properties.

To encourage loan restructuring, she suggested mortgage servicers be given more protection against lawsuits from investors. According to her, evidence suggests servicers are less willing to modify mortgages because they fear litigation.

Clinton also stated that she would support controversial legislation recently introduced by Representative Barney Frank (D) and Senator Christopher Dodd (D) that calls for $20 billion in public funds to establish a federally backed mortgage auction. 

Other ideas she mentioned included a huge expansion of the Federal Housing Administration (FHA) and an emergency, non-partisan “working group” that could brainstorm new ways to prevent more foreclosures. She recommended tapping economists, as well as former Federal Reserve chairmen Alan Greenspan and Paul Volcker and former Treasury Secretary Robert Rubin to lead the group.

Her speech comes as the mortgage crisis threatens to overwhelm the economy. The latest statistics show that nearly one million people are facing foreclosure, and more trouble is expected as rates reset and home prices continue to fall.

Senator Barrack Obama’s campaign issued a statement after Clinton’s speech to say that Obama is also working to ease the credit crisis. He too has suggested a “homeownership preservation summit,” expansion of the FHA and a larger mortgage bond program.

Other ideas Obama has come out with previously include stiffer penalties for predatory lenders and a simplified tax code that will allow more people to benefit from the mortgage income tax credit.

Republican presidential candidate John McCain is traveling down a different road. Today, he warned against government intervention, saying it is not the “duty of the government” to bailout irresponsible borrowers or lenders.

Breakdown of Hillary’s Proposals

• 90-day foreclosure moratorium
• Freeze the interest rates on subprime ARMs for at least five years
• Allow the FHA to guarantee up to $400 billion in refinanced mortgages
• Put underwater mortgages on the government’s balance sheet on a temporary basis
• Introduce legislation to protect mortgage servicers from investor lawsuits
• Create a $30 billion stimulus package to allow cities and states to purchase foreclosed properties
• Set aside $10 billion to expand the mortgage revenue bond program
• Create a “high-level emergency working group” to brainstorm more ideas to help ease the foreclosure crisis

Government regulators eased capital requirements for Freddie Mac and Fannie Mae on Wednesday. The move is meant to ease the housing crisis, but critics say it will cause the two overleveraged firms to hang themselves at the expense of taxpayers.

The Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac and Fannie Mae, agreed to allow the two government-sponsored entities to reduce their mandatory cash cushion by a third. The plan is expected to free up $200 billion that will go to buying up more mortgages and mortgage securities.

This is the third consecutive step the government has taken to ensure the two firms will be able to take on more of the country’s bad mortgage debt. The first came when Congress raised the limits for the loans that Fannie and Freddie can buy or insure from $417,000 to $729,750. The second occurred March 1 when Fannie and Freddie were released from the combined $1.5 trillion cap on their mortgage investment holdings.

The initiatives taken recently by the government are controversial because it raises the risks the two companies will be allowed to take on. This in turn raises risks for taxpayers. Although Fannie and Freddie are publicly-traded companies, they enjoy the benefit of an implicit government guarantee. In other words, taxpayers will be expected to flip the bill if Fannie and Freddie ever fail. 

And the risk of failure is very real. In the fourth quarter of last year, the two GSEs were responsible for nearly 75 percent of the mortgage backed securities on the market. They are also losing money fast and expect to see more red ink in the future.

Fannie Mae posted a record $3.55 billion fourth quarter loss. Analysts believe the company’s credit losses will continue to rise this year and in 2009. Freddie Mac is in a similar position. The company reported a record $2.45 billion net loss during the same period.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, assured everyone at a news conference today that Freddie and Fannie are “safe and sound” and would remain that way.

Until recently, Lockhart has been firmly against loosening regulations for Fannie Mae and Freddie Mac. There has been some speculation that his rapid change of heart stems from political and lobbyist pressure.

Federal Reserve Chairman Ben Bernanke publicly urged lenders yesterday to forgive a portion of the principal owed on loans. Bernanke insists the time has come for banks to consider this tactic if they want to prevent foreclosures. 

There is no hard data to quantify how many homeowners are making the decision to walk away from their troubled mortgages, but the general consensus is that the numbers are high enough for lenders to be legitimately concerned.

So what’s a bank to do?

According to Fed Chairman Ben Bernanke, the best thing banks can do to combat the “walk away” trend is to slash the amounts owed on delinquent loans. This was the solution he proposed yesterday to the Independent Community Bankers of America. As one might imagine, the idea received a lukewarm response from bankers.

Nevertheless, Bernanke insisted that restoring equity with a principal reduction could be the most effective way of preventing foreclosures and delinquencies among borrowers who are underwater in their mortgage.

“The fact that many troubled borrowers have little or no equity suggests that greater use of principal write downs or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders,” Bernanke told the crowd.

Principal balance reductions have been very rare so far. The banks that are offering modifications typically deal in loan extensions or rate reductions.

Bernanke reports that most lenders are reluctant to forgive portions of mortgage debt because it could establish a trend that forces them to write down the principal again and again if home prices continue to fall.

The Fed Chairman argued that while this may be true, lenders still have the opportunity to mitigate losses. He backed up the claim with a recent study that estimates total losses exceed 50 percent of the principal balance in the average subprime foreclosure.

Support for Bernanke

The speech Bernanke made yesterday flies in the face of everything Treasury Secretary Henry Paulson said just one day earlier:

“Being underwater does not affect your ability to pay your mortgage,” Paulson said in his speech. “Any homeowner who can afford his mortgage payments, but chooses to walk away from an underwater property is simply a speculator–and one who is not honoring his obligations.”

What this means is that Bernanke may now be at odds with the Bush Administration. It is very unlikely that Bush, Paulson or anyone else from that camp will endorse the write-down strategy.

On the other hand, the Democrats are keen to put their hands on the problem and may be willing to offer a stamp of approval in the next day or two.

The most opposition will naturally come from banks and investors, who have already taken a beating and may not be looking for seconds.

Project Lifeline is the new relief plan that grants a 30-day grace period to homeowners facing foreclosure proceedings. Critics say the plan is for banks, not homeowners.

In mid February, six major lenders (Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo) voluntarily agreed to an initiative known as Project Lifeline.

Less than a week after the announcement was made, the rest of the lenders in the Hope Now Alliance jumped on the bandwagon. Members of the Alliance include nearly 90 percent of the subprime servicing market and nearly 70 percent of the entire mortgage servicing market.

Although Project Lifeline has been adopted by most U.S. servicers, it will not be extended to all borrowers. The lifeline is aimed at severely distressed borrowers only. Homeowners who are less than 90 days past due will not even be considered.

Furthermore, Project Lifeline is more of a statement of intent than an actual program. All it really does is freeze foreclosure proceedings for 30 days to buy homeowners a little more time to work out their mortgage problems. It is not a workout plan, but a delay that allows borrowers more time to sell, refinance or engage in some type of loan modification program.

It is also worth noting the 30 day freeze is not automatic. All lenders are agreeing to do is initiate contact with borrowers. Homeowners who respond may or may not be considered for the 30-day reprieve. It’s up to the lender to decide who gets it and who doesn’t.

Too Little, Too Late?

Not surprisingly, Project Lifeline has been heavily criticized for being a stall tactic for banks versus an actual lifeline for people who are drowning in mortgage debt.

Some of the banks who have voluntarily agreed to this are so capital impaired that they can’t afford to eat the loans and just let borrowers walk away from an appreciating asset. In other words, it is the banks that desperately need a lifeline.

There is also some question as to whether or not the Project Lifeline gesture is just for show. Although lenders have been foreclosing, most have been willing to sit on a bad loan a lot longer than they normally would.

Terry Francisco, a spokesperson for Bank of America, has admitted that Project Lifeline would have little impact on what the bank was already doing to help borrowers.  Francisco said the real goal of the initiative is to make the borrower process “easy to understand.”

As home prices drop and mortgage payments rise, an increasing number of borrowers are handing in the keys to lenders and walking away from their mortgage.

A new term has been coined for the envelopes that lenders all over the country are receiving from struggling homeowners: jingle mail.

The phrase is used to describe desperate borrowers who are sending their keys back to lenders and walking away from their mortgage obligations. New reports show that this is happening much more frequently as an increasing number of homeowners find they are underwater in their mortgage.

Fitch Rating is claiming that borrowers’ apparent willingness to simply give up on their mortgage has contributed heavily to the high default numbers we are seeing now. On February 1, the company announced they would slash ratings on mortgage debt for this reason.

Does Walking Away Make Sense?

Foreclosure used to be a rare thing, typically resulting from job loss, illness, or a death in the family. But changes in the mortgage industry in recent years have altered the how and why of foreclosure.

Most of the borrowers who are walking away now are doing so because of increasing payments and depreciating assets. There is also the fact that the majority of the borrowers now have nothing to lose–they didn’t put anything down and therefore have very little invested.

Walking away can make sense for them because it can be less costly than going bankrupt in an attempt to save a single asset that is losing value by the day. Of course, this depends heavily upon where the borrower lives.

Different states have different rules for borrowers and lenders. For example, the state laws in California make it difficult for lenders to collect additional money after foreclosing and selling a property. In other states, like Michigan, lenders are allowed to go after the borrower for the difference.

Troublesome for Lenders

Not surprisingly, lenders are disturbed by the jingle mail trend. Wachovia and Bank of America have both discussed the issue in recent conference calls and say there is a definite change in the mindset of borrowers. Wachovia CEO Ken Thompson noted that some of the borrowers had the ability to pay, but weren’t willing to so since they have lost so much equity.

Most of the banks have no real desire to take the homes back as it will be very difficult to recoup all of the money that it is owed. A large number of borrowers overpaid for the home, didn’t put anything down, and didn’t make enough in payments to dent the balance. The chance that banks will break even on these sorts of properties, let alone make a profit, is slim to none.

What Is Happening to the Abandoned Homes?

For the most part, nothing is happening. Vacant homes can be found in nearly every city in America. In the better neighborhoods, the houses sit empty and neighbors take care of the lawn so that their own homes look better. In bad neighborhoods, the houses are sometimes burned out and used for illegal purposes.

There have also been reports of homeless who are taking refuge in abandoned properties. The homeless are outnumbered by vacant houses in many different cities. In Cleveland, for example, there are at least three abandoned houses for every one homeless person.

Brian Davis, the director of the Northeast Ohio Coalition for the Homeless, said the foreclosure crisis is a low-cost (i.e. free) housing option for people who don’t want to sleep outside or take refuge in a shelter. Since many of the abandoned homes still have lights, heat, and running water, they are convenient overnight stops for someone who needs a place to stay.