Foreclosure vs. the Short Sale

Owners Stop Paying Mortgage ... And Stop Fretting About It

The New York Times
May 31, 2010

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000.

“The volume is killing us,” Judge McGrady said.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton.

“They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.

“The longer I’m in foreclosure, the better,” she said.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.

Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time.

“I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said.

“These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.

“I need another year,” he said, “and I’m going to be pretty comfortable.”

Banks Ignore Delinquent Borrowers

CNBC
May 13, 2010

Some encouraging signs on the foreclosure front may not be as rosy as some are reporting.

RealtyTrac, the online foreclosure sale site, shows a 9 percent dip in the number of properties with foreclosure filings in April, month-to-month.

The driver of that dip is a big drop in new notices of default.

The final stage of foreclosure, that is bank repossessions (REO) shot up to a new record high, up 45 percent from a year ago.

When I first read the report I thought, okay, we knew there was a big pipeline of loans that would not get modified and would have to come out the end at some point; now is that point. The fact that fewer loans are going into the pipeline should be our focus, and that's a positive. That's what I thought until I interviewed RealtyTrac's Rick Sharga.

"People are sitting in their houses not paying their mortgages, and the banks are letting those delinquencies extend longer and longer periods of time before they put them in foreclosure," Sharga told me.

That, he adds, is the main reason we're seeing lower numbers of new defaults.

The borrowers are in default, but the banks aren't paying attention, so they don't show up in the numbers.

He goes on:

"The fact that we have six to six and a half million loans that are either seriously delinquent or in foreclosure also suggests we are not nearly out of the woods. If we just started to absorb that inventory at the pace we're currently seeing new foreclosure proceedings we have about a 50 to 55 month supply of loans that yet have yet to be processed, so we have a way to go before we are out of the mess."

I know you're all going to tell me that Sharga works for a company that makes its money selling foreclosures, so he's going to play the bear side.

Take it for what it's worth.

But Sharga makes a compelling point when it comes to redefaults on loan modifications. A lot of folks are either falling out of the trial modification period or not qualifying in the first place, and those loans are moving quickly to bank repossession.

California-based mortgage analyst Mark Hanson adds perspective with a look at "cancelled foreclosures."

These are not tracked by RealtyTrac, but they "bite right out of Notices of Default and foreclosures, so to get a real idea of how 'credit' is doing, you have to add a certain percentage back."

That's because Hanson believes the redefault rate on these modifications will be at the very least 50 percent 6-19 months out.

Why a Short Sale Often Takes So Long

Banks with taxpayer-funded FDIC "loss-share" agreements often make out better in a short sale; banks with private mortgage insurers (such as AIG, which received $182 billion in bailout funds from the taxpayers) often make out better letting the house go to foreclosure. Banks do whatever will provide the best outcome for their bottom lines.

Herald Tribune
April 18, 2010

... No one can fully explain why it remains such a difficult task to complete one short sale -- the process by which a lender agrees to accept less than is owed on a home -- while another sails through. The only certainty as to why lenders do what they do: their bottom line.

Sometimes short sales bring more cash than foreclosures, and vice-versa. Which one it is depends on a host of factors, not the least of which is whether a lender has an agreement with the Federal Deposit Insurance Corp. (FDIC) for (taxpayer-funded) reimbursement of most losses on a bad loan like those sold short.

Multiple liens on a house and fat home-equity lines of credit that must be dealt with first are easy explanations for why a short sale languishes. Another is that lenders -- historically only handling a few cases each year -- are now overwhelmed with hundreds or more in a month, a logjam that builds upon itself.

Then there are the complexities of the post-boom world: loans that have been bundled with hundreds of others, then securitized and sold to an investor, and scores of Florida banks on the verge of insolvency that do not want to account for losses on a short sale.

Even with those hurdles, there are short sales that can take 90 days or less from offer to consummation.

Simply put, the decision an individual lender or investor group makes -- even if that is not to make a decision -- is laden with a convoluted mix of what-ifs, if-thens, no-ways and sure things ...

In the worst straits are those borrowers, usually through sub-prime loans, who have had their mortgage wrapped into an investment pool like those held by Citigroup and Bank of America, Ross said.

About 25 percent of boom-time mortgages are contained in such securities. Few of those securities have even basic guidelines for short sales, he said.

"They got into some pretty crazy financial gymnastics," Ross said. "If your loan is in one of those groups it could be very challenging to get a short sale approved."

The process of bundling notes and selling them to investors as a security was a boom-time staple, said Irv DeGraw, a banking professor at St. Petersburg College. AIG, Citigroup, Lehman Bros. and others backed, or insured, these so-called "credit-default swaps." When the housing market began tanking in 2006 and foreclosures began piling up, pay-outs to the investors skyrocketed.

Eventually the federal government stepped in with the multibillion-dollar bailout that shook America's consciousness.

"It was an absolutely maniacal problem," DeGraw said. "Nobody understood exactly what we were dealing with and then it exploded. Those taking the risk did not understand the amount of risk they were exposed to."

In a counter-intuitive move, many investment groups preferred a complete collapse of the security rather than agreeing to short sales.

"When the mortgages start to get into trouble an insurance policy kicks in and they are made whole," DeGraw said. "If they grant a short sale they are not made whole. It's one of these bizarre nightmare scenarios where people got too sophisticated."

Thomas Budzyn, past president of the Mortgage Bankers Association of Southwest Florida, acknowledged the nightmare scenario that banks are facing with these bad loans.

"You are going to see more banks go out of business this year than in the last ten years combined," Budzyn said, noting that dozens of banks nationwide have failed so far this year.

In the midst of that crisis, it is somewhat understandable that getting a short sale done is often difficult.

"Some of the short sale offers I have seen, for example, are on a loan of $400,000, and the offer comes in at $125,000," Budzyn said. "Some of the banks would rather wait until a more reasonable offer comes in rather than take that much of a hit upfront."

Many are loath to approve a short sale because they stand on perilous footing -- one in four by the count of Ken Thomas, a Miami-based expert on Florida banking with a doctorate in economics.

"The banks in Florida are having a very difficult time because they make loans on real estate and we are ground zero for the collapse," Thomas said. "Instead of being hit by a Category 5 hurricane we've been hit with a Category 5 mortgage crisis."

Some banks are urging federal regulators not to come in and force them to admit all of their problem loans, he said.

"Most banks are trying to buy time. It is called the 'delay and pray strategy,'" Thomas said. "You delay valuating the house at market and pray the value will come back. If you mark it down for short sale and do that deal you have to take a hit to your capital."

Others employ what Thomas calls the "extend and pretend" strategy to keep regulators from noticing a delinquent mortgage, whether that be lengthening the term, lowering the interest rate or allowing a distressed homeowner to skip a few payments.

"Banks will say there is nothing wrong with that because we have one on the books for a million dollars and the market will come back in a year, so why we should we hurt our shareholders," Thomas said.

Banks are hoarding assets to avoid the fate that Thomas described, said Matt Augustyniak of Bradenton's Horizon Realty, Horizon Title and Horizon Financial.

"They have to show as much assets as possible to balance the books," Augustyniak said. "That is why these banks are dragging their feet on short sales."

When Bank A takes over failed Banks B's assets, usually laden with risky mortgages, the FDIC often agrees to a (taxpayer-funded) "loss-share" agreement to minimize the acquiring bank's risk. The agreements cover anywhere from 80 percent to 95 percent of any losses on the bad loan portfolio. In some cases, that prods lenders to agree to a short sale, especially if they can make more with the cash from the FDIC loss-share agreement than the banks would if the house fell into foreclosure.

But the opposite can be true as well, with the lender actually making more from a foreclosure if the loan has a private mortgage insurance (such as AIG) payout and can be resold at a good price.



The Committee for a Responsible Federal Budget, a Washington, D.C.-based think-tank, reports that the FDIC has taken over 203 failed banks since 2008, many with a loss-share agreement. Total deposits so far this year equaled $18 billion. In 2008, it was $389 billion, and at an estimated cost to the FDIC of $64.4 billion. Seventy-eight percent of the existing loss-share agreements have no deductible, so the FDIC starts paying banks for their losses immediately.

For single-family mortgages, the FDIC loss-share agreement stays in effect for 10 years and covers losses when the loan is modified, foreclosed upon, when a second mortgage is charged off, or when the property is sold short.

"It has helped us sell a considerable amount of assets that we normally would have had to keep," said FDIC spokesman David Barr. "We audit the loss-share agreements to look that they are modifying the loans in a timely manner and not just opting for foreclosure or short sale. They have to choose the option that makes the most economic sense to the FDIC."

Despite the efforts of the Obama administration to speed and streamline the short-sale process, experts say banks do whatever will provide the best outcome for their bottom lines.

Charryl Youman, a sales agents with Prudential Florida Realty in Venice, has seen that firsthand.

What the banks are often doing by scuttling a short sale seems -- at first -- to make no sense, Youman said.

She had a buyer put in three offers over the course of 240 days on a two-bedroom, two-bath home selling short for $82,000. The buyer gave up.

"I never did hear from the bank," Youman said. "I did, however, hear from the foreclosure listing agent to take off my lockbox because the bank now owned the property. They sold it for $48,000."

But it turns out the lender may have played the game very well, she said.

The bank received mostly interest payments for three years before the buyer defaulted. It also received the payout from the private mortgage insurer, which was about $50,000, and then the proceeds of the foreclosure sale.

"The bank walked away with $98,000 -- and the three years of mortgage payments," Youman said. "The bank is not really losing much and sometimes can actually make money on these deals -- and so they can have little incentive to take a short sale offer."

The Great Highway Robbery Continues: How the FDIC Is Legally Transferring Billions in Taxpayer Money to Hedge Funds

Zero Hedge
February 10, 2010

It is not a secret to anyone who has been closely following the FDIC's quasi criminal bank takeover practices over the past year, that acquirers of failed banks end up receiving a massive and risk-free gift in the form of taxpayer benefits via the FDIC when it comes to funding losses on a given bank acquisition.

Should there be a short sale resulting in a loss to the full principal (not the cost basis mind you)? Not to worry; Sheila Bair is there to hand out taxpayer money to the hedge funds/banks owning the newly transferred assets.

A recent example of this was the glaring insider trading which preceded the acquisition of failed AmTrust Bank by New York Community Bancorp, in which both NYB and those who bought calls in advance of information being made public, made massive illegal profits.

And as the SEC continues to pretend like this episode never happened, we remind the intellectually subprime Mary Schapiro to finally pursue those involved, and will continue doing so for as long as it takes.

But back to the FDIC: the folks at Think Big Work Small have compiled a terrific video detailing exactly how several hedge funds, currently owners of recently created shell holding company OneWest Bank, are picking apart the carcass of failed IndyMac, all the while encouraging short sales (instead of loan mods) as only that way do they get to benefit fully from the taxpayer-funded FDIC loss-share arrangements which makes the IndyMac transaction an immediate slam dunk for everyone involved...except America's taxpayers, and the FDIC's ever depleting DIF reserve.

As the authors appropriately title the video, this is indeed a slap in our face. And this goes on every single bailout Friday when the FDIC continues handing out billions of dollars under the guise of "loss sharing" arrangements, which is simply a guaranteed profit from the acquirors' cost basis to 90% of the original loan value: an instantaneous 30% risk free IRR.

Spring Market Will Turn Home Prices on Their Heels

CNBC
April 6, 2010

Today the Administration's Home Affordable Foreclosure Alternative Plan takes effect, offering incentives to borrowers, servicers, investors and second lien holders to push short sales through the system. Yep, everyone gets a cut of government funds to get these troubled borrowers out of their homes and get them sold, even if the sale price is less than the value of the loan.

I find it interesting that before the plan even went into effect today, the Administration upped the incentives a week ago, doubling the amount of cash to $3000 offered as borrower "relocation expenses" and juicing the payoffs to the others as well. Of course they want to push short sales because of course they know that their modification program isn't working as planned.

But the biggest impediment to the plan is the lenders themselves, who have to weigh what's going to save them the most money and cause them the least bleeding on their books.

Is it a short sale or a foreclosure sale?

We're already seeing inventories shrinking way down out West, where banks are holding on to foreclosed properties and manipulating prices to their advantage.

I'm also starting to hear rumblings among the number crunchers that the wave of foreclosures we keep hearing about is about to hit with a thunderous roar.

Servicers are ramping up the mod process and pushing those who don't qualify out the door more quickly than ever. A big jump in inventories, which we already saw last month, right in the midst of the Spring market, will turn home prices on their heels.

Don't get me wrong, I'm loving the jump we saw today in the Pending Home Sales Index, but there was just something a little too hesitant in the Realtors' report. They seem to be talking about hints and hopes, rather than real change.

Homeowners’ Hard Times Are Good for the Foreclosure Business

The New York Times
April 5, 2009

The celebration started early Saturday, with poolside music and drinks, as partygoers passed around business cards and compared notes on successful techniques for evicting residents who try to stay in bank-owned property, a process they call “cash for keys.”

One woman in a T-shirt walked around with a hand-written sign that read “Bank Property” affixed prominently to her chest.

Welcome to the spring 2009 Reomac conference, which has attracted nearly 3,000 real estate agents and property managers to this lush desert resort. The crowd brimmed with a gusto that is hard to find in this recessionary era. The hotel bar did more business on Saturday night than it did on New Year’s Eve. Small wonder: These are the people cashing in on the boom in foreclosed properties.

R.E.O. is industry lingo for “Real Estate Owned,” the term that bankers assign to homes they have taken in a foreclosure. Reomac is the industry group that serves the mortgage default trade, specializing in selling the busted-up American dream.

“Things are going tremendously,” said Darren Johnson, an R.E.O. agent from the Detroit area, who has handled about 180 bank property sales in the last year. “It has never been this good.”

The conference this year is centered on the “R.E.O. tsunami,” referring not to any natural disaster but to the one caused by the flood of as many as 700,000 bank properties now on the market nationwide. There were just 100,000 in 2006.

The tsunami has leveled off a bit in recent months, because of foreclosure moratoriums imposed by major banks and the Obama administration. But the real estate agents here were told not to worry — the flood will continue for several more years, and probably has not peaked yet.

In February, nearly 45 percent of the home sales nationwide were R.E.O. or so-called short sales, in which homeowners, under duress, sell a property for less than their mortgage, according to the National Association of Realtors. The sales have intensified a nationwide decline in home values. R.E.O. homes typically sell at a 20 percent discount.

The convention at the Desert Springs J. W. Marriott formally began on Sunday, with a golf tournament, featuring a “19th hole” bash cosponsored by Coldwell Banker, the giant real estate firm. Other convention-goers were at the resort spa, getting top-priced treatments, like the protein-rich caviar scrub for $185.

“What we have seen so far is just a hint of what is coming down the pike in the next three years,” Marty Higgins, a San Francisco real estate broker who specializes in apartment buildings, said as he stepped off his golf cart, smoking a cigar.

For real estate industry service providers, like title insurance companies, the R.E.O. market has become essential if they want to remain in business, which explains why executives like Ron Jones, from a California title company, was walking around offering to send wine to one important Arizona agent.

“Buyers now have tunnel vision,” Mr. Jones said. “R.E.O. is all they want.”

The convention’s biggest party was the so-called Tsunami Club event on Sunday night, at an 18,000-square-foot stone house in Rancho Mirage. In the grand foyer, two young women in leather boots, black bustiers and shorts danced atop platforms to a D.J.’s club music, while waiters in white shirts buzzed around with trays filled with hors d’oeuvres and drinks. Beyond was a row of craps and blackjack tables and a pool surrounded by palm trees, with a view of a desert mountain range.

“Everyone wins but the loser,” one man yelled at a blackjack table, when the cards turned against him.

The event also included a selection of hand-rolled cigars, a special Scotch lounge and a patio set aside just for networking.

Educational seminars take place on Monday and Tuesday, where the convention-goers can learn about how a giant wave of foreclosed commercial properties is expected to come in behind the flood of bank-owned homes.

They will also learn how to deal with challenges associated with handling vacant properties, like pools the color of pea soup (the color they turn as algae takes over a pool that has not been maintained), as well as what to do when they find a vacant home with abandoned pets...

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

The New York Times
August 11, 2010

During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar.

“People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since.

“The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next.

“I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable.

“It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”