Detroit Councilman Walks Away From Mortgage

Kwame Kenyatta, Detroit Councilman and mayoral hopeful for the next election, has mailed the keys to his home in an upscale Detroit suburb back to the mortgage company and moved out.

And he’s not the only one.

The Wayne County Prosecutor’s Detroit home has gone into foreclosure, and recently California Representative Laura Richardson nearly lost her home as well, but managed to come with back payments in the eleventh hour. Kenyatta knows that walking away may jeapordize his chances of becoming mayor, but he feels he did what he had to do.

Kenyatta bought his Rosedale Park brick home for $225,000 but the value continues to fall. Currently it is appraised at $100,000; much higher than the median Detroit home price of $5,600, but far less than what is left on Kenyatta’s $2600 per month mortgage. To make matters worse, Kenyatta’s mortgage was about to reset, causing his payment to go up an additional $1,000 per month.

Kenyatta’s mortgage payments were made on time and he was not in danger of foreclosure when he mailed back the keys to his lender. Because of his excellent payment history, he did not qualify for any lender-based loan modifications or relief programs. Because the home is so badly underwater, he also does not qualify for the new  Obama foreclosure program.  Kenyatta, a former Detroit school board member, makes $82,000 per year. His wife is retired. They now rent an apartment in another part of the city.

Detroit Councilman Kwame Kenyatta's Rosedale Park home in the Detroit suburbs now stands vacant after he mailed back his keys and moved out. The value of his home has fallen over 50% in the last several years.

The practice of mailing the keys back to a mortgage company, sometimes refered to as ‘jingle mail’, is not illegal and is becoming more and more common in the United States as the foreclosure crisis worsens. The practice ruins the homeowner’s credit, but often makes economic sense in the longrun. The likelihood that Kwame Kenyatte will see his Roseland Park home appreciate to anything close to what he paid for it in his lifetime is slim.  At present, the value continues to fall. More and more homeowners are cutting their losses and walking away.

Obama’s mortgage relief program helps only a very small segment of the U.S. population, and was designed to avoid offending the very vocal people who are incensed at the idea that home buyers who made bad decisions can now get government help. Yet many responsible people are now badly underwater on mortgage loans that they were fastidious about paying  on time and keeping current. Even long-held conventional mortgages in hard-hit areas are now going upside down.

When a home buyer mails the keys back to a lender and walks away, the bank simply tries to resell the home. In parts of the country like Detroit, the likelihood of a resale of that sort of house is small, and even if a buyer is found, the lender will almost certainly take a loss. It’s hard to understand why lenders won’t modify terms and balances under these conditions. Perhaps some of them should be compelled to do so.

Until prices stop falling or the government or lenders find a way to address to problem of underwater mortgages held by responsible buyers, the foreclosure crisis is likely to pick up speed.

Right now, as desperate as the U.S. is for a bit of good news, no bottom is in sight.