Just before Thanksgiving last year, Jasmine and Brian stopped paying their monthly $1,865 mortgage and moved out of their South Seattle home. The house's value had depreciated $90,000 in four years—and they were deep underwater. But unlike millions of Americans who have defaulted on their debts in the housing crisis, this couple didn't move downward into a smaller house or a rental.
The couple moved two miles west into a bigger house with a new mortgage that costs them less.
"Since our loan was only in Brian's name, I wondered if I'd qualify for a new loan in my name," says Jasmine, who asked that we not print their last names.
As the couple discovered, they could leave their waterlogged mortgage by letting one person's credit take a hit, acquire a new mortgage under the other spouse's name, and ultimately take advantage of the recession's lower housing prices.
The couple's story began near the top of the housing market in 2007, when they purchased the two-bedroom "fixer-upper" on Beacon Hill for $305,000. The Wells Fargo loan was in Brian's name (because he had better credit). But one year and $20,000 worth of investments later, the real-estate market tanked and suddenly, "We were paying a $305,000 mortgage [for a house] that was suddenly worth $225,000," Jasmine explains. Wells Fargo denied two attempts to refinance the debt, and the couple, who work as an office manager and a nonprofit director (read: big money!), were told they weren't eligible for government aid programs.
And then Jasmine found out she was pregnant. So in May 2011, Jasmine called the same Wells Fargo lender who helped the couple with their first mortgage: "She ran the numbers and said that we were approved for $275,000 based on both of our incomes and our current mortgage payment." Would their new mortgage be affected if they went into foreclosure on their current house? "She said no, not at all," Jasmine says.
Lara Underhill, a spokeswoman for Wells Fargo, wouldn't comment on the loan application process. But another Wells Fargo employee explained, "Our lenders evaluate clients on an individual basis."
Six months later, the couple closed on a new house—a two-story rambler with four bedrooms, three baths, and double the square footage of their previous place—which they purchased for $240,000. "In the end, I can't believe how easy it was," Jasmine says.
Obviously, their story is a departure from the typical foreclosure tales of eviction—stories that became more common in 2006, when the national foreclosure rate jumped 42 percent, according to real-estate tracker Realtytrac.com. Foreclosure rates jumped another 75 percent in 2007. Living on the edge of homelessness has become the new norm for many families; currently, an estimated 11 million Americans are in danger of bank foreclosures. In Washington State, more than 243,710 Washington families (or 17.2 percent of homeowners) are paying on mortages that are higher than what their homes are currently worth, according to real estate market research firm CoreLogic.
Why don't more homeowners simply refinance? "Refinancing almost never reduces the principal amount owed," explains Michael Zeno, a Seattle-area real-estate lawyer. "Instead, it tends to move payments around, maybe reduce them for a while. But you'll always end up making them up later, whether you can afford it or not."
Jasmine and Brian's strategy may sound like a magical scam, but they aren't the only ones legally enjoying loopholes in lending practices.
"It's becoming more common," Seattle real-estate agent Sarah Rudinoff says about clients dumping their houses in search of a better deal. "Now that we have a ton of homes in foreclosure that are being resold for cheap, people aren't as willing to meet their high mortgages."
Jen, half of another local couple (who also asked that their last names be withheld), says, "We bought in 2007 under my name because my husband was a student. Our mortgage immediately sank, and the bank practically laughed when we tried to refinance." Last year, the couple moved to Portland and struggled to rent out their West Seattle town house at a huge loss, "when an accountant friend advised us to just walk away," Jen explains.
"At first it freaked me out completely, but if you get rid of the emotional ideals of 'home' and 'security' attached to the property and just focus on the finances, it makes sense. So we walked." Seven months later, the couple bought a Portland home for $280,000.
Of course, both of these stories came with a catch: One person from each couple stands to take a serious loss to their credit score.
"I was told my credit would be totally fucked for a few years," says Jen. "But it was definitely worth it."