'Underwater' homeowners

"Such borrowers are said to be “underwater” -- they are drowning"

... totally untrue. Many recent buyers (last year or two) might owe more than their house is worth, but will be just fine paying the mortgage and be back on top in another few years. In the mean time, they have a home at historically low mortgage rates. Yes, there are a minority who are WAY underwater because they've made very stupid decisions. But the majority who have bought in this area might be temporarily underwater and it will have no effect on their daily lives whatsoever.

If I can afford my monthly mortgage payments and don't have to sell, why does it really matter if my house or condo is underwater or not?

Richard,

The concern is that being underwater may lead some owners to conclude that their home is not a worthwhile investment, and therefore they may decide to stop investing -- that is, to stop making monthly mortgage payments.

This argument can also be made with a little more nuance: Borrower with less equity are less likely to press and scrape and do everything they can to make their monthly mortgage payment. They are more likely to just give up.

It's a dangerous situation for lenders because if anything happens -- if the homeowner can no longer afford the payments, or no longer wants to make the payments -- the lender can't recoup the loan by reselling the home.

Mortgage companies historically were so scared of this situation that they required 20 percent down payments, and borrowers who couldn't put up 20 percent were required to take 'private mortgage insurance' to protect the lender.

Now that fear has become a phenomenon, and we'll see what happens.

well it matters if property values fall even if you can afford your current mortgage payment because property tax revenue will decline ...which seems like a good thing at first because everyone ALWAYS wants lower taxes.

However what social services are you willing to give up, how many school teacher do you want to lay off, firemen, policemen..maybe we can collect the garbage once a month instead of once a week s
sss

d

It's called jingle mail--just walking away from your underwater mortgage, and "mailing the keys" to the bank. In some cases, these homeowners first purchase a similar house at a far lower price--while they can still get a mortgage--and then simply abandon their old house.

At this point virtually all major lender CEOs have remarked on the phenomenon. It makes sense. Why throw good money after bad?

As far as remedies go, the "certificate" option is simply silly and unlikely to have much effect. The federal "assumption" of mortgages is a direct bailout of reckless lenders, and a handout to Wall Street so blatant is likely to cost politicians their jobs. It needs a better fig leaf, at least.

For the most part, all of these "remedies" are simply last gasp efforts to avoid the inevitable. The entire runup in house prices since 2000--and all the asset "value" thereby created--was a sham. Everyone who lent on those assets is just going to have to recognize major, major losses. Period.

I, along with a great many other responsible borrowers, am going to be very upset if I pay my mortgage on time every month and the government (which already takes too much from us) decides to bail out these idiots and "swallow the difference".

That means the fiscally responsible will be paying off their own debt as well as the debt of the idiots. They get to stay in their homes while we make up the difference. I'm sorry, but that's just not right.

Why are people so gullible to think that these proposed "remedies" to this "problem" are designed to help out the average homeowner? The reality is that the residential real-estate became very inflated in the past ~7 years, and any policy that could actually be effective in maintaining the current inflated values will have the side-effect of increasing taxes, deflating the value of the dollar, or both. The only real beneficiaries of bail-out policies will be banks and some irresponsible homeowners (I do have a little bit of sympathy for the uneducated poor people who were tricked into thinking they could afford a house that they really couldn't, but I have no sympathy at all for middle-class people who refinanced their way into an "underwater" situation).

Also, could someone please explain to me why bankers, who are supposed to be educated in economics, were so foolish as to make loans that could only work under the assumption that real-estate prices couldn't fall? I find it hard to believe that they were actually that stupid... they just assumed that their friends on Beacon/Capitol Hill would come to their rescue if this situation did ever materialize. Well, it's starting to look like they were right, and this is completely wrong! Banks and mortgage made some very bad mistakes, they made a lot of money on the upswing, and the companies and their executives should have to pay the price now that the party is over. Please don't support your Congressmen's disingenuous plan to cushion their fall.

Hi Binyamin,

I think the problem is a bit different. Many lenders now know that they made too many bad loans that borrowers can't really afford. At the time these loans were made, lenders assumed ever-increasing house prices would solve any future problems with borrowers defaulting. Now that real estate prices are headed down, lenders now understand how hosed they are. 100% financing proves little room for error.

The real problem here is bad loan practices. Lenders bet that real estate prices always go up and they lost.

After shutting down my house hunting in the summer of 2004, and getting excited about re-entering the market, my government is conspiring to pull the rug out from under my feet and slam the door on my being able to afford so much as a modest place in a city or town where I'd like to live? And in the process rub salt in my wound by taking my hard-won money to give to my nemeses - the generally irresponsible or greedy or even fraudulent parties (both mortgage companies and buyers) - in order to prop up artificially inflated prices that will prevent me from owning a home?

Pardon my language, but hell no. This is very disturbing news to me. I know this is supposed to be about preventing a depression or very severe recession, but it is really short-sighted politicking with lip-service about problem solving. It not only will do more harm than good, it is unfair. If I'd have known, I would have indulged away and leveraged myself to the hilt.

How about a government plan that gives responsible buyers like me money for a purchase, enabling us to pay a above current market prices while still curbing and cushioning the well-deserved hit that bad owners and mortgage companies deserve to take. Everybody can't be irresponsible and greedy or stupid all the time. At least some of those, like Bank of America/Countrywide, and those buyers falling in these categories, need to at least partially suffer the consequences of their actions.

We are all going to take a hit now, but less of one than we will later if we keep saying such behavior will be encouraged and supported by the government. And I should take less of a hit, not more of one, than those who got themselves and now the rest of us in this situation.

don't sweat it, the pols are just posturing, trying to say anything to make it look like they are taking action (any action at all, including chasing their own tails). The bottom line is the MARKET will dictate the housing correction, not some piddly attempt by the government to stem a tidal wave. Given the income/to hoem price ratio in many markets around the country (including Boston), there is now where
for prices to go but down (and down sustantially). We are niot even half-way through this mess.

A Great way to "one up" your neighbors who would
like to impress everyone with their waterfront property !

Don't forget, this is the Globe attributing the proposed relief to its parent, the New York Times. If you read the Times piece you see that the closest thing to what the Globe attributed to the Times for a government bailout was a reference by a Barney Frank staffer about what they were thinking about proposing to Frank's subcommittee. I guess if poor attribution can work for the parent paper, the Globe can follow suit with even weaker attribution.

Binyamin,
Housing should never be viewed as a short term investment, so if some are underwater right now, they should be looking to the recovery that will happen and appreciation will go back to a more normal 3% or so annually.
The mortgage companies arent the ones that required 20% down, that was the small banks. They determined that if they foreclosed a 20% reduction in price was needed to sell the property and get it off the non perfoming list.
To say a low downpayment is the root of the issue, it isnt. The lack of financial understanding by the US population is. If anything, the low down payment is the best for the rate of return on homeownership when viewed as an investment. Remember, at the end of the day we have to live somewhere.
Not sure what the report was, but a large amount of the US home owners dont know the terms of their mortgage. Unless they have someone that manages it for them, that is scary.
The recent mortgage program that has hit the US from Australia is a great example. It works for them, but is not the greatest for the US. Same goes for comparing the US to Japan and the 100yr amortization loans. These cant be comapred unless you know all the terms.

One last commment/project for you. Find the answer to these questions.
How many countries in the wold have a 30 year fixed rate mortgage ?
How many countries in the world offer a tax break for owning a home ?

With the answer to these, you can then blog on why we are in such a pickle that the rest of the world is not in.

The psychology of purchasing an asset that has fallen in value is relevant and influences our other purchasing decisions (ie we are probably less likely to make discretionary purchases if we have a lower sense of self worth). This affects our entire economy. BA, it is unfortunate that people have come to view their houses as "investments" first and "homes" second. I can recall a few years ago when self worth was tied to stock market value and not to home value. I do not recall the same sympathy for those who lost money purchasing stock on margin.

The corollary of Richard's (#2) comment is that a home only loses value when it is sold (just as a stock loses value only when it is sold). We are in an inflationary times and home prices (and home income) will eventually again increase even if the true value stagnates. A long term view is needed.

In the meantime, for the subset with ARMs who are underwater and will drown when their interest rate readjust, mortgage lenders with the help of our government have no choice but to be more flexible (ie readjust the term of the loan, etc...). They will need to do this for the sake of our system (not just the individual homeowner). But completely absolving homeowners of payback responsibility would send the wrong message and would be unfair to those who did not overextend themselves.

Great, so if the government steps in and adjusts these loans to the true market value, what happens if, next month or the month after that, the loans are worth less than they are, today?

Then what happens? Another round of loan reduction? More loan forgiveness?

I think this idea is stupid from the get-go.

I am looking to move my family to Metro West this spring and am suprised at how many houses have come under contract in the last few weeks. Sam how are you taking a hit and not taking a chunk out of someone if you buy this spring?

The initial signs of the subprime mess to come was there for all to see at least 5 years ago, not just in 2006.

Around the time I last refinanced my home mortgage in 2003, several news magazines (Newsweek, Time, Business Week) had articles noting that the volume of mortgage applications and refinancings was declining sharply due to higher interest rates, high home prices, and market saturation. That is, nearly everyone who wanted and was conservatively qualified to afford a house already had one.

The news stories at the time mentioned that the large number of mortgage brokers and lenders (and their Wall Street enablers) were increasingly hungry for fees and thus the low- or no-documentation mortgage was born to extend the mortgage market a while longer. Even then, there were stories about appraisers being pressured by brokers to "hit the number" by justifying the selling price, or lose referrals.

Most lenders were immediately selling the mortgages they originated anyway, so there was little incentive for them to stick to conservative lending standards. Example: In 2003 a mortgage lender qualified my brother-in-law for a fixed-rate loan amount that he and I calculated would leave him subsisting on cat food, let alone saving for anything.

It all comes down to greed, lack of caution, and thus wanting the party to last forever believing it's someone else's potential problem in any case. But of course it will eventually affect everyone in some way, and here we are with the credit market meltdown.

Strangely, in Australia, the same signs have been there for years in our housing market too. For years, we Realtors have been saying that the lenders are lending too much too easily, and that behaviour has artificially inflated the prices of homes across the country. Now that interest rates have gone through the roof, the problem has come home to roost. The so-called 'underwater home-owners' here are loosing their homes at the greatest rate in Australia's history, flooding the market with 'cheap bargains' for investors to snap up, thus driving the values down below the level of other homeowner's mortgages. It's a cascading effect. The lenders are now creating the dire consequences of the very problem they created in the first place. Meanwhile, our governments talk about a lot and seem to do little. God help Australians in the coming few years.

Sam,

Do you have any numbers to back this claim?

"I am looking to move my family to Metro West this spring and am suprised at how many houses have come under contract in the last few weeks"

Frankly, I find it hard to beleive....

In response to Ted (#16) - Ted, I take a hit because house prices have only gone from grotesquely overpriced to very overpriced. The houses coming on the market are still unrealistically overpriced - the recent dip in prices is only about 4% or 5%, and only about 2% if you exclude foreclosures, which overwhelmingly occur in areas I'm not looking to buy in. Prices are still well out of whack with the average MA income in proportion to tried-and-true guidelines for how much someone can afford to pay based on their salary.

I make an above average salary in MA , by more than just a little, but according to these guidelines and budget, still can't afford an average house in the Boston area, based on the current average price. And a bailout would prop up the current prices, or which are artificial due to extensive fraud, poor monetary policy, and a spasm of irrational psychology during the frenzy of the euphoric bubble. I just want to pay in the vicinity of a rational market rate based on the tried-and-true standards, not take a chunk out of anyone. I want to pay what I can afford. And I don't want to pay money into a bailout plan to give to someone who paid for more than they could afford, which unfairly diminishes further what I can afford.

I need prices to approach earth a little more before I can afford to buy, and I'm confident that if the government doesn't ill-advisedly intervene, I'll be able to responsibly buy within the next year.

Let me say up front that I have not lived in Boston for the last 8 years and currently live in Annapolis. With my oldest kid ready for Kindergarten next year we were looking to move back to MA this spring/summer. Southborough looks like the best fit and from the emails I get from our the MLS system, it seems to me like things are selling. Sam, after reading your response, I agree things are over priced but not so sure what I looking for is going to go down much further. I really miss that Boston Hard edge which why I must choose to write on this board.

All the best

cs-
Property valuations is a system to divide up among the residents how the amount of tax need by the city/town, will be paid. If property values in a town go down according to the tax assesments, the tax rate will simply go up such that the same amount of tax is collected. No need to lay off the friendly firefighter or policeman for this reason.
Sam, I agree with you about homes being out of whack with income. I'm no economist, but if people are buying and people are selling at "x" dollars, isn't that true market value? I live in S. Maine, and am on the border of Portsmouth, NH. Portsmouth prices have been fairly stable for 8 months or so, but most out lying areas are still decreasing (at varying rates depending on desireability) because they are less desireable. Is this what is happening around Boston as well- good areas and locations are holding or coming close to holding their value, and bad areas are losing and have lost the most value?

Home prices are way overpriced still.

No state job growth. Cheaper tech labor in other countries. Slowing US economy. There is nothing to push up home values in this state, or even support them.

Assessments will fall. Municipal bond autions are failing, pushing up interest payments. Expect city/town salaries to start going down, and tax rates to rise. Bad for home values.

My family lives in Metrowest. Since 2000. We are selling this summer. Unless we find a good deal, we will rent a home until our son finished HS. Then, if prices are not adjusted, we are out of the state. See ya later, Carolina here we come. It would be nice to stay, but we are not going to cash strap ourselves and live on the edge until death just for the privilidge of owning a home in Massachusetts.

Home sellers - sell now. I repeat - Sell now, for what you can. You have no idea how badly you will be burned if you dont. Nobody is moving into this state. Birth rates are down. Even the Brazilians are leaving to go back to Brazil, which is in the midst of a massive economic boom. Baby boomers are about to sell homes in large numbers. Take what you can, and move on. You can wait for "prices to go back up" until the cows come home, but it aint going to happen. Home values have been falling in Japan for 18 straight years. The US is entering, to everybody's surprise - not inflationary times, but deflationary. US home prices may never recover. If the US money supply remains stable, and is not "hyperinflated" like Argentina using the money press, home prices will never again.. and I mean never ever again.. reach 2005 levels. Inflation only happens due to bad money policy, and the US debt-ridden lifestyle is ending as we speak. We will come out a better nation for it.

As a realtor in the Metro West area; I have seen many homes go underagreement quickly as long as they are priced correctly. There are a fair number of "short sales"
as well as "pre-forclosures". It is really to bad that we are in this mess. I blame the Banks and Mortgage companies. Many unfair promises, and loans to buyers who could not afford the increase of their rates. The fudging of numbers to make them work. Many of the buyers that I have had the pleasure of working with, dealt with lenders that pre-approved them at the highest rate of their adjustable mortgage. This way they new they could wait out a down market. There is no excuse for not having proper representation ,you must know the facts, what a shame.

It the information in Scott Burns' column today is correct, and foreclosure problems are regional and not systemic, it would be natural to question whether the "underwater" homeowner problem follows suit.

If this is the case, Ted may financially have an easier time moving to the Boston region from the greater Washingon Metro area than someone who is trying to geographically relocate from Detroit or Stockton.

Blame the appraisers for all these mess.
Let me do a walk through of your house.
Hmmm...the market value for your house is
"long pause" $412,842.00. WTF?

Consumer Beware!

With Bank of America being one of the largest Banks in the World and recently exiting the wholesale mortgage business channel and laying off 1,000.s
of employees and now Bank of America has been given the thumbs up to acquire
Countrywide this can only spell TROUBLE to the US conusmer. Bank of America
Lobbyist in Washington are very powerfull.

Take your business to the old fashion Credit Union or local Mortgage Broker
and stay away from the Bank of America's and Bankrate.

If you go the local mortgage broker route be sure to ask if they are a Certified Mortgage Planner. This is called a CMPS designation and separates those of us that are committed to a new set of industry standards vs. others who treat the mortgage process more like a commodity.

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Great read. I think I'll subscribe to this as it has some good info! Thanks. I do apppreciate the blog :-)