In over their heads

I would think it would make sense to hold on to the property provided you can make the mortgage payment. Markets are cyclical so over the long haul the price will probably rebound. Plus, if you keep paying down the mortgage, you will hopefully get close to that "break-even" number.

This means you may have to rethink if you had planned to live in your house for only a year or so and then "make a killing" on the resale. You may have to live there a little long and then only expect to make a more modest profit. People should start remembering that these are home and should not be treated like stocks that you can buy and sell daily (although that is what most people did in the past couple of years).

This also means you probably won't be able to refinance or get a line of credit unless you have a very forgiving lender....

Many people will walk away from their debts. Or wait for a government bailout. Hey, it's the American way.

If you HAVE to move. Buy a new house then just walk away from the old one if you are upside-down a bunch...Jingle Mail

"My big question is what do “underwater” homeowners do? Do they look for an exit strategy? Or do they hold their breath and hope they reach the surface sometime soon?"

My suggestion is that they live there and pay the mortgage. That is why they bought the house in the first place, right? At the time, they could afford the mortgage, right?

The value of their home going down shouldn't affect their mortgage that they pay every month, and it should not also affect their salary that they take home. So if they could afford it in 2005, why can't they afford it now? Just live there, that's why you buy a home.

If you buy a home for speculative reasons, then you made a bad investment, but you took the risk.

People want to be able to take risks, but when they get burned, they don't want to deal with the consequences of those risks.

My mutal fund investments have lost about the same 24 percent as people who invested in a house. Do you think the government will bail out my investment too? Why are we letting home owners who's property has lost value but still can afford to make mortage payments walk away and stiff the banks? If the bank was dumb enough to loan someone money who could not afford the mortage payments then the bank is dumb enough to loose the the money

"Nationwide, properties gained 4.4% over the past five years, and 6.5% over the past 10."

Fantastic! But hey, wait a minute. What happens over the next 5 years as all of the foreclosed and underwater properties come up for sale? Do I still get my 6.5% gain when I sell? No? My Realtor told me I was making a smart 'investment', and to ignore those naysayers.

With energy & food & health care costs rising, can't I just refinance my way out? That's not 400k worth of debt, it's an investment! Prices in Greater Boston won't continue dropping. My Realtor told me to read Kimberly Blanton, and she said Boston is different . We're all rich real estate investors! Wooohooo!!!!!

It seems a bit immoral to stop paying on a mortgage just because your house is worth less than when you bought it. Walking away from the house really is robbery, you took a loan and now you should pay. However, some of these mortgages are unfair and an effort needs to be made to assist in refinancing. There are some individuals who kept on getting equity out to the point that the house was over mortgaged. These same people used the money for trips, tuition, cars..etc. Now these people don't want to pay the over extended mortgage, shame on them. Where is the responsibility and maturity of these adults for their actions?

Typically, first time buyers were putting 5% down and trade up buyers were putting down a lot more than that because they had equity in the place they were selling.

When you say someone OWES more than their house is worth, literally that means that if someone had a 5% down payment that the martket value of the house is 95% what they paid. The peak in Massachusetts was in 2005, and I believe I read in one of Kim Blanton's articles that homes WITHIN 495 dropped much less than outside the belt. Also 2005 had mortgage rates in the 5's (lower cost of capital than today) so their mortgage payment isn't a bad as some might guess.

People that traded up had appreciation / equity from the place they sold, so many have a lot of cushion and have a low cost of capital.

What they ought to really look at are the percentage of people that took out Home Equity Lines of Credit and used their homes as an ATM. How many people were able to buy their homes from themselves at market rate.

The biggest issue in my mind is based on the distortion created when market value is determined by a small percentage of trades can lever valuations and financial activity that is way out of economic capital structural proportion. Basically, the ratio of buyers to sellers determines the price, but if you have 20 sales in a town and 500 refinances the fundamental "market value" is skewed because if 500 people put their homes on the market at once, the prices would absolutely drop. Add to that, the wealth effect and the problem amplifies.

Get a bridge loan and buy the house that is for sale next door for 1/2 of what you paid for yours..... Foreclose on the current house...... Wait seven years.......

My mutal fund investments have lost about the same 24 percent as people who invested in a house. Do you think the government will bail out my investment too? Why are we letting home owners who's property has lost value but still can afford to make mortage payments walk away and stiff the banks? If the bank was dumb enough to loan someone money who could not afford the mortage payments then the bank is dumb enough to loose the the money.

"Only" 13.3% are underwater in this area? That's huge. Foreclosure rates were historically very low, they are spiking because of an irresonsible lending environment. I know in Marlboro at least, Brazilian immigrants in particular were targeted and were buying up ridiculous amounts of condos and even small houses in that area for years. Now a lot of them, who weren't citizens to begin with, just leave the place abandoned/foreclosed, or go back to Brazil, ready to come back when economic times look better. And who's left holding the bag? The mortgage companies of course, who have now tightened lending for the people who were responsible enough to begin with! (Most people can't get out of their homes in this environment, so the patient ones who stayed by the wayside waiting for the right time to strike now have to wait to save more money because lending requirements have changed). This vicious cycle isn't going to end any time soon, not with the dollar weakening and generally bad domestic & foreign policy.

I'm glad I'm not a property owner right now. But I can't wait to scrape up a great value in a year or two when the bottom starts to really fall out.

This is nothing new- welcome to New England.

We owned three homes:

We bought the first home in 1986 with 5% down which we borrowed. We sold it 6 years later and had to take 30K to the closing to get out of the mortgage.

Our next home appreciated 75% in 7 years.

Our current home is worth about what we paid for it 7 years ago.

My advice: Buy a home you can afford and if you build up equity, don't squander it.

Walking away from the house does not erase the debt. Two major documents are signed at a loan closing: the mortgage-which gives the bank collateral, and the loan note, which is a contract to pay all of the money back. The mortgage gives the right for the bank to foreclose and recoup as much as possible with a foreclosure sale. Any deficit that remains on the note, along with foreclosure fees is a debt that the borrower is still legally obligated to pay.

I find the information on Zillow.com to be very inaccurate at best, completely wrong at worst.

I would never use zillow as a source for a story, although I am sure they enjoy the publicity.

I agree with most people on here, that either people can wait it out until home values start to come back up or unfortuantely, there are people who are just going into foreclosure. FJ, the reason she wrote "only" 13.3% is because that is significantly less than the nation as a whole, so yes, that means the Boston area is doing much better than many other parts of the country, as has been pointed out in many blog entries. It's funny to me that you claim this viscious cycle isn't going to end anytime soon because of the dollar weakening. Have you been paying any attention to the news or economy over the past month? The dollar has actually been strengthening, and gas prices have been falling quite drastically. Things are actually starting to look better, not worse....

People are not walking away from their home because the home is worth less. They are walking away because they were in some sort of adjustable rate mortgage that is meant for a short-term and when the high rates kick in they are unable to re-mortgage because they have no equity in the house.

In the interest that you are charged and in the mortgage insurance you pay is the built in risk for loaning money. After all money is lent for profit and all business ventures have risk, usually proportional to the possible gain. Throw morality aside, if you can walk away and gain more than the long term cost to your credit rating then go for it, it is a sound business decision. If we lived in a world where everyone got the same interest rates regardless of their connections and their wealth then maybe I would feel differently.

I agree with most people on here, that either people can wait it out until home values start to come back up or unfortuantely, there are people who are just going into foreclosure. FJ, the reason she wrote "only" 13.3% is because that is significantly less than the nation as a whole, so yes, that means the Boston area is doing much better than many other parts of the country, as has been pointed out in many blog entries. It's funny to me that you claim this viscious cycle isn't going to end anytime soon because of the dollar weakening. Have you been paying any attention to the news or economy over the past month? The dollar has actually been strengthening, and gas prices have been falling quite drastically. Things are actually starting to look better, not worse....

Actually, I believe the comment (#12) by jjim earlier here is not correct. In the case of a mortgage it is a "secured" loan. The home itself is collateral and surety for the loan. At any time for any reason you may walk away from a mortgage and let the bank foreclose and your responsibility is over other than facing the penalties and credit rating issues that come with foreclosure which are clearly stated in the mortgage docs.

Are we really using Zillow as a credible source for real estate?

Zillow information is so inaccurate that I don't believe any of it. I looked at Zillow's estimate for my home and it pulled comps from a property several towns away that has no reflection on the value of my home. Don't believe the info from Zillow.

On Zillow and the Globe - So you believe that 30% of all people who bought homes in since 2003 owe more on their mortgage then the market value? That's what your article says!

a) most people come in with a down payment when they buy a home.
b) most purchases are not a first home. That means that most purchasers trade their equity up to bigger and better. That translates into a bigger down payment yet.
c) you should be ashamed for posting such obvious baloney.

You are worse then the Herald for printing trash. You should be extinct, and I am sure you will be soon enough. The Globe has lost the handle....

Most people are not talking about another aspect of what caused all this. Homeowners lived beyond their means for years. The racked up tens of thousands in credit card bills, and then refinanced cause they gained so much equity in their house. At the time of refinancing, the rates were going lower and lower so it justified doing it. Then they started charging away again since they had zero balance on their credit cards. 18 months later, they refinanced again, and again, and again.....

Mortgage companies made a killing with all these refinance closing costs, so I do not feel bad for them now that the tide has turned. But we now are all faced with the reality that the great ride of home equity drunkeness is over, and we have to sober up and spend more responsibly.......

In in this kind of an economic climate, many find themselves in this negative equity predicament at the same time that they need to travel afar for other job opportunities because of a stagnant economy. It's a tough situation confrontimg many young hardworking people who pride themselves on playing by the rules.

When we bought our home in 2004, we were comfortable with our 30 year fixed rate mortgage and put 20% down. Thanks to some good career moves on my part, my husband and I do make a better joint income than we did in 2004. However, our cost of living increases, including the costs associated with a preteen and teen (who were much less expensive four years ago), and the costs of oil and electricity, not to mention our huge leap in property taxes, have made things very tight. Throw into the mix an impending divorce (unavoidable -- abusive situation), and the situation is untenable. Ride out the market? I hope I can manage. I believed we were buying a home, not an investment, but it can easily become unaffordable depending on personal circumstances. Also, to note, we do not take vacations, go out to dinner, and squander our money on luxury items -- we live very conservatively. Pointing fingers does not work -- these are difficult times.

So what's the problem. Every foreclosure I see warms my heart as I imagine prices starting to become rational again. Look, it aint gonna get better till it hurts so bring it on I say. The more foreclosures the better, people need to take responsibility for stupidly buying houses that weren't worth what they paid.

Bottom line, let it roll.

What's that you say, another foreclosure? Great!

I couldn't agree with John more. I think Zillow is a big scam. I've seen SO MANY inaccuracies on their site. As far as I can tell, they basically use some multiplier for the tax bill and say that's the value. There's no local market knowledge, which in real estate is everything.

It worries me that they're the source for any story. We're getting awfully lazy when we take Zillow's word as gospel.

Just wait until the Alt-A foreclosures start hitting your neighborhood. Oh wait, everyone that comments here lives in the neighborhoods immune from the housing bubble. I keep forgetting.

People bought homes at the prices they paid because they wanted and needed a home, and that was the market. Nathaniel G, your post is incredibly immature and mean-spirited. What goes around comes around...

#12 is wrong, and #18 is correct-you can walk away from a mortgage loan easily, In addition, the IRS does not care if the eventual bank seller took a bath-they will not try and charge the original borrower with the difference between the sale price and the loser price. Been there, done that. Yes, your precious credit is damaged, but so what? Life goes on, you'll recover. Houston early-mid 80's taught me a lesson-I learned, you will, too.

I would like to clarify the comment about the status of the financial obligation when you walk away from your home. I am a real estate lawyer in Massachusetts with over 30 years experience but will try not to be too technical. In all conventional home loans, the Note the borrower sign is the document that creates the debt and the mortgage is the security for the debt. In the event of a foreclosure, provided the lender sends a deficiency notice (and they always do) the borrower is still liable for all obligations under the note. That includes the principal, interest and thousands of dollars in legal and foreclosure expenses. The borrower is given credit for the amount that is bid at the foreclosure sale. Some lenders are allowing a “short sale” in which the bank will allow the sale to go through with payment of less than the full amount of the balance of the mortgage but, they will often ask the borrower to sign a new note for some smaller amount depending upon the borrower’s ability to pay. There are many factors to consider in a situation like this before I walked away from a home but in this economy some people have no choice and I have great sympathy for them.

People bought homes at the prices they paid because they wanted and needed a home, and that was the market. Nathaniel G, your post is incredibly immature and mean-spirited. What goes around comes around...

In that Zillow uses data from public and town databases for their analyses, their take on price paid vs current value is probably pretty accurate. But they don't look at post-purchase refinancing activity, so their view of the number of "underwater" homeowners may be underestimated. (I agree that their individual market valuations are flawed, however, because they don't and can't consider subjective data in the analysis.)

I had neighbors that paid $200k for their house, but refinanced several times and ended up owing over $400k after several years. What did they do with the refinance money? They bought expensive cars, new furniture, built a media room, traveled, and more. They sold the house for more than they paid for it, but for less than they owed on their mortgages. That's a tough lesson that many are learning now - lenders as well as homeowners.

I have no sympathy for the lenders and mortgage brokers that pushed the interest-only ARMs on people, and not a lot for those arrogant buyers who jumped into these things planning a windfall after a couple of years, but I DO feel for the many who were taken in by the unscrupulous or lost their jobs and are now in trouble.

Foreclosures are not something to gloat about, Nathaniel. They are a sure sign of an economy in trouble and a wake-up call for improving ethics in business. And if people remember the difficult lessons, then things should be more rational after we get through this period. (And if those who made fortunes on the backs of naive buyers can be held accountable, all the better.)

Nathaniel - Up until the last year, over 75% of all foreclosures were due to a family or medical emergency. Like a death, a terrible illness, or so on. The media suggests the landscape is littered with people who spent vast unjustifiable money on a home, then spent it all the equity on vacations and Hummers, and now will walk away. However, if you go door to door, you wont find many of those people. They are out there, but the reality is that this was not the norm.

No community is comppletely immune from this. But the reality is that you are going to see 50% price declines in some areas, and 10-15% in others. Why spent 200k for an old place in Dorchester with bullets flying over the porch if 500k gets you a small ranch in a Wayland culdesac? The price gaps between communities makes no sense and will grow. In the end, you will see that lose lending, and a political pressure to lend even more losely to residents in failing communities, is going to lead to very different home price depreciations based on community. The wealth gap is about to grow a lot more, and as usual its thanks to the government trying to fix it.

Whining about foreclosures is becoming tiresome. It's not a tragedy when a borrower is freed from a debt he cannot afford to repay, especially when he can replace an expensive mortgage with cheaper rent. The original tragedy was extending the mortgage in the first place.

Oh, and anybody who claims the underwater homeowner problem is just a media creation needs to read the news today about Countrywide.

#12 is correct. If your property is forecolsed on and the sale proceeds does not cover the entire debt, the borrower still owes the money. The first thing you sign is the NOTE which is the contractual promise to repay. Read the terms of the note. The MORTGAGE is signed next, which conveys a power to sell the property if you do not comply with the repayment terms of the note. Once the property is foreclosed upon, the MORTGAGE is discharged, but the NOTE still exists. If there is a deficiency, you still owe the deficiency amount, which can include all legal; and foreclosure fees, unless a deal is struck with the lender for less. A bank may choose to forgive a small deficiency if the cost of collection is too great. The IRS has nothing to do with this process.