Study Finds 20 Percent of Mortgage Underwater – I say so what?

From my Realtor email newsletter today:

Nearly 20 percent of home owners owe more on their homes than their properties are worth, finds a new study by First American CoreLogic. About 8.31 million properties were underwater at the end of 2008, up 9 percent from 7.63 million at the end of September. Corelogic predicts about 2.16 million properties will be underwater if home prices fall another 5 percent. The problem is the worst in Arizona, California, Florida, Georgia, Michigan, Nevada, and Ohio.

Nationwide, 68 percent of U.S. adults own their own homes, and about two-thirds have mortgages.
Source: Reuters News (03/04/2009)

So what? Being underwater is not the same as not being able to make the payment. You know, we keep hearing politicians and talking heads and consumer advocates using the term “under water”, as if this is something new and to be avoided.

The truth is, most people are under water on just about everything in life, and there has never been the sort of outcry about it that we now hear. Under water on their new car 2 minutes after they drive it off the lot. Under water on just about everything they purchase, including new furniture, clothing, boats, vehicles, computers, TVs, video games, etc. – all loaded up on the credit card.

Where is the bailout plan to cram down those 7 year auto loans so people are not “under water” on the car? Hmm?

Where is the bailout plan to help people cram down the balances on credit cards so they are not “under water” on their furniture and clothing. At least the mortgage interest rate is probably less than 7% compared to 12% to 26% on the average credit card payment. And the mortgage interest is tax deductible. And whether it seems like it now or not, the value of all that real estate will go up again, unlike the consumables that most people borrow money to purchase, and don’t seem to mind being “under water” on.

So when I hear a politician say that some average American is “under water” by 20% on their home loan, I’m sorry, but I still have to say “who cares?” Just stay there and keep making the payment, and be greatful you have a job and can still afford your payment. And in 5 years, when you’re still in year 6 of that 7 year auto loan, and the car is worth 15% of it’s original value, you’ll have equity in your home again.

On Nightline one night the reporter never even asked the Arizona woman who was griping about her decreased home value whether or not she still had her job and why, if she’s still making her payments on time, she thinks the government should pay off part of her mortage just so she can feel better about it. Lousy reporting. Not asking the right questions. Instead, just focusing on the depreciated value of the home and ignoring the fact that Americans have been living “under water” on just about everything other than real estate for the past 20 or 30 years.

The only thing that makes a mortgage payment different is that it’s actually a better form of debt to have than the consumer debt that most people don’t think twice about accumulating.

I tell my kids the only thing they will need to know about money when they are out on their own someday is:
1) Spend less than you make and invest or save remainder. In other words, live beneath your means, always, forever.
2) Never borrow money to buy things that depreciate in value over time, ever. Save and pay cash, or don’t buy it.
3) Guard your credit rating. Always pay back what you agreed.

Most Americans don’t follow these 3 simple rules and now want the rest of us who do to subsidize getting them above water on their mortgage. As one of my southern cousins from Georgia might say, that ain’t right.

39 thoughts on “Study Finds 20 Percent of Mortgage Underwater – I say so what?”

  1. That’ll have quite an impact on your buyer pool, don’t you think? Many people won’t be able to relocate when they need to for work. Move-ups will be pretty heavily hit.

    If you assume a $200,000 house loses 20%, that’s $40,000 that a family needs to come up with just to move. The other “underwater” items you discuss involve smaller amounts that can be spread out over time.

    Also, with 4% appreciation, the house will get back to value within 5 years, but the owner won’t have any equity. And if the economy stays in the tank and we take a more conservative 2% appreciation, you’re looking at more than 10 years before it gets back to value. That’s not going to affect your business?

  2. “And in 5 years, when you’re still in year 6 of that 7 year auto loan, and the car is worth 15% of it’s original value, you’ll have equity in your home again.”

    There are some assumptions built in to this statement that smack a bit of cheerleading. If real estate values stayed flat, from where they are now, for 5 years; it is very unlikely that anybody with a brand new loan would make up enough ground to be above water given how little principal is paid at the beginning of the loan.

  3. I completely agree Steve. Give the Congress Critters enough time – the bail outs for the credit and auto loans are surely on the way! Right now they are still busy creating the chaos of crisis.

  4. Another way to put it – if 35-40% of households in southern California are underwater, who’s going to be moving to Austin and supporting house prices here?

  5. M1EK, my main point is that the media constantly draws focus to the wrong elements of these sort of problems. It’s the term “under water” that bugs me. An investor who in 2007 put $100K into the stock market is under water $50K today. Should there be a bailout for those investors? No, because it’s a part of life that we win or lose on our financial decisions.

    But for some reason, we want to treat home equity differently, and say that negative home equity is an unacceptable tragedy when in fact it’s something that time will cure, and faster than most people realize. What’s going to happen in these worst areas is that people who are under no economic stress other than the mental anguish of negative equity will stop making payments so they can get 90 days behind and qualify for “help” that they don’t need or deserve.


  6. Steve, your sentiment is shared by millions of other “play-by-the-rule” home owners who felt that they are doing everything right, and yet they are somehow liable for some irresponsible neighbors down the road who are in danger of foreclose their homes. I felt the same way.

    However, you really should look at the bigger picture. The home mortgage crisis is causing a chain of events that’s causing the near collapse of the world financial system. We don’t know what’s gonna happen if governments around the world stop their emergency measures and “let the market run its own course”. However, one possible outcome will be as bad as the 1929 crash or even worse. By that time, you and I will be affected big time.

  7. Most homes containing negative equity are those where the buyer of the home either placed no money down, or a trivial amount of downpayment and/or refinanced to take money out of the home to finance largely the purchase of non-productive/depreciating assets. The statistics are bearing out that those purchasers who put a 15% or larger downpayment on a home are not allowing those properties to go to foreclosure or walkaways, even when those properties are underwater from a loan to value standpoint.

    I would take the position that having a large % of the housing stock underwater is a problem with the housing market. I just take serious issue with the policies being pursued to assist the country in working through the problem. In essence, we are providing households with unsustainable credit problems with more credit in hopes that over time they will work things out. Rather than assisting them to liquidate the unsustainable and unhealthy debts that are a constant emotional burden. Further, the government continually avoids hard choices necessary to liquidate the bad debts and insolvent entities clogging the economy from housing, to banks to autos, and rather choosing to shuffle these debts to the Fed’s balance sheet or to quasi-nationalized companies that the government shelters via public ownership.

    All we seem to get is class warfare geared programs to transfer wealth to the insolvent borrower rather than those to encourage those with capital to place those resources at risk to fill the void, acquire properties and create businesses and jobs.

    I would guess that we are in about the 8th inning of the credit crisis, but only the 3rd inning of the broader economic crisis. We are morphing from a lack of lending to a lack of jobs. If the levels of wages and employment continue to shrink, and debts are not liquidated, our society is faced with lower aggregate wage cashflows to finance our huge aggregate debt levels. That issue will not be solved by propping up underwater homeowners, failed business models, or creating government jobs (where tax receipts are in decline). We have to encourage capital to come off the sidelines, be put at risk and be allowed to reap the rewards and create those jobs/wages and profits necessary for growth, prosperity and a healthy public purse via the corresponding increase in tax revenues.

  8. I’m glad that I’m not the only one who questions this “underwater” canard.

    It’s simple really, you can either
    1. Pay your mortgage
    2. You can’t

    If you were depending on refinancing a horrible mortgage in order to obtain solvency, then you are likely doomed anyway.

    What I am really (really, really, really) concerned with, is the fact that any “save the homeowners” plan will, at best, keep millions of Americans in homes they can barely afford. That will mean millions of Americans who cannot
    1. Buy new cars
    2. Invest in markets
    3. Buy televisions, furniture, or any other goods that keep our economy chugging along

    If these same people had house payments that better fit their income, they would have excess money. The economy would grow again, rather than entering a persistent pattern of stagnation. It will be hard for anyone to get ahead when so many are struggling just to get by.

  9. Steve,

    To answer your “So What?” question; the reason it is so perilous right now is because of the destruction in jobs that is going on. That’s the problem right now. People AREN’T going to be able to make payments if they lose their jobs and exhaust their savings, which is exactly what is going on right now. It’s the combination of being under water, plus job losses, plus having insolvent banks take over the properties and being forced to sell that will drive prices significantly lower from here.

    January unemployment data is finally out from the Texas and boy they are ugly.

    The numbers speak for themselves. It’s terrible and the employment numbers in Texas is catching up with the rest of the country.

    Let’s look at the Austin numbers relative to other Texas cities. We can see that the job market has started to collapsed in Austin. Unemployment jumped MORE THAN FULL PERCENT IN JUST ONE MONTH! We went from 5.2% in December to 6.4% in January.

    That’s a stunning increase and what I have been warning about constantly for the past few months. I’ve been saying the unemployment rate in Austin is going to double (from 5%-10%). Many people here said it’s “unrealistic”. Well folks, it’s in the process of happening right now. I have been warning that we may see a collapse in the job market in Austin.

    We are still better than Dallas, about the same as Houston, but now worse than San Antonio. This is a significant change as the Austin job market use to be strongest out of all of them. We lost 10,000 jobs in Austin in just 1 month.

    What happens if this continues for another 6 to 10 months? There’s another 100K jobs gone from Austin.

    Out of those job losses, how many of those are homeowners?
    Now think about what is going to happen to their homes in 3-6 months when they run out of savings to pay the mortgage? Their bank will own the home. Are the banks in any position to hold onto this property? One look at the news headlines tells you the state of our nations banks. They must sell to raise cash in order to stay solvent.

    Unless you can get a deal far below the market, it is best to stay on the sidelines because we are going lower first before we go higher.

  10. > What I am really (really, really, really) concerned with, is the fact that any “save the homeowners” plan will, at best, keep millions of Americans in homes they can barely afford.

    What I think should be done in the case of these owners who are hanging in there, but at risk of future default is to reset their mortgage to a more affordable amount, but on a different home that they can afford.

    So, in a California neighborhood where the owner bit off more than they can chew, and are in an $800K home now worth $500K, instead of cramming the mortgage principle down to $400K, let the borrower get a new loan on a $400K home and move. And the rule could be that you have to downsize into a foreclosure, or no deal.

    But the idea of me and you buying down the mortgage on someone elses home, just so they can afford to stay, offends me.

    There are a lot of out-of-the box ways to approach what is essentially a massive game of musical chairs, only with homes.

    Then, as Todd says, make it so investors start purchasing the leftovers and renting them out to people unable to obtain a mortgage, which is what the rental market is there to do. We essentially converted a lot of renters, who should have remained renters, into buyers between 2001 and 2007. Many of them need to go back to renting, where they belong. The home ownership rate in the U.S. is just fine at about 60%. Misguided politicians thought they could score points by driving it to 70%, and we see how that turned out now.


  11. >There are a lot of out-of-the box ways to approach what is essentially a massive game of musical chairs, only with homes.

    Most of the approaches being implemented, unfortunately, lock in homeowners to barely affordable mortgages. These schemes also lock out potential buyers, who know the market needs to come down in spite of government interference. Until that correction occurs, everyone is left waiting, and the economy stagnates.

    The irony is that the two groups being rewarded in the bailout scheme are precisely the ones who should be paying the most.
    1. The homeowners who moved into an unaffordable house.
    2. The investors who bought mortgages (or securities backing them) for these questionable homeowners.

    In order for capitalism to work, people who make bad investments have to lose their money. If there is no risk, resources will not be properly allocated, and everyone will go for the get-rich-quick scheme that does not work, instead of working hard for secure returns.

    The big issue, which no one seems to know how to address, is how to let these 2 groups (homeowners and investors) pay for their mistakes without dragging everyone else (banks and insurers) down with them.

  12. It’s really simple, folks: Homes being underwater is qualitatively different than stocks being underwater because it prevents people from moving to where the new jobs might be. It hurts our ability to recover from economic downturns like this one. The 1981-1982 recession did NOT have large chunks of the populace significantly underwater, with a few anectdotal exceptions.

  13. Steve, thanks for this great information. It is very thoughtful, as usual. I just wanted to say that I think sellers and listing agents are doing the market a great disservice by continuing to insist on listing prices as if nothing has happened in the equity or credit markets. I am a highly qualifed potential buyer with a great income (top 2%), no debt, FICO of 780, and an ability to close very quickly. There is NO WAY I would EVER EVEN LOOK AT most of the houses being listed in my price range ($1 mm plus) in area 1B because the sellers are all asking way, way too much–some north of $400/sq ft and almost nothing less than $300. Sellers need to realize that with (1) the possibility of losing a portion of the mortgage interest deduction; (2) historically wide spreads between conventional and jumbo mortgages; and (3) serious concern about asset price deflation, there is NO WAY any rational buyer would buy a house priced as if it were still 2007 or 2008. In my view, prices need to come down by at AT LEAST 25% on houses currently priced north of $1 million.

  14. Hi Romone,

    I don’t disagree with your assessment of the $1M+ homes. If more agents would refuse those listings, sellers might get a clue, but I doubt it.

    Sylvia had an expired listing appointment recently on a home that was price $1M+. I did an analysis on it and priced it at $950K, but thought it would actually sell for less than $900K. The sellers wanted to hold out for $1M+, despite ample data and evidence to the contrary, so we walked from the listing.

    There are a lot of agents who take over priced listings, for a lot of reasons. Some know they won’t sell the house, but that they’ll make a buyer sale or two on the traffic generated by the listing. Others simply don’t have the nerve to walk away or argue the price with seller, and other simply don’t know how to price a home.

    But you’re right. It’s a disservice to the seller when over priced listings are taken.


  15. Leon, you need to look at the data, instead of just believe what other people say.

    From Texas state number, Austin lost only 4K job Jan 2009 over Jan 2008, out of around 800K total jobs.

    And as the number is not seasonally adjusted, there is really not surprise that Jan’s big drop over Dec, as there are many temp retailer jobs in Dec.

  16. Umm Steve,

    I think you need to look at the data more carefully. Look at the unemployment rate from Jan 2008 vs. Jan 2009. Look at the number of people unemployed this year vs. last year. Also look at the CLF (Civilian Labor Force).

    Yes, we lost 4K jobs vs. Jan 2008, but the CLF increased 17K. That’s bad. Job growth should be at least keeping up with population growth. It isn’t. That’s more people competing for fewer jobs.

    Despite increasing population, we lost jobs vs. last year. The unemployment rate was 4% in Jan 2008. We are now at 6.4%. There are 21K more people unemployed in Austin Jan ’09 vs. Jan ’08, despite the labor force increasing only 17K.

    What’s more disturbing is that the unemployment rate is ACCELERATING to the upside. In other words, not only is it getting worse, even the rate of change is getting worse.

    I can’t see how this is not going to start hitting the real estate market 6 months to 1 year from now…

  17. The problem with being underwater on your house vs underwater on your car is a function of scale. If you are underwater on your house by a a couple hundred thousand — and your investment was a small percentage of the purchase price (even nothing down) — you are better off walking away from the house if you can find a place to rent for a lower monthly payment. Why keep making payments on a house that will not generate any equity? In those markets that had a huge run-up in price — fueled by cheap loans — the foreclosures are understandable.

    I don’t like the bailouts — it rewards bad behavior. But I am unclear that the alternative of doing nothing is better.

  18. Leon, where those increased workforce come from?

    Again, Austin is only losing 4K out of more than 800K job, which is less than 0.5%; while the nation lost almost 3% of jobs.

    And if it takes Austin one year to lose 0.5% of job, do you think it will take another 10 year to hit your prediction of double digits?

  19. Steve,

    The increased workforce comes from population growth. You have to look at the number of jobs in relation to your population to come up with the unemployment rate. It will not take 10 years to double unemployment. Look at how unemployment jumped from 4 to 6.4% in just a year. Also, there are fewer jobs supporting more real estate as the real estate stock increases due to new construction.

    National unemployment numbers for February shows we lost another 650K jobs. Unemployment now stands at 8.1% for February compared with 7.6% in January. It was 4.8% in February ’08.

    Based on the national numbers, we can be pretty sure Austin’s unemployment rate is already at or above 7% at the moment.

    The graph here tells the whole story about the collapsing job market:

    There’s not even a leveling out of the unemployment rate. If anything, the slope of that chart is getting steeper, which tells you the unemployment rate is still accelerating higher.

    So yes, we are doing relatively well compared with some other cities that have declining jobs and population (i.e. Detroit), which is an absolute disaster for real estate. At least our population is still growing.

  20. Leon,

    Austin is expected to add about 2,000 jobs net in 2009. That’s from Angelou Economics and a couple of other sources I’ve read.

    2010 and 2011 are expected to pick back up to job growth rates of 2005/2006.


  21. If you are underwater on your house by a a couple hundred thousand — and your investment was a small percentage of the purchase price (even nothing down) — you are better off walking away from the house if you can find a place to rent for a lower monthly payment. Why keep making payments on a house that will not generate any equity?

    Why? Because you signed a contract! Where’s your integrity? Presumably your purchased to LIVE in the home not to just generate equity! The root cause is staring you in the face. Lack of follow through, lack of integrity and greed – those walking away from the mortgages are just as much to blame and are just as greedy as those who originated those bad mortgages.

    It is always easier to walk away than to stick to a commitment you made. I thought the latter was the American way. I fear we have certainly lost this.

  22. Hey Steve,
    Let’s go back to your $800k Cali house example. I’ll humor you and allow the owner to purchase a foreclosure for $400k (that likely needs lots of work due to the prior owner trashing it). Now, who is going to purchase the $800k home and more importantly at what price? Let’s say it is up for sale at %75 of the amount due – $600k. The lender/note holder still has to eat a $200k loss, but let’s forget about that. The question is who is going to purchase this original $800k house? At least it is probably now at a price that they can get Fannie/Freddie to buy the loan, but the new purchasers is still going to pay at least %0.5 more on the mortgage rate. But back to the who? A long time renter – they will probably wait for the bottom and price to head slightly up. The move-up buyer – not likely there are many of these that aren’t underwater. The wealthy buyer – looking to downsize, but they have a bigger issue of who will buy their home, and the mortgage rate probably might be even worse. The investor – not likely, rent will be quite high, so I think it’d be difficult to get a cash flow, even long-term, since the pool of qualified rents is much smaller when you are likely talking about $5k a month in rent. Getting long term appreciation on a large price tag house is like putting all your eggs in the same basket, so the likelyhood of it is lower.

    Steve, I think you have a good suggestion to move people back down the affordable housing chain, but it likely won’t work.

  23. I think Anon has a crucial point, “Presumably your purchased to LIVE in the home not to just generate equity!”

    If housing prices plummet, but you are still able to pay your mortgage, you would not necessarily ditch the house. Why? Are you planning on trading up?
    1. You liked the house enough to buy it in the first place
    2. You will have difficulty getting a new mortgage if you abandon your first one, and you aren’t going to get a decent price if you sell (i.e. no trading up)
    3. If you honestly believe the market is heading south, you will not want to buy in again. Better to just wait it out in your current abode until it hits bottom

    Buying a house and moving is an enormous hassle. You have to have cash up front, and it is a great waste of time. I would suspect that almost no one is going to abandon their house just because it is underwater. They abandon because they cannot make the payments.

    Hell, in Texas it is almost impossible to know whether you are really underwater or not. You could do a hypothetical CMA for your house, but it may not be valid. You don’t even really know if or how much you are underwater until you sell.

  24. I could not agree with the posting any stronger. There are no promises in life. Most assets go down in value and no one complains about it. The “scale” issue of a car versus a house is irrelevant.

    If your house goes down in value, so what. Butch up and deal with it. In my mortgage closing, I signed a written contract where I promised to pay back the principal and interest. There was no clause or language that said I only have to do this if the house does not lose value or if I’m not “underwater”. It is a contract between me and the lender. They agreed to loan me the money and I agreed to pay it back with interest.

    While it might be a financiall prudent thing to walk away; it is not the RIGHT thing to do. Is anyone else offended at this level of irresponsibility? How anyone could look themselves in the mirror or into the face of their child after doing so with out incredible shame is beyond me.

    To “help” with the negative equity issue will only force the banks and their investors to “eat it” which will then be forced on the responsible taxpayers. Sorry, you took your risk, you made your bed, you will now have to sleep in it!

  25. -If housing prices plummet, but you are still able to pay your –
    -mortgage, you would not necessarily ditch the house. Why? Are
    -you planning on trading up?

    Or you luck out and are one of the many losing their jobs and, afford or not afford your house, the government will step in to help. It is frustrating, I know of two people that bought too much house in central Austin and had the unlucky event of being laid off. They both are now getting their interest rates reduced to around 3% and one is getting his mortgage note reduced by 18% because he has no equity.

    Buyers waiting for a bottom are going to have to wait longer because the more layoffs the more secure people are in their home, at least in the government runs out of money, which doesn’t look to far off.

  26. Yes, but what about investors? Where is their incentive not to walk away from an investment gone bad?

    In other news. expect more local layoff announcements next week.

  27. All this back and forth.

    Steve is definitely biased. Don’t blame him. He obviously makes a living off real estate and has a lot of investment property. He has to look on the brighter side of things or else the poor guy isn’t going to sleep at night.

    Leon is Mr. doom and gloom. Trying to become the next Meredith Whitney of Austin real estate. 😉

    The real answer is somewhere in the middle. Austin isn’t immune. I see downward prices for the next year, then stagnation at bottom for 2 years. Under 300K price points, relatively unscathed.

    FWIW- I almost put a bid on a 1B property with a motivated seller. My agent did the comps from the last 6 weeks. What little comps are out there are surprisingly low. I’m going to re-evaluate my bid over the weekend. Even if I low bid, I expect to be taking on some down market risk……but, it will be somewhere I’m going to live for a long time.


  28. Just a heads up – I’ve started working through the February Austin real estate stats, and average sales price is up 6.5% and median sales price is up 2.5% over Feb a year ago. Our Austin real estate market seems to be as jerky as the stock market, up one month, down the next. Hopefully I’ll get the full stats up later tonight, but I have THREE different sets of buyers I’m showing today and one offer to get signed, so things do NOT seem slow around here.

  29. M1EK – In the eighties I lived in Houston where hundreds, likely thousands of people were underwater on their mortgages. It was exactly like what is happening now except there were a few less people involved because loans weren’t as easy to get back then.

    It’s courage and strength to make good decisions that improves people and the economy. It’s not about bailing people out. Heck I’ve been home shopping around the entire U.S. for the past 2 years looking for “good” investments that are on our path. I’ve found very few because people are HOLDING their prices. Even in MIchigan (no, not Detroit but in the scenic nice areas).

    Besides, do you bail out your child every time they are unhappy with a situation they create? “That’s okay Johnny, you don’t have to clean up your room, we’ll still give you television time and dessert after dinner because we care about you and we’ll even clean up your room FOR you.”

    Steve – haven’t you heard – suddenly the “economic crisis isn’t so bad”? “It’s a good time to invest in stocks.” Obama said so.

  30. > Steve – haven’t you heard – suddenly the “economic crisis isn’t so bad”? “It’s a good time to invest in stocks.” Obama said so.

    I heard!! 🙂
    We’ve been writing offers all week. It’s just hard to get anything to stick right now.


  31. Kelly, I was not advocating a particular course of action, but rather disputing the pronouncement that being underwater on a mortgage isn’t a big problem for the person who’s underwater.

    If I were to sum up my feelings, it would be: “yeah, sucks to be you”, rather than the, paraphrased, “it’s not a problem!” Steve said.

  32. > If I were to sum up my feelings, it would be: “yeah, sucks to be you”, rather than the, paraphrased, “it’s not a problem!” Steve said.

    What I meant was there is a different between being under water and not being able to afford your mortgage payment. If someone can’t make their payments, that sucks whether they are under water or not. Since it costs roughly 10% of a sales price to sell a home, even people with 10% equity are theoretically under water from a cash-at-close standpoint.

    I’d rather be under water and still have a job and ability to make payments than have no job and 50% equity and forced to sell in a soft market.


  33. Yes, in the scenario where you have some ability to protect your job.

    The point is that there’s a loss in the mobility we assume we have so much more of than the Europeans when people are underwater (you have a lead on a new job in Houston, home is in Detroit; there’s no way you can afford to go if you’d take a $100K bath in the process).

  34. Hi everyone! This is my first blog comments, so please don’t kill the messenger.

    I have been in real estate since 1999 in the Austin area. About 3 years ago I started getting specialized training for short sales/pre-foreclosure sales. I had seen the trend for about 18 months that home owners were having trouble selling their homes because they had no equity and no cash to bring to the closing table.

    It was very clear to me why this was happening – volume builders/developers were purchasing large tracts of agricultural land (very low tax base) and then quickly developing subdivisions on that land. They (the developer) were also the builders of the homes and had their own sales offices with their own sales people. They offered large incentives to the buyers who used their lender and their title company. The sales people were encouraged to “prequalify” these buyers for the homes with their lender. Most of the sales people I heard over the years were eager to get the buyers into the very most expensive home they could convince the buyer to purchase. The usual sales talk I heard was “you can refinance in a year or two at a lower rate” or “next week the price is going up” or “we have this great no money down and no closing cost loan”, etc. After sitting through one of these sessions with a buyer I realized why the sales reps wanted agents to just register their clients and then leave. They never once tried to explain the consequences of the loans or what would happen if they couldn’t refinance in a year or two. They never explained what an ARM was or that the property taxes were going to go from $37 a year to $3,500 a year because now the property was not agricultural any longer. The buyer didn’t ask these questions because they didn’t know enough about the loan process to realize they needed to ask the questions.

    I stopped the sales person when they started the “close” and asked the buyer if they understood what kind of mortgage they were going to be getting. I asked them if they understood about the no down payment and what it would mean if they had to sell their home in a year. I asked them what an ARM was and if they knew how it worked. I asked the sales person if they had used the adjusted tax amount when giving the buyer an estimate of what the monthly payment would be. I asked the sales person if the loan had a prepayment penalty that would keep the borrower from being able to refinance in a year or two. I explained to the buyer that if they did the no money down and put the closing costs on top of the loan that they would not have equity in their home for over 5 or 6 years at best, probably longer. I explained that it was my responsibility to give them the most accurate information possible so they could make an informed decision about buying a home. I was not that sales persons best friend any longer! I have not sold very many new construction homes over the years, even though the builders offer huge commissions and bonuses to agents that will bring them buyers. The new homes I did sell, all the buyers heard the “informed speech” before they signed the papers.

    Over 41% of ALL mortgages written in the last 5 YEARS are on homes that are no longer worth the amount of the loan. I think the largest number of these loans were originated in the subdivisions I just talked about. The homes that were financed by the builders lender and closed in the builders title company could be appraised for any amount and the buyer could be qualified if they were alive. Those lenders sold those loans before the ink was dry. The builder/developer was paid, the sales person was paid, the title company was paid and the new home owner was happy until the tax appraisal doubled their payments because now there was a house (Overpriced) on that vacant land. The owner was also a year behind in the escrow of taxes. Then the owner struggled to make the payments until the ARM was going to adjust. They began trying to refinance that loan and learned that there was a prepayment penalty and it would cost thousands of dollars to get a new loan with the same lender. So the ARM adjusted and the payment doubled again. They made a few payments using all their resources and then missed a payment. Now they had no way to refinance because their credit scores were going down because of the late or missed payments. The snowball was now an avalanche going downhill! If there was an illness or loss of job, the avalanche buried the homeowner.

    I don’t know who is to blame. I do know that even home owners with very good credit when they purchased their home have now ended up in the same snowball going down the hill. I also know that way too many people were “qualified” by fraudulent or unethical means for loans they should never have gotten. I also know that those same loans were bundled and sold as mortgage backed securities without any oversight on whether they were prime or subprime loans. I know a lot of people made a whole lot of money in this mess and now the taxpayers are paying the bill again.

    I just keep doing what I can to help people sell their homes. Working with the same lenders that created the mess is not easy. Short sales and pre-foreclosure sales are difficult and most agents don’t want to mess with them. The home owners that I have worked with are not the “just walk away” or “trash it” kind of people. An elderly woman that just wanted a newer home because the old home needed so much maintenance and she couldn’t do it any longer – she didn’t understand the ARM she was sold. The family with the disabled child that couldn’t continue to make the payments when Dad was laid off for several months. The wife whose husband was killed in a car crash just after they bought their “dream home”. The young couple that were convinced by a sales person that they could refinance the loan in a year. A couple that ended in a divorce after years of marriage. The family that was transferred out of state to keep their jobs, but had to sell their home here. The list goes on and on, but it doesn’t get any easier.

    Short sales give these home owners a way to save a little of their credit and dignity. They are trying to honor the agreement with their lender, even if not to the full extent. The homes are then sold at the current market value and purchased by someone as their new home or by an investor as a rental property. Most of the defaulted loan comes off the lenders balance sheet and frees up funds for further lending. I just try to look at each transaction as my way of helping the economy get better.

    Pam Jernigan, Realtor
    Keller Williams Realty

  35. “It’s really simple, folks: Homes being underwater is qualitatively different than stocks being underwater because it prevents people from moving to where the new jobs might be. It hurts our ability to recover from economic downturns like this one. The 1981-1982 recession did NOT have large chunks of the populace significantly underwater, with a few anectdotal exceptions.”

    I could not agree more! My area (South Florida) has been hard hit by the bust. My own home, purchased with a healthy downpayment and fixed rate mortgage, is presently underwater by at least $100,000. I have a good job but friends in similar situations are not so fortunate. The area is devoid of professional jobs, but anyone who bought between 2003 and the present is underwater and trapped down here. No wonder they have to short sale or walk away.

  36. An interesting solution to the underwater equity problem and opinion on moral judgements on strategic walkaways-

    from an academic paper by Brent T. White, associate professor of law- Univ. of Ariz.

    “Regardless of the precise policy prescription, it is time to put to rest the assumption that a borrower who exercises the option to default is somehow immoral or irresponsible. To the contrary, walking away may be the most financially responsible choice if it allows one to meet one’s unsecured credit obligations or provide for the future economic stability of one’s family. Individuals should not be artificially discouraged on the basis of “morality” from making financially prudent decisions, particularly when the party on the other side is amorally operating according to market norms and could have acted to protect itself by following prudent underwriting practices. The current housing bust should be viewed for what it is: a market failure – not a moral failure on the part of American homeowners. That being the case, it is time to take morals out of the picture and search for an equitable solution to the negative equity problem.”

    I wonder if his suggestion of eliminating deficiency judgement/making national non-recourse, and to amend the Fair Credit Reporting Act to prevent lenders from reporting mortgage defaults and foreclosures to credit rating agencies would not help stem the foreclosure process (by encouraging more renogotiations) while avoiding future foreclosure crises (by letting lendors know that they do in fact have some risk to manage).

    Your thoughts?

  37. Well, here’s my issue:

    I have NEVER missed mortgage payment…NEVER. Because of the current housing crisis, and the slew of foreclosures on my street alone, my value has dropped about $30,000 below what I owe. No problem…I really wasn’t worried until I lost my job last June. (I still haven’t missed a payment.) We will be moving to find viable work, and this is when the “under water” deal becomes a problem. This is when it goes from “who cares” to “I care.”

    Any suggestions?


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