Not understanding the underwater concept

[inneedofhelp]

So, I understand that a person buys a home, and the home may lose value and be worth less than the value of the home.

I also understand (and have researched) the numerous schemes and tricks and general nastiness that occurred and had people have loans where the interest rate would suddenly double after a certain amount of years. I feel that those people that were misinformed and or cheated (and my heart goes out more to the first time home owners from low-income areas, as they were targeted a bit more) should receive some help as I feel a lot of hands were in the take, so to speak, on making money off of their ignorance. Also, numerous studies show that people from specific ethnic groups, etc., were given bad loans, when they had good enough credit to get a more reasonable fixed rate.

The thing that baffles me are those that want out of their loan because they are now underwater. Is there a part of this equation that I am missing? I am not a homeowner, so I may not understand things, but it is my impression that housing prices rise and fall, and if I buy a home, I am agreeing that it is worth the price it is being sold for, or worth what myself and the seller can negotiate.

What I don't understand is trying to renegotiate the loan because the value has dropped. To me, that is kind of odd (I buy clothes at a certain price, and once i wear them, they are no longer worth their original price). Does something happen to the mortgage itself when the house is underwater?

Again, I don't agree with those there were victimized under predatory lenders, and as person from a bunch of the groups most victimized, I understand how confusing the whole process of buying a home can be.

[boosami]

The thing that baffles me are those that want out of their loan because they are now underwater. Is there a part of this equation that I am missing? I am not a homeowner, so I may not understand things, but it is my impression that housing prices rise and fall, and if I buy a home, I am agreeing that it is worth the price it is being sold for, or worth what myself and the seller can negotiate.

Here's are some examples:

Bob can afford a $1,000 a month house payment. So, he mortgages a home that costs him just that. A few years later, the interest rate has adjusted a few times and the payment has gone up 50%. Additionally, the housing market has bombed so he owes more than the home is currently worth. Now Bob has to pay $500 a month more than he can afford to keep his home. To get a lower rate, he needs to refinance the mortgage. But, since his home has dropped in value and is now underwater, no bank will refinance the loan. He is now stuck and needs to get out of the mortgage or else he will ultimately default on the loan.

Or maybe Bob can afford the extra $500 a month, and realizes that since housing prices are depressed he can get twice the home for the same amount of money he is paying for his existing home. This is another motivation to get out of the underwater loan to a more potentially profitable future situation.

Or maybe Bob has a fixed-rate mortgage, but he has owned the home for a few years and needs some desperate repairs done. He has no money, so he could normally take a loan out against the equity in his home. If it is worth less than the amount owed, there's no equity to borrow against. Once again, he needs out of the original loan somehow or the house will fall into complete disrepair.

There are lots of situations where an underwater mortgage can be a bad thing. And at the same time, if you can afford and are content with living in your home and don't need to use any of the equity, you could care less what it's worth in the current market, underwater or not.

[KTP]

I would maybe be ok with modifying home loans to make them "above water" IF when the house is later sold this money plus some amount of interest is taken out of the profit and goes to the entity that did the modification (be it the government or private investors).

Example. California home loan is $400,000. Current value of home is $300,000, ie, the homeowner is 100,000 in the hole. If we modify the loan down to $300,000 so they don't owe more than it is worth, using taxpayer money (my and your money) then it seems only fair that when the market recovers (and it always does) and this home sells for $600,000 that the $100,000 plus some amount of interest goes back to us as taxpayers.

[jasonnoguchi]

The point of view of the mortgage bank is risk control.

A bank or mortgager requires you to pay a 30% downpayment for a housing loan so that when you don't pay, there is a 30% "guaranteed" equity built into the house which they can recover by auctioning it off super cheap. However, when the value of a house drops, there is no more guarantee the new 30% of the house price is worth enough to meet their risk control needs, therefore a top up would be needed or the loan "renegotiated".

[Seeker]

I would maybe be ok with modifying home loans to make them "above water" IF when the house is later sold this money plus some amount of interest is taken out of the profit and goes to the entity that did the modification (be it the government or private investors).

Example. California home loan is $400,000. Current value of home is $300,000, ie, the homeowner is 100,000 in the hole. If we modify the loan down to $300,000 so they don't owe more than it is worth, using taxpayer money (my and your money) then it seems only fair that when the market recovers (and it always does) and this home sells for $600,000 that the $100,000 plus some amount of interest goes back to us as taxpayers.

The problem sometimes too is that the homeowner may need to move on and leave the property for other reasons (ie maybe they lost their local jobs and have found other viable workplaces, but cannot or will not make that 100 mile commute).

The housing market "always does" recover, but this time, how long will it take?

No one really truely knows, and if people cannot afford their homes now, how are they going to stay long enough to see that potential recovery in the future?

[wincrasher]

While the concept of a home value going "up and down:" is understood by you, the vast majority of people are still freaked out by it.

Since WW2, housing prices all over the country have continued a steady march upward in value. That is still the nation's mindset and I don't think people will give up on that. They are still holding onto hope of a return to "normal".

Without home pricing recovering, people don't have any confidence in the economy and certainly don't feel as "wealthy" as they have in the past. Maybe this is good long term, but probably not if you work for a living.

[cptacek]

The thing that baffles me are those that want out of their loan because they are now underwater. Is there a part of this equation that I am missing? I am not a homeowner, so I may not understand things, but it is my impression that housing prices rise and fall, and if I buy a home, I am agreeing that it is worth the price it is being sold for, or worth what myself and the seller can negotiate.

What I don't understand is trying to renegotiate the loan because the value has dropped. To me, that is kind of odd (I buy clothes at a certain price, and once i wear them, they are no longer worth their original price). Does something happen to the mortgage itself when the house is underwater?

I don't understand it either. You have a contract to pay a certain amount. Pay that amount, or lose the house. It is a legal obligation, not a legal suggestion.

Bob can afford a $1,000 a month house payment. So, he mortgages a home that costs him just that. A few years later, the interest rate has adjusted a few times and the payment has gone up 50%. Additionally, the housing market has bombed so he owes more than the home is currently worth. Now Bob has to pay $500 a month more than he can afford to keep his home. To get a lower rate, he needs to refinance the mortgage. But, since his home has dropped in value and is now underwater, no bank will refinance the loan. He is now stuck and needs to get out of the mortgage or else he will ultimately default on the loan.

Or maybe Bob can afford the extra $500 a month, and realizes that since housing prices are depressed he can get twice the home for the same amount of money he is paying for his existing home. This is another motivation to get out of the underwater loan to a more potentially profitable future situation.

Or maybe Bob has a fixed-rate mortgage, but he has owned the home for a few years and needs some desperate repairs done. He has no money, so he could normally take a loan out against the equity in his home. If it is worth less than the amount owed, there's no equity to borrow against. Once again, he needs out of the original loan somehow or the house will fall into complete disrepair.

There are lots of situations where an underwater mortgage can be a bad thing. And at the same time, if you can afford and are content with living in your home and don't need to use any of the equity, you could care less what it's worth in the current market, underwater or not.

Sure all these things can happen. The house could be flooded and be worth $0, the neighborhood could collapse and there could be vacant houses as far as the eye can see, a sink hole could develop, etc. That would make the mortgage "upside down". But I still don't know why that should change the contract that you signed. And I don't know why banks should be castigated because they refuse to renegotiate with you. Why should the bank eat the difference because someone can now "afford" a better house (your second example)? And why should the rest of us (the taxpayers) subsidize your move to better accommodations?

The problem sometimes too is that the homeowner may need to move on and leave the property for other reasons (ie maybe they lost their local jobs and have found other viable workplaces, but cannot or will not make that 100 mile commute).

I think the answer here is either fulfill the contract (i.e., pay it) or default on it and take the associated credit hit. A credit score actually measures something...your propensity to pay your obligations. If you fail to pay your mortgage and default, you should not be able to just walk away. There should be some associated punishment.

[disneysteve]

Here's are some examples:

Bob can afford a $1,000 a month house payment. So, he mortgages a home that costs him just that. A few years later, the interest rate has adjusted a few times and the payment has gone up 50%.

This person bought a house he couldn't actually afford, or more accurately, bought it using a loan he couldn't actually afford. He knew, or should have known, that when that rate adjusted, the payment would go up. I've got no sympathy for this one.

Or maybe Bob can afford the extra $500 a month, and realizes that since housing prices are depressed he can get twice the home for the same amount of money he is paying for his existing home. This is another motivation to get out of the underwater loan to a more potentially profitable future situation.

That's just too damn bad. Bob shouldn't get bailed out, especially at tax payer expense, because he has buyer's remorse. He made a decision and signed a legally binding contract to pay for that decision. If circumstances have changed and he no longer likes the decision he made, it is too late to change it. The purpose of buying a home is not to make a profit.

Or maybe Bob has a fixed-rate mortgage, but he has owned the home for a few years and needs some desperate repairs done. He has no money, so he could normally take a loan out against the equity in his home. If it is worth less than the amount owed, there's no equity to borrow against. Once again, he needs out of the original loan somehow or the house will fall into complete disrepair.

Again, this would indicate to me that he bought a house he couldn't actually afford. He didn't maintain an adequate emergency fund. He was house poor, tying up all of his wealth in his home with no reserve. Bad decision for sure, but not one that warrants a bail out.

I understand people who bought a home and then lost their jobs or got transferred out of town and now need to sell and can't. Circumstances beyond their control conspired against them. Even people who put down the recomended 20% down payment found themselves in this situation, so it isn't just people who put nothing down.

What I have no comprehension of is people who bought a house they could afford, can still afford the payments, but choose to pack up and walk away because the house has dropped in value. I think that is a criminal offense and should be handled as such.

[boosami]

I'm not advocating people trying to get out of mortgages... I agree with you guys that in most cases this is effectively stealing and immoral. I'm simply pointing out situations where people might feel like they want to get out of underwater mortgages.

[disneysteve]

I'm not advocating people trying to get out of mortgages... I agree with you guys that in most cases this is effectively stealing and immoral. I'm simply pointing out situations where people might feel like they want to get out of underwater mortgages.

For sure. There are perfectly legitimate reasons why someone might want or need to sell their home but are now trapped by being underwater. Some examples:

1. Bob and his wife bought their home 3 years ago. They are now getting divorced. Neither one wants or can afford to keep the home on their own. They want to sell but can't because of the drop in value.

2. Bob had a good job with a Fortune 500 company. Life was good. Six months ago, he got laid off and has been unable to find work earning anywhere near what he made before. Their EF is just about gone. They've had the house on the market but can't get anywhere close to what they paid for it. They can't afford to keep it. They can't afford to sell it at a big loss. They're trapped.

I could go on but you see the point. I think what OP was commenting on was folks who aren't in those situations and can afford the house but choose not to.

[cschin4]

What I don't understand is trying to renegotiate the loan because the value has dropped.

If you buy a home and agree on the price and plan to live in the home, then all this hoopla means nothing. The real issue is people who use their home as an ATM machine. If you don't then no worries. The only real problem then is if the market significantly depreciates and you are trying to sell the home but still owe more than it is worth. But, again, so what? That is life.

[cschin4]

I'm not advocating people trying to get out of mortgages.

If one wants out of one's mortage, then you sell the home for whatever you can get. If you still owe money, too bad, why should that then be the taxpayer's problem? I have made money and I have lost money. Oh well.

As for the housing market "always" recovers. Nothing "always" happens with anything. A recession/depression/economic collapse etc is a possibility. Those who hedge their bets on some mythical guarantee. There isn't one. Play the odds, look at past history, hope for the best and plan for the worst, that is all anyone can do.

[Inkstain82]

What I don't understand is trying to renegotiate the loan because the value has dropped.

Why not? You should be able to renegotiate anytime you want, for any reason. The worst they can do is say 'no.'

This American Life did a great episode a few months back that included a section on how banks would make more money if they could renegotiate instead of forcelose in most cases, but they simply didn't have the corporate infrastructure in place to od so.

[LivingAlmostLarge]

The sucky part is when you've put down 20% and paid off a good chunk, then your house goes down and sure it'd be nice to renegotiate but they won't since you still owe less than it's worth.

[cptacek]

Ok, you have a good point. You should be able to try to renegotiate. But you should also be laughed out onto the street. As I said before:

And I don't know why banks should be castigated because they refuse to renegotiate with you. Why should the bank eat the difference because someone can now "afford" a better house (your second example)?

Maybe someone with awesome negotiating skills could convince the bank to eat $100,000 on a loan, but there should be no pressure for the bank to do so, political or otherwise.