Not understanding the underwater concept

[disneysteve]

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.

I think there are 2 different circumstances here.

1. For some legitimate reason, an owner can no longer afford his payments. If he can't get some type of relief, he will lose the home to foreclosure. The lender has to decide if they'd rather get back a smaller amount or have to foreclose.

2. An owner can afford the payments but feels he shouldn't have to since the home is no longer worth what he paid.

In #1, it could be in the lender's best interests to renegotiate the loan. They will lose money based on the original contract, but may not lose nearly as much as if they foreclose.

In #2, the lender should say "Tough luck. You borrowed the money and you have to pay it back as agreed."

[Inkstain82]

To me, there's no moral component to it. The law and the contract should each specify the consequences for non-payment, and if you are willing to accept those consequences, then you are free to stop payment. The possibility that you might do so should be accounted for in the bank's willingness to renegotiate.

As long as you enter into the contract in good faith and are willing to accept the consequences, deciding to change your mind later is your prerogative (as it is their's).

If banks don't want to accept the risk that I might change my mind about repayment, they can stop charging me interest based on their assessment of that risk.

[cptacek]

Inkstain82, I think we are closer in thought than may appear. I think when most people want to renegotiate the mortgage balance down to the value of the house, they don't want to accept any consequences for their actions.

However, I also know that somehow we have moved from "my word is my bond" to "make sure you have your lawyer read all the extra fine print" and part of that is people not living up to their contractual obligations.

[cschin4]

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

First, the above is not my quote. If you have a home loan and can get a better interest rate, etc, that is great and not what I am talking about.
What I am talking about is refinancing your home and piling more money into the loan for non-house spending (and, by that I mean any expenses that are NOT the actual mortgage and taxes).
But, again, I am not saying there aren't people who can do this wisely and pull out money for various reasons. I am talking about people who use their house as an ATM and max out all their debt which they can't afford.

[cschin4]

As long as you enter into the contract in good faith and are willing to accept the consequences, deciding to change your mind later is your prerogative (as it is their's).

I don't know too many contracts in which "changing your mind is your prerogative.
You can default on a contract you can and should be held to the terms of the contract you signed.

[LuxLiving]

All this points to the fact that buying a home is no 'ticket to ride' and has large risks associated with it.

Circumstances change. Be PREPARED.

[Inkstain82]

As long as you enter into the contract in good faith and are willing to accept the consequences, deciding to change your mind later is your prerogative (as it is their's).

I don't know too many contracts in which "changing your mind is your prerogative.
You can default on a contract you can and should be held to the terms of the contract you signed.

That's exactly the point. If you are willing to accept the consequences laid out in the contract, then there's nothing immoral about accepting those consequences.

If the contract says I can pay $100 or forfeit some property, I can choose to forfeit the property. If the law says I can pay $100 or be sued, I can choose to allow the suit.