'Under Water' Mortgages on the Rise

[classicman]

Mortgage Crisis

CAPE CORAL, Florida (Oct. 22) - Long before she filed for bankruptcy, Ann Neukomm was "under water" -- she owed more on her mortgage than her house was worth -- a situation more and more Americans are finding themselves in. As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the U.S. economy with a new wave of foreclosures and bankruptcies.
About 12 million U.S. homeowners owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, said Mark Zandi, chief economist at Moody's Economy.com.
"At the root it's 'the' problem," said Zandi. "If you're going to put your finger on the one thing that's gotten us into this fiasco, it's the fact that millions of homeowners are under water on their homes."
If, like Neukomm, these homeowners go into foreclosure, it would add to the oversupply of homes, delay a recovery in the housing market, and add to pressure on banks.
Already, U.S. consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund their lifestyles.
In a slowing economy, it doesn't take much to push an underwater mortgage into default.
"When you're under water and you have some kind of hit to your income or some kind of unintended expense, that's when you default. And so now we've got this noxious mix of millions of people under water and quickly rising unemployment," Zandi said.
Like Neukomm, 57, many people got into trouble by refinancing mortgages to pull out cash when rising property values made it seem like an almost risk-free deal.
She ended up filing for bankruptcy in May after failing to keep up with mortgage payments on her home in Cape Coral, a once-booming town in southwest Florida.
"It's a dirty word," said Neukomm of her bankruptcy and personal feelings of failure. "Nobody wants to say it."

Here comes round 2. Should we really bail the people who bought more than they should have been able or borrowed to the hilt and beyond against a mortgage they put nothing down on?

[lookout123]

Just to clarify, a lot of folks are under water that had serious amounts of equity before. At one point in my rental home I was sitting on 23% real equity due to money down and improvements to the property. I'm now sitting 38% under water due to foreclosures and lack of sales in the area. Not all underwater homes are that way because of 100% mortgages or buying more property than they can afford.

[Pie]

But L123, you can still afford your payments. Underwater or not, you will "discharge your obligations".
What about people who (because of layoffs, etc.) can't keep up with the mortgage? They can't even sell their property and move in with Mom because they'd get less than the outstanding loan amount.

[lookout123]

I'm aware of that. I've even advised a few of my clients to let their houses go. It happens. I was simply pointing out that while we hear many stories about people getting greedy and buying too much house or mortgaging 100%, there are also many people that were responsible in their purchase but now are underwater through no fault of their own.

If a person has to move because of job or family and their house value has dropped 25% or more, what choice do they have but to let it go? Likewise, if a person can't afford the payments anymore but owe too much to sell, what choice do they have other than to hand over the keys? not much

Chalk it up to lessons learned and start over. Such is life.

The people in your scenario that can't "move in with mom" are in a situation where moving is their ONLY choice. They let the home go in a short sale or foreclosure and move into a rental or in with family.

[DanaC]

If a person has to move because of job or family and their house value has dropped 25% or more, what choice do they have but to let it go?

My bro lost his house in the early 90s in pretty much those circumstances.

[SamIam]

Dumb question, but if folks have to re-locate to find a new job, what's to stop them from renting their home for the amount of the monthly mortgage payment? Whatever else may be going on, I haven't yet heard of people fleeing one area of the country for another a la "Grapes of Wrath". Even in my little rural part of the nation, rents seem to be humming along quite nicely. If your home is underwater, why can't you just hang on until prices re-align themselves as they always do?

[smoothmoniker]

Around these parts, you can rent a decent 2 bedroom home for about $2500. Mortgage on that same home will probably run you $4000 if you bought close to the peak of the market.

So, add $1500 to the price of your new mortgage, along with losing the tax deduction for interest on the mortgage, and it starts to look pretty untenable for a lot of folks.

[DanaC]

Originally Posted by SamIam

Dumb question, but if folks have to re-locate to find a new job, what's to stop them from renting their home for the amount of the monthly mortgage payment? Whatever else may be going on, I haven't yet heard of people fleeing one area of the country for another a la "Grapes of Wrath". Even in my little rural part of the nation, rents seem to be humming along quite nicely. If your home is underwater, why can't you just hang on until prices re-align themselves as they always do?

My bro rented his house out initially. The rent didn't cover the mortgage payments. Then the tenant let him down (as happens sometimes) and as he was operating so near to the edge, it tipped him over.

This is probably one of the reasons I am cynical about home ownership. I was 18 when Our Kid got married and bought a house with his new wife. By the time I was 21 they'd lost the house and were starting again in a rented place.

[Sundae]

We call it negative equity here, and my sister and brother in law were caught in it at about the same time as Dani's bro.

They bought a one bedroomed flat at the top of the market, moved in, got married. They could afford the mortgage payments and did not have 100% mortgage as they both had savings when they bought.

Then my sister fell pregnant.
Although she got maternity leave in her full time job, she wanted to change to working part time rather than put her baby in childcare from 08.30 to 17.30 every day. The job wasn't availble as a part time option and she had to quit.

They were stuck in their flat for nearly two years because the market dropped pretty much the same time my sister got pregnant. In the end she worked a late shift at the local supermarket, and then at a local factory in order to make ends meet and put a little aside.

They didn't lose the flat, they were not in any danger of that, but they lived in a one bedroom place with a growing daughter, on a shoestring budget for what felt to them like an eternity before they could buy a house. Like my parents when I was ggrowing up, they hardly saw eachother during the week because one would be coming in from work while one was going out - in order that my niece would always have a parent at home.

It happens to sensible people too.

[sweetwater]

Originally Posted by SamIam

Dumb question, but if folks have to re-locate to find a new job, what's to stop them from renting their home for the amount of the monthly mortgage payment? Whatever else may be going on, I haven't yet heard of people fleeing one area of the country for another a la "Grapes of Wrath". Even in my little rural part of the nation, rents seem to be humming along quite nicely. If your home is underwater, why can't you just hang on until prices re-align themselves as they always do?

What stopped us from renting out our large condo with a view of Long Island Sound was me - and that was due to too many negative experiences with tenants. We moved out of state for a new job so we would have been out-of-state landlords. Nope. Not again. Ever. In our new location we could buy and rent out any house we could find that is available, but choices are few. Moving from a cold market to a hot one is not wise, but it's done now. Thank goodness!