People Can Live Underwater, Although They May Not Like It

In a story anticipating the home mortgage deal that was announced today, The New York Times conflates "the millions of borrowers who are delinquent and facing foreclosure," many of whom presumably are delinquent because they can no longer afford their payments, with "borrowers owing more than their houses are worth," who may be perfectly capable of paying their mortgages, although perhaps not eager to do so given the crappy investments they have made. This seems to be a common error in press coverage of the housing market, perhaps because the decline in home prices and the recession are tied together in people's minds. But the fact that your house is suddenly worth half what you paid for it does not mean you are suddenly unable to make your payments, unless you have lost your job or suffered some other misfortune that reduced yor cash flow or increased your living expenses. Conversely, people whose mortgages are smaller than the value of their homes might nevertheless be struggling to make ends meet because of recent financial setbacks. Yet the Times says "about one in five Americans with mortgages are underwater," implying that all of them, including multimillionaires who bought mansions at the height of the bubble, are the intended beneficiaries of the loan modifications to which the banks have agreed. 

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  • sarcasmic||

    Any who believes a politician's stated intentions is an idiot.

  • ||

    Any what? Person? Alligator? Troll?

  • sarcasmic||

    Yes.

  • ||

    Well, it's "any. . .believes", so it must refer to some collective group. Like a hive-mind of some sort. Ants. Congress. That sort of thing.

  • sarcasmic||

    The Borg.

  • ||

    "Any Borg who believes a politician's stated intentions is an idiot."

  • ||

    The Borg believes in Locutus.

    Locutus/Borg Queen 2012!

  • BakedPenguin||

    They're going to be pissed about Obama using "resistance is futile" as the campaign slogan.

  • sarcasmic||

    Rush 2112!

  • anon||

    Locutus/Borg Queen 2012!

    I thought that was our current administration.

  • Almanian||

    Under the sea!
    Under the sea!
    lalalala...dum dee dum...
    something....words...lalalala...
    Under the sea!

    /Disney happy shit

  • Apatheist||

    OHHHHHHHHHHHHHHHHHHHHH who lives in a pineapple under the sea? SPONGEBOB SQUAREPANTS Absorbent and yellow and porous is he! SPONGEBOB SQUAREPANTS

    Yeah I know it by hear, so what? Love that shit.

  • ||

    I don't believe for a second that you only know it by hear.

  • sarcasmic||

    I like to be
    under the sea
    in an underwater mortgage
    with a snail

  • ||

    We're underwater on our mortgage. The day we signed the papers we found out the appraised value had dropped by about 3%. It's probably gone even lower, but we bought a small inexpensive home and financed it at the appraised value, not asking price. We also plan to stay here for the next 15-20 years or more; this was not a quick investment property for us but a permanent home.

    I wonder how many of the underwater mortgages are for vacation or investment properties or second homes.

  • Zeb||

    Unless you are about to sell your house, or were counting on a home equity loan or something, being underwater on a mortgage is not a problem. It is only likely to become a problem for people who were idiots and bought somethign they can't afford.

  • ||

    Exactly. We knew the value would go down, but not plummet, and we'd recoup any losses because we're riding out the loan for its lifetime, or at least a good portion of it.

  • Relitter||

    It totally depends on how much underwater you are. And how the rest of the neighborhood is doing. Paying on your underwater mortgage might be a very stupid thing to do, economically speaking, if the rest of the owners in the neighborhood are abandoning the properties.

    There's nothing moral about throwing money away. Unless you're a Democrat.

  • ||

    There's nothing moral about throwing money away

    I do not consider keeping my word "throwing my money away", but then, I consider my word to mean something.

  • Mensan||

    "There's nothing moral about throwing money away. Unless you're a Democrat."

    There is, however, something moral about honoring your agreements, paying your debts, and fulfilling your contracts.

  • Gojira||

    That's ridiculous. Businesses, including banks, strategically default on property all the time, if it makes economic sense to do so, so why should individuals be held to a higher "moral" standard?

    There's not even anything "moral" about it. You didn't "give your word", you signed a contract with stipulations about what would happen if you were to stop paying. You only become a douche if you stop paying and try to fight the consequences (stay in the home, tying it up on the courts, etc.)

  • Relitter||

    You only become a douche if you stop paying and try to fight the consequences

    This is exactly right. And the lenders stipulated what would happen in the event of non-payment - foreclosure, and now they want some other result instead because their contracted stipulation isn't what they want now. The lenders can enforce the contract, they cannot enforce payment.

  • Paul||

    I wonder how many of the underwater mortgages are for vacation or investment properties or second homes.

    Bout all of them.

  • Rev. Blue Moon ||

    "underwater", with respect to mortgages, is the dumbest concept ever. No one says "I'm underwater on my car" or "I'm underwater on this Twinkie I just ate"

  • robc||

    I was just going to point out that with cars.

    If you buy a new car with minimal down, you are underwater the second you drive it off the lot.

  • ||

    Yes - The payments are what matters. Whether it is monthly rent before you sign a lease, or the mortgage payments for 30 years - you should know what you can afford.

  • ||

    But Rev, people said that house would be the best investment they'd ever make! Therefore its continual increase in value is their God-given right.

  • ||

    It's just good sympathy-marketing.

  • ||

    Indeed it is about marketing. I remember the heady days of 2007-8 when the bubble was first bursting, and calls for government intervention to bail out borrowers seemed to be falling on resentful ears.

    Now it seems more widely, if not all that passionately, accepted. I suppose the bank and auto industry bailouts had something to do with that ("Where's MY bailout?"), but it ultimately comes down to he search by Santa Claus politicians for new occasions they can turn into Christmas.

  • Tman||

    And ultimately the mortgage bailouts are what inspired the great Santelli rant which many believe lit the fuse behind the Tea Parties.

    Everyone who has a mortgage who pays on time each month for it because they bust their ass to be able to do so looked at the mortgage bailout as inherently wrong in every way.

    You bought a 3000 sq foot McMansion on a janitors salary and now you want me, who bought a 700 sq ft condo because that's all I could afford, to bail YOU out?

    Fuck and no.

  • Mike M.||

    Not you, just your children and grandchildren. Which is even more fucking depraved and immoral than demanding that you do it.

  • anon||

    Not you, just your children and grandchildren. Which is even more fucking depraved and immoral than demanding that you do it.

    Precisely why I won't have children. Fuck them. Fuck them up the ass. Hard. I hope the future enjoys what they've done to themselves. Fuckers.

  • Robert S||

    Be careful. The courts aren't scheduled to find rights in the constitution for you people for another 20 years.

  • anon||

    You bought a 3000 sq foot McMansion on a janitors salary and now you want me, who bought a 700 sq ft condo because that's all I could afford, to bail YOU out?

    Fuck and no.

    Same situation, wholeheartedly agree. I bought my condo because I knew even if I suffered slow business I could afford to pay my debt. Obama sure showed me what "fiscal responsibility" means.

  • anon||

    Also, being a "Custodial Engineer" in New York pays ~45k/year.

    And requires a 4 year college degree.

    Yeah, I fucking lol'd.

  • Paul||

    Being a sanitation worker in Seattle gets around ~50k/year.

  • Tman||

    I even had an opportunity in 2006 to get a FHA loan for a moderately sized home (1500 sqft) with no money down and a fixed rate that was pretty low, but the payments would've been close to half my income so I declined and kept my condo.

    I've been rewarded by higher property taxes and President Not My Fault taking more of my money to give to those who made the bad decision I didn't.

  • ||

    As somebody who chose to remain a renter because I wasn't comfortable buying a house with less than a 20% down payment, which would have left us uncomfortably short on ready cash, I am extremely fucking bitter about my money being used to bail out deadbeats who didn't think their decision through carefully enough. Seriously, fuck them.

  • Paul||

    Bailouts are designed to punish the prudent and reward the foolish. Designed...

  • Punt||

    The average American idiot (at least 60% of the population) thinks Rick Santelli and Rick Santorum are the same person.

  • ||

    You know, that wouldn't surprise me.

  • Joe M||

    Sloppy journalism from the Times? Hush your mouth!

  • ||

    Yet the Times says "about one in five Americans with mortgages are underwater," implying that all of them, including multimillionaires who bought mansions at the height of the bubble, are the intended beneficiaries of the loan modifications to which the banks have agreed.

    As if anyone other than multimillionaires could ever be the intended beneficiaries of a government program.

  • shrike||

  • cynical||

    Except that the first drop in prices corresponded to a period of deflation (where all nominal prices dropped), and so was hardly surprising. The second drop does not correspond to a period of deflation, and thus likely represents an actual market correction.

  • Jeffersonian||

    Keep blowing, the bubble's ready to reinflate!!

  • Citizen Nothing||

    I just got a registered letter from my bank offering to cut my 30-year mortgage rate from 4.5% to 4. No fees, no strings, they just don't want me doing a refi elsewhere.
    Sweet.

  • anon||

    I would not oppose my bank choosing to do that. It's a pretty good business decision. Can you tell me if it's Bank of America?

    Also, I remember hearing Clark Howard talking about a few banks like Chase doing this to all their customers.

  • robc||

    BoA offered me the same deal, but that was years ago. Mid-last decade.

    Basically, they had streamlined the ATM feature of refinancing, by allowing you to pull out equity whenever you wanted and resetting to 30 years at current rates.

  • sarcasmic||

    No fees or strings could mean that the fees and strings get folded into what you owe.

    I've had my mortgage for six years, and I keep getting similar offers. Sure it would lower my monthly payment, but the closing costs would bring the principal back to where it was when it started.

    Six more years to pay the loan down to where it is now?

    Fuck that.

  • Citizen Nothing||

    No -- my principal will be exactly the same. No points, no title fees, no recording fees, no origination fees. Nada. Chase Bank. Gotta say this has me liking them more than I did last week.
    (The 30-year clock will start again, but, of course, I can increase my principal payment and pay back quicker if I choose. But at 4%, I'll be in no hurry to pay the sucker off.)

  • ||

    Depending on how long you've had your mortgage, there's also a cost to resetting the clock, of course. It will crank up the percentage of your monthly that goes to interest. But, unless you are deep into amortizing your mortgage, that's probably decimal dust.

  • ||

    Bite the bullet and get a 15 year mortgage.

    We were 8 years in to our 30-year (5 3/8%) and refi'd to a 15 (3 7/8%). I calculated that even sending $300 additional principle each month to get the loan period down to 15 years on the 30, we'd still pay $20K more in total just from the difference in points.

    That, and our payment to principle more than tripled with the 15-year. The amortization table is a beautiful thing to behold.

  • Brett L||

    Eh. I did the math before I refi'd a year ago. Dropping from 6.5%/30 years to 4%/15 years, my payment went up $80/month (and I'd already been overpaying $75/mo, so it was essentially zero) and it would take 16 months to recoup my closing costs. Even if I hadn't been overpaying, the turnover was 18 months. I'm in month 13 and not selling. I save myself 28 (initial term less overpay)-5(years paid on initial mortgage)-15(years of new mortgage), so 7 years of mortgage payments if I keep the house to term versus not selling the house for 18 months to get to the break even point.

  • Invisible Finger||

    But the fact that your house is suddenly worth half what you paid for it does not mean you are suddenly unable to make your payments

    So what? The mortgage contract says if I don't pay, the bank can take the house. Some people are just saying, "Fine, let them take it. No sense throwing good money after bad."

    All we have is a standoff - the borrower doesn't want to pay, and the bank doesn't want the house. Why should one party (the bank) not be forced to live up to its end of the contract but the other party (the borrower) has to live up to his end?

  • Tman||

    Why should one party (the bank) not be forced to live up to its end of the contract but the other party (the borrower) has to live up to his end?

    Because the contract the buyer signed said "I will pay X over Y years at Z% and if I don't the bank gets the house". Just because the bank doesn't want the house doesn't mean they didn't hold up their end of the bargain. They loaned someone else the money so the buyer could have the house. The buyer didn't do anything except default on the contract, thus they are the ones not holding up their end.

  • Invisible Finger||

    The bank isn't holding up their end by trying to force payment instead of just taking the collateral (the house); and by falsifying their accounting by listing the loan as a full-value asset when it isn't (the whole point of not taking the house).

  • ||

    The bank isn't holding up their end by trying to force payment instead of just taking the collateral (the house);

    The bank has no obligation to take the house instead of trying to collect what you owe.

    and by falsifying their accounting by listing the loan as a full-value asset when it isn't (the whole point of not taking the house).

    I doubt your contract with bank addresses how they account for your loan.

  • Invisible Finger||

    And the borrower has no obligation to pay - his penalty is forfeiture of the property. That is the contract. (I realize "recourse" is different in some states and loan types, but most mortgage loans are non-recourse.)

    The lender doesn't want the house because they don't want to record the loss - if there was no expected loss the house would have already been foreclosed and re-sold to another buyer. The bank doesn't want to record the loss and the borrower doesn't want to record the loss.

    Both sides took their respective risks, one isn't more obligated than the other. If you can quote some legal complexity that obligates repayment rather than forfeiture, please do.

  • Invisible Finger||

    The clarify, the bank doesn't want to record ANY loss and the borrower doesn't want to record FURTHER losses.

    It's ECB vs. Greece writ large.

  • Gojira||

    I made the same point up above. I've worked in the foreclosure industry for about 7 years now, and there's nothing "shameful" about defaulting if it's in your economic best interest to do so.

    I'm baffled why so many people, even here, think that businesses should make economic decisions but individuals should be held to some sort of tribal honor-code.

  • ||

    I'm baffled why so many people, even here, think that businesses should make economic decisions but individuals should be held to some sort of tribal honor-code.

    Oddly, that tribal honor-code often turns out to call for actions that are in your long-term self-interest. And businesses should act in their long-term self-interest, as well.

    I, personally, have no objection to businesses that operate according to primitive notions of morality like "honesty", "integrity", "keeping your word", etc. An entirely amoral business is not one that I would care to be associated with, or invest in.

  • Gojira||

    Well you and I have different notions of business. I'm sure most large businesses have a different notion of it, too, and I'm sure you have purchased products from a company, probably quite a few times, that doesn't live up to your values.

    I completely agree with Invisible Finger; trying to shoehorn morality into what is very clear, black-and-white contract law is a fools errand. If anyone's "word" meant anything, then we wouldn't even need contracts. It's precisely because nobody's word means anything to anybody (in the broad sense; obvious exceptions for friends, family, etc.) that is the very reason we have written contracts and contract law in the first place.

    I can also tell you that every single major bank, grocery store, etc. has strategically defaulted on various properties, many, many times, when it was in their self interest. So, keeping with the theme of the post, if you consider that a violation of "integrity", you're going to have a very difficult time finding anywhere to shop.

  • ||

    I distinguish between buying products from and investing in companies, so there's that. I do draw the line at buying from companies that are too deeply in bed with criminal cartels (GE, US automakers, Cuban cigars, etc.).

    If anyone's "word" meant anything, then we wouldn't even need contracts.

    I disagree completely.

    The very notion of a contract (which is an exchange of promises, after all) is based entirely on the idea that you should do what you promise to do. We believe this is so important, in fact, that we use the power of the state to enforce those promises.

    True strategic default means that you have the ability to perform, but choose not to because you would rather not, thanks. The reasons are irrelevant. Contract law generally doesn't order "specific performance" of contracts for a variety of reasons having mostly to do with involuntary servitude, but allows you to buy your way out of your promises by paying damages.

    But to say that the morality of keeping your word is entirely absent from contracting is to miss the entire point of contracting.

  • Gojira||

    We'll just have to disagree. The reason we have to use the state to enforce contracts is because ones word is (again, speaking in broad terms) utterly meaningless. If it wasn't, you wouldn't need a legally binding piece of paper to enforce it.

  • robc||

    but most mortgage loans are non-recourse

    False. Most are recourse. Non recourse states are a significant minority.

  • Gojira||

    A lot of the time banks themselves choose not to pursue a deficiency. For example, in about 95% of the recourse foreclosures I conduct, we write it all off. Usually the people are all but wiped out after having bled themselves dry trying to keep up with the payments for as long as possible, so it would cost more to try and take what little they have left than is worth while. We just sell it off to a collection agency.

  • ||

    I'm a lender and i want the list of the people who decided it was in their economic interest to cease paying their mortgage and forfeit the property.

  • ||

    And the borrower has no obligation to pay

    Yes, he does. That note thingy says he agrees to pay according to its terms. Not paying is a breach of this obligation. Foreclosing on the house is a remedy that is available to the bank in the event of a breach.

  • Paul||

    Yeah, this whole underwater thing is utter bullshit. Everyone who buys a new car is underwater five minutes after driving the thing off the lot. When you buy a house, depreciation baby, you're underwater for a while.

  • Big Rich Guy||

    BAIL OUT for Borrowers since you already BAILED OUT THE BANKS!!!

    No Cash on HAND Handouts !!!
    No Principle Reduction !!!

    What we should do is FORCE the BANKS to convert sub-prime loans ONLY to a 30 year FIXED RATE at the TEASER RATE. That is what the borrower was approved for and that is what he should pay.

    And, if he can't afford to pay what he was approved for, enforce foreclosures.

  • anon||

    What we should do is FORCE the BANKS to convert sub-prime loans ONLY to a 30 year FIXED RATE at the TEASER RATE. That is what the borrower was approved for and that is what he should pay

    You aren't very bright, are you? Can you please explain why they shouldn't pay their current adjusted rates since that's the contract they signed?

  • ||

    No, the Alice Bowie troll isn't very bright.

  • Alice Bowie||

    I didn't even say anything

  • Big Rich Guy||

    I'm brighter than you think. And my proposal and you having a difference of opinion has NOTHING to do with Brightness. With the exception of your arrogance that makes you feel you know better than everyone.

    As per the contract, it was bogus. The borrower knew DAMN well that he wasn't going to be in possession of the loan once the rate switched. As a settlement, I'm suggesting what I mentioned above.

    Let's try to keep a free open mind to opinions...even ones that we may not agree with...and stop the personal insults and name-calling.

  • Invisible Finger||

    The borrower knew DAMN well that he wasn't going to be in possession of the loan once the rate switched.

    The LENDER knew DAMN WELL he wasn't going to be in possession of the loan even sooner - they sold the loan weeks after the deal was made!

    Trying to wedge some sort of morality into contract law is a fool's game.

  • ||

    What we should do is FORCE the BANKS to convert sub-prime loans ONLY to a 30 year FIXED RATE at the TEASER RATE.

    Still a handout.

    Who will eat the loss when this conversion happens? The originating bank? The bondholders that now own the mortgage? Or . . . the taxpayer?

  • Anonymous Coward||

    Aren't the bondholders of said mortgages mostly public employee pension funds?

  • Rev. Blue Moon ||

    Are you not, by your own words, acknowledging that the "teaser rate" was just that - a teaser? The fact that the loan can adjust is advertised in the name of the product: "Adjustable-Rate Mortgage"

  • 16th amendment||

    We ought to look at the details of the law to see if people who can make their payments will still be able to refinance or get principal taken off their loans. Maybe the law looks at the ability to pay.

    But make no mistake. The big winner is the government. According to http://www.foxnews.com/politic.....p=trending they are going to get over half of the settlement:

    BEGIN QUOTE

    Other payments will go toward state governments, and the federal government, to "repay public funds lost as a result of servicer misconduct," according to the Justice Department.

    END QUOTE

    It will be like the tobacco settlements, with states using the money to increase their pensions, start new programs, bombard us with ridiculous ads.

  • Big Rich Guy||

    There should be NO re-adjustments of Principal balance. The loan should be converted to 30/40year fixed with a RATE that the borrower was originally approved for. And, if the borrower can't afford the original rate for any reason, he has to give up the property.

  • Thom||

    Unfortunately, you're fighting a battle against compound interest, so converting these mortgages to longer maturities doesn't really help. The reduction in your payment for adding ten years to the term of your loan would only be around $100 for somebody with a $175K-$225K home financed at 5%.

  • ||

    *disappointed at the lack of actual sublittoral dwellings*

  • Brett L||

    Blame AZORIAN BLUE HADES, dude. The Benthic Treaty is a bitch.

  • Thom||

    Nevertheless, it magnifies the consequences of losing your job or experiencing a decline in income. So in an environment where people are regularly losing their jobs or experiencing declines in income, it matters.

  • ||

    I predict a wave of ultra-LOW appraisals; owners would now want to have the lowest possible payoff, to be better positioned for a more rapid gain in value when real estate prices actually DO start going back up.

    In fact, it's probably a good time to become an appraiser, and let word of mouth go out that you are a low-ball appraiser.

    There is opportunity in chaos.

    CB

  • ||

    You left out the bit about polishing your monocle, etc.

  • buy3buy.com||

    nike

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