OT Underwater Mortgages

[rwsaunders]

Looking for a deal in Las Vegas....

Nearly one in four mortgages nationwide was in negative equity status as Dec. 31, 2009, up 600,000 from third quarter, according to a report released yesterday by First American CoreLogic.

Nevada is struggling with the nation’s worst equity situation, as 70% of all borrowers owe more than their homes are worth. Arizona follows with 51%, Florida with 48%, Michigan with 39%, and California rounds out the top five with 35% of all mortgages underwater.

Nevada’s statewide loan-to-value ratio is 123%, underwater nearly $25 billion. Arizona and Florida follow with 95% and 91% LTV respectively. Georgia is next at 80%.

News that California’s housing market is stabilizing showed in equity numbers; compared to other high negative-equity states, California had the smallest increase during the fourth quarter, only 0.4%. Nevada, Georgia and Arizona experienced the largest increases.

"Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners," said Mark Fleming, chief economist with First American CoreLogic. Fleming said because he expects home prices to only increase slightly during 2010, negative equity will remain a “dominant issue” in mortgage markets for “some time.”

[veloduffer]

One of the issues of negative equity is people turning the keys over to the bank because they are so far under. There is a likelihood that the property value won't recover, so it becomes a depreciating asset and monetizing a loss.

On a philosophical front, we are becoming more of a secular society than religious one, so the moral responsibility of continuing to pay the mortgage is lessened (no social stigma). An example is Hong Kong, which has had property bubbles time and again but almost negligible housing defaults; and until a couple of years ago, personal bankruptcies were quite rare but are more common due to credit card debt.

In the US, foreclosures in good communities are competitive (ie bidding taking place) and the winners are ones that are able to pay in cash, since the mortgage process is taking much longer.

[Ozz]

Originally Posted by rwsaunders

..."Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners," said Mark Fleming, chief economist with First American CoreLogic. Fleming said because he expects home prices to only increase slightly during 2010, negative equity will remain a “dominant issue” in mortgage markets for “some time.”[/I]

I would guess that not being able to make the payments under the terms of the loan is what is "driving foreclosures"....the negative equity problem only arises when the homeowner is trying to sell the home.

Which it probably is significant for homeowner who were hoping to buy and sell homes as an investment rather than actually live in them....

Not to mention the problem of people buying more home than they could afford, under loan terms they did not understand or chose to ignore.

[Ken Robb]

inability to make payments is sometimes the cause of defaults but some people just walk away from their pledge to pay. They didn't put much if any $$ down so they have zero equity in a depreciated home and they feel they are "buying" the property again for more than it's now worth.

[RPS]

Originally Posted by veloduffer

On a philosophical front, we are becoming more of a secular society than religious one, so the moral responsibility of continuing to pay the mortgage is lessened (no social stigma). An example is Hong Kong, which has had property bubbles time and again but almost negligible housing defaults; and until a couple of years ago, personal bankruptcies were quite rare but are more common due to credit card debt.

On the housing front, this morning’s report that seasonally-adjusted existing home sales are down is not good.

On a philosophical front, I often question the premise of whether there is much of a connection between religion and personal responsibility. I agree with you that there is less social stigma, but I have a hard time connecting that with religion. Over the years I’ve known many irresponsible religious characters and have also known many righteous non-religious types who anyone could seal a deal with a simple hand shake – men of their word, so to speak. And then there is also the argument that churches are full of sinners.

[veloduffer]

Originally Posted by RPS

On the housing front, this morning’s report that seasonally-adjusted existing home sales are down is not good.

On a philosophical front, I often question the premise of whether there is much of a connection between religion and personal responsibility. I agree with you that there is less social stigma, but I have a hard time connecting that with religion. Over the years I’ve known many irresponsible religious characters and have also known many righteous non-religious types who anyone could seal a deal with a simple hand shake – men of their word, so to speak. And then there is also the argument that churches are full of sinners.

I think I should substitute moral for religion and agree it is personal responsibility. It's part of the reason why American society is so litigious.

On the other hand, corporations renege on contracts all the time. So financial CEOs shouldn't throw rocks in glass houses.

[Joellogicman]

Originally Posted by Ozz

Which it probably is significant for homeowner who were hoping to buy and sell homes as an investment rather than actually live in them....

or California. A significant portion of the boom in Southern Nevada, and somewhat less in Arizona and Florida was fueled by flippers.

To Veloduffer's point, people who bought houses as an investment probably see walking away from them pretty much the same way any business views walking away from a money losing deal.

There was an interesting guest opinion piece in the NYT a few weeks ago where the author argued that by losing their investment and property rights in foreclosure, the defaulting mortgage holders are in fact paying the penalty as provided in the mortgage contract. Arguing an additional moral obligation implied in contract beyond the agreed upon penalty is wholly outside established understanding of what is meant by the rule of law.

[BengeBoy]

Let's not kid ourselves. People are walking away.

I lived in Houston during the oil bust of the mid-80's -- it was the same thing. People had "stretched" to get into tiny starter houses way out in the suburbs, and when the oil bust hit, and a bunch of people lost their jobs, house values started to drop.

Eventually, even the people who still had their jobs felt like chumps for making payments on houses with substantial negative equity and no short-term hope of recovery. They walked away by the *thousands,* and moved into houses they could not have afforded closer to their jobs, bigger, in nicer neighborhoods.

The banks were so desperate to unload the homes they had foreclosed on that a homeowner could default on a loan from bank A and sign a contract on a house available from the distressed property division of bank B, with little hassle. As long as you weren't one of the laid off people -- and you could show the bank a steady income stream -- it was possible to get a new mortgage, even if you had defaulted on a prior one.

There is an increasing amount of anecdotal evidence and real reports showing this is happening across the US today.

[veloduffer]

Besides one's house being underwater, you can see where it would make sense financially to walk away. Given the rising cost of healthcare and retirement (fewer pensions, weak investment returns on retirement funds, rising college costs), it can come down to a choice of accepting financial difficulty for the rest of one's life.

[Tobias]

Originally Posted by Joellogicman

There was an interesting guest opinion piece in the NYT a few weeks ago where the author argued that by losing their investment and property rights in foreclosure, the defaulting mortgage holders are in fact paying the penalty as provided in the mortgage contract. Arguing an additional moral obligation implied in contract beyond the agreed upon penalty is wholly outside established understanding of what is meant by the rule of law.

To be clear, who is the "defaulting mortgage holder"? The bank or home owner?

[gone]

The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

Makes no sense to me. And for the record, I've never been so much as late with any payment any time in my life. Having said that, I just don't believe in being stupid financially.

[malcolm]

tip of the iceberg

[Joellogicman]

Originally Posted by Tobias

To be clear, who is the "defaulting mortgage holder"? The bank or home owner?

I originally typed in the legal term mortagagor meaning the borrower. Mortgagee and mortgagor are tend to confuse people not in the industry, as the meaning is the exact opposite of what some familiar with terms such as say, lessor and lessee.

Changing to what I thought would be easier to read I became distracted and wound up being more confusing.

[sloji]

This is just the start...!

[Joellogicman]

Originally Posted by ghsmith54

The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

The mortgagor was given a loan after going through a process created as much by the banks as any player in the business.

In many cases, the troubled mortgagors have asked the bank to reduce the principal or interest of the loan to better reflect reality. The bank's by and large are refusing to do so. If pressed, I am sure the banks would explain they have a business obligation to their investors to get the maximum possible profit out of their business.

That leaves many a mortgagor to look to the mortgage for the only possible business remedy available: surrendering claim and title to the property to the mortgagee.