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Questioning the Panic Over Under-Water Mortgages

October 26, 2011 · 81 comments

in Home & Garden, Personal Finance

So President Obama has another plan to help out the housing industry.

In synopsis, this revision to the Home Affordable Refinance Program (HARP) will allow ‘struggling homeowners’ with good credit history, no late payments in the last 6 months, and have a mortgage backed by Fannie Mae/Freddie Mac to refinance without a credit check or home appraisal.  (Other exceptions do apply.)   One article said that the purpose was to alleviate the pressure on ‘homeowners who are underwater’.

Now, don’t get me wrong, I totally sympathize with those that bought their home at a high price and the house is now worth 50 percent of the original purchase price.

However, why is there pressure on these under water homeowners, and why do they need to be rescued?

Don’t Hate Me Because Of My Opinion

When we bought our home, we paid what the market would bear at that point in time.  The market soared after we bought our house, and we could have made a lot of money on our home had we sold it about 2 years after we moved in.  But, we didn’t view our home as an investment, we viewed it as a place to live and raise our family, so we stayed put.

Flash forward 8 more years, and the value of our home has dropped to below what we paid for it.  We are not under water because we aggressively paid down our mortgage, and we did not do a cash-out refinance when our home was worth a lot during the housing boom. What we did do was bought a home that we could afford on one income, and we paid our bills responsibly.

That should not be a novel idea!

So Why Do People Who Are Under Water Need Bail Outs??

Paper gains and paper losses occur all the time.  Why are mortgages treated differently than stocks?  Does anyone care that my 401k was down 10 percent for the third quarter of this year?  After all, my retirement account is now worth less than it was in June, shouldn’t someone be worried about my retirement and be willing to provide a special program for me?  Nobody promises when you buy a house that it will appreciate in value.  Buying a house can be a risky proposition, and should be treated as such.  That is why you should not buy more home than you can afford.

Keep in mind, in theory I think it is just fine that homeowners that qualify will be able to refinance and lower their overall mortgage bill. I just don’t understand why so much attention is paid to under water homes when really, the value of a home does not really matter unless you absolutely have to move.   Also, if you purchase only what you can truly afford, then being ‘under water’ shouldn’t affect you at all. (Exception given to those who are forced to relocate.)  Whether my house is worth half a million or a hundred thousand really doesn’t affect my monthly cash flow. My mortgage payment is static for the term of the mortgage, and the revised ‘value’ of the home does not matter.  As a matter of fact, if people did not know what their house was currently worth and just went about paying their bills, would the housing crisis be as bad?  Is the mere fact that people KNOW that they owe more than their house than the house is worth causing panic and encouraging people to walk away from their mortgages?  Just because your home is worth less than you paid for it doesn’t mean you are suddenly in financial distress!

So, is a lot of the housing crisis really just on paper?  Really, this new mortgage program is aimed at people that do not have much equity in their home, and are not in foreclosure or dire straits.   In other words, it is designed to help those that have a ‘paper loss’ on their home but are not at risk of default.  Is that any different than having poor returns in your 401k?  What do you think?



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{ 39 comments… read them below or add one }

Moneycone October 26, 2011 at 7:28 am

It helps those who can’t refinance because they are underwater but instead of walking away, have been making payments. Personally, I think some relief is better than no relief at all.

I can’t talk for everyone, but I know a few friends in California who bought homes at the peak not to flip or rent it out but because of circumstances (most common, baby on the way). And during the peak, if you lived in CA, there was no way you could buy a house without paying a hefty premium.

None of them can refinance now. Double incomes became single incomes. There were pay cuts. They are bitter yes, but sensible to not walkaway. Should they be punished?

If they pay less in mortgages, they have more for other things. Rewarding wrongdoers and punishing the good has to stop. This is a good first step.


Kris October 26, 2011 at 8:03 am

It does help those who have been staying with their underwater mortgages, assuming they are backed by Fannie or Freddie.

However, people have lost a lot of money on investments in recent years, what makes their loss any different? Again, I have no problem being able to lower their interest rate. However, my question is more about is this an area the government should be intervening? When people lost half their savings in the dot com bubble and were struggling, the govt didn’t step in.

In general, what makes now different than other times in history when people bought overvalued houses and still had to pay their bills? I think a lot of is all the talk about under water mortgages and people feeling ripped off.

I reiterate, I am glad that those who have been paying their bills are finally getting some sort of reward. I am just wondering when the intervention will ever stop? Do the bailouts that keep happening just make people more emotionally dependent on the govt (and others), which results in even less accountability?


Kris October 26, 2011 at 8:40 pm

MC, I guess the thing I don’t get is, how is it viewed that your friends would be punished by not being able to refi? There have always been rules about having a certain loan to value in order to refi, so there really isn’t a punishment here by not allowed them to refi when underwater. However, it is perceived that those who are underwater and stay in their house are going above and beyond because so many people have walked away, including many who were not having any financial problems at all. In reality, the rules have always been the same about refis, but now we need to reward those for doing what everyone should have done in the first place, which is sticking to the contract they signed.

I agree rewarding wrongdoers has to stop. I don’t know what is going to fix this mess, that is for sure.


The Biz of Life October 26, 2011 at 8:37 am

We are bailout nation. Everyone is looking for a bailout….. from the banks to the OWS crowd to homeowners. The government after being the major enabler of the housing crisis through artificially low interest rates, subsidizing home ownership, forcing banks to lower lending standards, and juicing fannie and freddie on subprime now feels a need to clean up the mess it helped create. Maybe Fannie and Freddie shareholders can get a bailout too on their lousy investments that are now worth zero. A house is like any other investment or purchase; you should shop for bargains and not overpay. The banks and the government didn’t force anyone to overpay for a home at the top of the market, but they did enable the bubble with easy credit and lax qualifications. These types of bailouts (whether with housing or Wall Street) only encourage bad behavior in the future and set the expectation that people and institutions will be bailed out of their foolish decisions (the old privatize the upside and socialize the downside argument). That isn’t capitalism and a good dose of capitalism is what we need for the housing market to heal and recover naturally.


First gen american October 26, 2011 at 10:46 am

I am in the same boat as you. I bought my moms house in 2005 during the peak of the market. I am not looking for handouts and I don’t think people who bought homes with very little down or cashed out equity should be rewarded with a bailout. Plus, it’s not like interest rates were crazy during the peak either, so how much cost savings will there really be by dropping 1% point?


Money Beagle October 26, 2011 at 10:54 am

I always thought the programs in place now were to allow ‘underwater’ homeowners to refinance. If two people have the same house worth the same amount, but one has equity and one doesn’t, the one with equity will have access to re-finance while the other won’t. If the ‘underwater’ person doesn’t have access, it will take that much longer to get out from the underwater status, where an equivilent re-finance to the above-water neighbor would allow them to get to the break-even point that much faster.

I think it’s also designed to stabilize the housing market. If the underwater owner doesn’t have access to the re-finance, it makes them that much more apt to say ‘Ah, F it’ and just walk away. If a re-finance cuts that time down before they’re back at break-even, they might be more apt to stick with it. In theory this would reduce the number of foreclosures and give some stablility to the housing market.


Kris October 26, 2011 at 8:25 pm

Money Beagle, I don’t know that this will really cut down how long it takes those drowning to the break even point. That would assume people actually put the money saved by having a lower interest rate into their mortgage every month, but I can pretty much guarantee that will never happen. I agree that it might prevent some from walking away, but under water homeowners are probably so bitter that the last thing they want to do is sink more money into a cruddy performing asset.


Jacq October 26, 2011 at 12:46 pm

Kris, I saw a chart somewhere on the increase in housing prices down in the states during the last decade. It totally boggled my mind that anyone would buy into a curve that was clearly peaking. No way do I buy stocks that way, I always wait for a dip.

It seems that the right to a “chicken in every pot” has expanded over the last century into it being a right for everyone to own a home – and not just a home, but a great home with a master bedroom bigger than the houses our grandparent’s raised 10 kids in.


First gen american October 26, 2011 at 3:02 pm

That’s just it. When we bought my moms house at the peak, we knew it was at a bad time so we bought a real dump that needed tons of work. When the market dropped, we didn’t lose as many $$ as we could have because it was cheap to begin with.

I really don’t want to subsidize someone’s McMansion payments on top of losing equity in a home I bought in a more fiscally responsible way.


Kris October 26, 2011 at 8:11 pm

Sandy, since you are so responsible, can you cover my November payment? I mean you should. You might have a good income and you really should pay your ‘fair’ share.

(that was all sarcasm, I totally agree with what you said.)


Kris October 26, 2011 at 8:21 pm

You aren’t kidding Jacq. A 1500 square foot house isn’t big enough for a family of 4 anymore. People just assume they need the best house in the best condition, like it is a given and they deserve it.

Look at all the people that did buy during the tech stock bubble. I saw stocks go from $150/share to literally nothing. Common sense went out the window when people bought stocks of companies that were losing money every quarter. Stock market is very similar. I knew someone that was going to buy a home in California with an interest only loan and then sell it in a year because houses were going up 100k/year, like it was a guarantee. You can imagine how that worked out.


Krantcents October 26, 2011 at 1:35 pm

The only reason we care is there is a mortgage! In many cases, the homes that are under water the mortgage exceeds the value. In those cases, many people are walking away or allowing their homes to be foreclosed. Unfortunately, there are too many of these foreclosures and they are affecting the whole economy. Rhis why we care. Investing in stocks usually is not financed.


Kris October 26, 2011 at 8:15 pm

This is the problem exactly Krant! We allowed people to take out interest only loans and all kinds of things that helped create this housing mess. Banks got bailed out from making ridiculous loans, and look at the snowball of events that have happened.

Maybe we need to make it harder for people to walk away to discourage the strategic defaulters? My neighbors are strategically defaulting and they are both professionals, they just decided to move to another state. Don’t think that is really right, and I don’t think refinancing would have changed their decision either.


Ashley @ Money Talks October 26, 2011 at 3:35 pm

Wasn’t loaning to people with poor credit and loaning more than the home’s value what caused this mess to begin with? How is that going to fix the problem?


Kris October 26, 2011 at 8:09 pm

Exactly Ashley. Now, we will refinance people with negative home equity and the owners of fannie and freddie will go down the tubes.


YFS @ YourFinancesSimplified October 26, 2011 at 3:49 pm

You had me at “What we did do was bought a home that we could afford on one income, and we paid our bills responsibly.” I love you! Now on to a more serious note :-). Housing is subsidized because home owners vote. The American Dream is sold by politicians and other groups to get your favor at the voting station. Is it right? Hell no, but that’s why it is done. You did your part by not being apart of the problem.


Kris October 26, 2011 at 8:09 pm

I am loved, thank you! I just don’t get this whole thing that people should get saved by the government for variety of things when people made decisions with their eyes wide open. For instance,I could have refi’d my house for 100k more than I bought it and just made minimal payments. I might have ended up under water after that because I had an even bigger mortgage and mortgage payment. However, I did not do that because it seemed incredibly risky. I know a ton of people that did exactly that though. Can someone come by and give me some extra money because I did what I should?


Christa October 26, 2011 at 4:18 pm

I think the biggest reason the government wants to make refinances possible to more people is that it could potentially increase the consumers’ abilities to spend more money, which will eventually turn the unemployment around, which will eventually help boost the stock market. That being said, encouraging refinances the first and second times around did not decrease our unemployment. I really don’t think trying this tactic again is going to solve anything.


Kris October 26, 2011 at 8:03 pm

I don’t think it will solve anything either. In a sense, it will act as a ‘stimulus’ package if people spend what they are saving (some thing people will use that money to pay down their mortgage- ha!) However, there have been plenty of stimulus packages and I don’t think our economy is thriving yet.


retirebyforty@retireby40.org October 26, 2011 at 5:49 pm

My home is under water. We purchased in 2007 and put down 20%. I would love to refinance and lower my payment by a couple hundred $.
The government is bailing out the housing industry because there are powerful lobbies at work. Housing account for a huge percentage of the economy and many corporation are pushing to get more businesses. Actually, I don’t know if this is true, I’m just guessing.
This will win votes though so that’s why politicians support it.


Kris October 26, 2011 at 8:02 pm

That is my thought RB40, we are gearing up for elections! Sorry about your house though, and I hope you can qualify. Are you freddie/fannie backed?


Miss T @ Prairie EcoThrifter October 26, 2011 at 7:34 pm

Very interesting. I had never even heard about underwater status until this post. We don’t seem to have this in Canada. Talk about being in a bad situation. I guess a bailout is really the only way to make it to the next point. If everything crumbles than so will the rest of the world.


Kris October 26, 2011 at 8:31 pm

Miss T, the thing is, many of these people shouldn’t need to be bailed out. Their mortgage payments have not changed, just the market value of their homes have. If people bought what they could affect, the value of their home should not matter.


Linda October 26, 2011 at 11:26 pm

People with adjustable rate mortgages are drowning. It’s not simply because they are upset that their house is worth less on paper. They may have bought in at a low rate that they could afford at the time. Fast forward to the point where their ARM comes due, and their payments jumped up drastically. Maybe they suffered a job loss and cut in income, too. But they can’t refi to a fixed rate mortgage like they planned back when they got the ARM, due to the fact that they have negative equity. It’s people in those situations that these programs are supposed to help. Not everyone bought a house that was a stretch; it may be that the only financing they could secure was an ARM (this is typical for condos, BTW).

And it’s possible even for relatively well-informed people to be “taken” when getting a mortgage. How do I know? The first home my ex and I bought back in 1998 was a condo. We met with a mortgage broker highly recommended by someone we trusted. The guy was so nice at our first meeting, but we never saw or talked to him after we filled out the paperwork; all calls went to his secretary and we could never reach him. We told him we wanted a fixed rate mortgage and were assured that was what we were getting. We even checked in with the office a week before close since we were so concerned that we hadn’t seen any paperwork. Mortgage OK? Yes. Fixed rate? Yes. We showed up at close with our lawyer and were give the papers then. No, it wasn’t a fixed rate mortgage, it was an ARM. We were furious, but couldn’t do anything about it. We were at the closing table and either needed to sign the papers to close the deal or lose all the money we had put down. Everything worked out OK for us in the end, but that was an awful experience. After talking with other folks in the mortgage business I found out that it is standard to not get a fixed rate mortgage on a condo purchase.


Kris October 27, 2011 at 8:10 am

Linda, I totally agree that ARMs have really hurt a lot of people, and it sounds like your situation was awful. However, I am guessing people were hurt by ARMs way more in the past than they are now (since interest rates are at such a low ‘base’ rate). ARMs are always a risk, and I assume many people were always drowning if they didn’t pay off the balance within the ‘fixed’ portion of the loan- not just today. Risk is the nature of the ARM vehicle. You get rewarded with a lower than fixed rate at the beginning, and then you get punished at the end…

I hope your situation with your scammer broker is the exception and not the rule. Sounds like he took extreme advantage of first time home buyers and you got raked over.


Jenna, Adaptu Community Manager October 27, 2011 at 6:06 pm

I think it’s unfortunate that people’s houses are under water. However, I feel like it’s a combination of poor choices and bad life circumstances that got them in that place in the first place. Not necessarily their house alone.


Kris October 27, 2011 at 7:18 pm

I agree totally Jenna. I wish everyone’s investments were doing great right now, mine included. However, I made specific decisions regarding my house so that I hopefully would not be in the underwater situation. I hate that interest only loans ever existed also.


101 Centavos October 28, 2011 at 6:53 am

Ultimately who really benefits from this bailout is not homeowners, but the banking industry. Banks get to keep non-performing loans on the books as active assets, and keep the debt payers on the treadmill longer.


Kris October 30, 2011 at 7:09 pm

I think Fannie and Freddie will really take a hit from this initiative though. They are allowing some pretty risking refinancing!


Evan October 29, 2011 at 7:17 pm

I agree with your basic attitude that we don’t need to jump to help everyone that got caught in the bubble…but the reason people worry is that people are just going to walk from the house and if enough people do this it reverberates throughout the economy


Kris October 29, 2011 at 10:04 pm

Oh, I agree. I am waiting for my neighbors to just walk away from their house. Well, they moved out already, I am wondering if foreclosure is next.

I don’t remember the recession in the 70s well enough to know if people just up and walked away from their mortgages then like they do now. If not, then what is different? Perhaps there wasn’t as many people underwater because high risk loans weren’t as prevalent? I know a ton of people that refinanced because their home’s value skyrocketed, and they just blew through the money. However, if their job status did not change, they should still be able to afford their mortgage payment. They just don’t want to pay it because they feel ripped off.


Financial Samurai October 30, 2011 at 10:56 am

Good question on why are mortgages treated differently then stocks!

I guess it’s because housing is a basic fundamental right! And I fundamentally demand to live in a mega mansion! 🙂


Kris October 30, 2011 at 7:04 pm

You should live in a real mansion Sam, don’t limit yourself.


Heather October 30, 2011 at 6:24 pm

We put 30% down on our house, bought it with a 30-year-fixed. Our only non-mortgage debt is my student loan. We don’t have cable or smart phones. We don’t live in a McMansion.

Our house is worth less than 2/3 of what we paid for it, and we’re under water, despite a perfect payment history and a large down payment.

I disagree that it is irresponsible not to be “aggressively paying down” the mortgage. We make our payment on time every month without exception.

Why should we be able to refinance? We’re not looking to move right now, but it’s not unreasonable to live in a house for ten years and decide to live somewhere else. In another four years, we won’t be able to sell our house for market value.

We could pay down the mortgage if the mortgage payment was lower, and then we wouldn’t be stuck here.

Or we could just buy the house across the street for $130K less than what we paid for ours, short sell or walk away from ours, and not worry about it.


Kris October 30, 2011 at 7:00 pm

Heather, I am confused- if you put down 30 percent and it is 2/3rds it’s original value, you can’t be too far underwater, can you?

I don’t think I said that people needed to ‘aggressively’ pay down their mortgage, it is just what we did. I do think people should make their regularly scheduled mortgage payments though.

In four years, you WILL be able to sell your house at market value, because that is exactly what houses sell for, what the market will bear. However, you may not get what you paid for out of your house, just like I won’t be able to sell a bunch of stocks I bought for a profit. It is the risk of home,stock,commodity buying.

I honestly think that many people that refinance will use that extra money for other things and not their mortgage. Personally, I hope you can refinance and lower your payment. My point is, the fact your home is underwater does not impact your ability to make the monthly payment. It impacts your flexibility in moving if you are not willing to accept a loss on your house, but your expenses are not any higher because your home value has dropped.

It isn’t unreasonable to want to move in 10 years. However, it isn’t unrealistic that housing prices drop over time and that people may not be able to move in ten years. I recognize that people can choose to walk away from their mortgages, but my thought is many people are doing it solely because they don’t like the fact that their homes are under water, not because they are in financial distress.


commerical money loans October 31, 2011 at 10:44 pm

Excellent that you did not view your home as an investment. It is like you said, a place to live. A consumer good even if it’s value went up temporarily.


Kris February 12, 2012 at 1:58 pm

I hope we are at the bottom, that is for sure!


Property Investment Australia March 15, 2012 at 8:41 am

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QUALITY STOCKS UNDER 5 DOLLARS April 2, 2013 at 1:27 pm

One that is under water on a mortgage should never assume that the party holding the mortgage will agree to allow the mortgage holder thats under water to just walk away from their debit balance. You may have to prove that it would be a great hardship for you to have to continue paying down your debit balance.


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