upside down mortgages

Help me understand why having an upside down mortgage is a huge problem.

1. OK, let's say you buy a house.
2. You live in the house for 5 years and your home value increases by 15%.
3. You have a fixed rate mortgage that you can afford and a good job.
4. You pay your mortgage every month.
5. Then, the economy tanks and a lot of people start defaulting on their mortgages.
6. You've still got your job and you've still got the same mortgage payment.
7. You continue paying your mortgage every month.
8. 9 months into an economic crisis, home values are way down.
9. Your home value has decreased by 25% (10% lower than when you bought it).
10. You still have your job.  Your mortgage payment hasn't changed.

You don't like your home value decreasing, but why can't you ride it out until your home value goes back up eventually?

Who are the people who can't ride it out?

The one's that no longer have their jobs or have been forced to take pay cuts and can no longer afford to make the payments.  They can't refinance and they can't sell either.  The Bank is stuck with the cost of foreclosure and the loss.

Or the one's that get transfered and need to sell the house but can't.

Obviously the ones hardest hit first were the ones with adjustable rate mortgages.  Their payment became unaffordable at there was no way out because of the drop in value and the tightening of the lending guidelines.

that makes sense...

• people who've lost their job
• people who've had their hours cut
• people who've taken a pay cut
• people who had adjustable rates and no wiggle room in their budget
• people who had balloon payments, which i don't care who you are, that is unwise anytime

Is this most of the people, do you think?

I don't think that many in your scenario have a real problem.  Heck that happened to me & my hubby in the early 90's crash.  We were upside down for 10 years!  So much for our "starter" home we were going to flip after 2 years.   But it was more than made up for in 2002 when we purchased our 2nd home, which tripled in value in by 2005, which was the beginning of the crazy SoCal boom, and we sold and paid cash for a home here in Louisiana. 

The people who DO have a problem, are the ones who bought into the extremely popular (at least in SoCal new subdivisions they were) interest only payments, whose payments ballooned after the 5th year.  I mean, why would you EVER commit to a house that you KNEW you could not pay for in 5 years if the house market crashed and you could not refi (which of course it did).    And my own sister is one of the idiots.  I warned her in 2005, but of course she did not listen.

Original Post by nomoreexcuses:

that makes sense...

• people who've lost their job
• people who've had their hours cut
• people who've taken a pay cut
• people who had adjustable rates and no wiggle room in their budget
• people who had balloon payments, which i don't care who you are, that is unwise anytime

Is this most of the people, do you think?

 Or anybody that needs to sell the house or was planning to use the house as collateral on some other loan.

People are upside down in their cars all the time and it is no problem unless they have a wreck or want to trade. 

As long as you have a fixed rate mortgage, still have the income you had, and aren't going anywhere it doesn't matter if you are upside down or not.

Going by every point in your scenario (including, they can still easily afford the mortgage payments even though the value has decreased,) I have seen this happen a lot where I live, due to our proximity to the ocean.

A lot of people who had no business doing so started buying real estate at the beach earlier in the decade as an investment, with no intent to ever live in the place (or at least no intent to live in it full time.)  Some people bought second/vacation homes, some bought homes solely to flip them after a couple of months and make a profit, some bought thinking they'd live there for a year or so or rent the place out then flip it...etc. 

There were also a lot of people investing in real estate to avoid the capital gains tax.

For a while, this all worked.  But then the bottom fell out so quickly that for most people, the chances of them ever turning a profit on what was basically an unneeded home were at zero.  So most of them figured they were best to just sell it for whatever they could get for it and not have what could turn into a constantly depreciating "thing" on their financial records...especially one that wasn't all that well built to begin with, was at the beach, and susceptible to hurricanes and floods, etc.

So...my answer to your question is the "amateur real estate investors" who learned why real estate investing is not for the faint of heart.

Original Post by thmheh:

IThe people who DO have a problem, are the ones who bought into the extremely popular (at least in SoCal new subdivisions they were) interest only payments, whose payments ballooned after the 5th year.  I mean, why would you EVER commit to a house that you KNEW you could not pay for in 5 years if the house market crashed and you could not refi (which of course it did).    And my own sister is one of the idiots.  I warned her in 2005, but of course she did not listen.

 I agree.  Some did not listen.  But others were lied to by lenders using extremely shady lending practices. 

I also blame our outlook as a whole.  We as Americans feel like we are owed everything.  We believe that we are entitled to that big house that will strap us for cash every month, for example.  People started buying houses that were way above their means and the lenders were letting them.  It was sad on both ends.

This really hit me when my brother and sister in law (who I knew made much less money than us) bought a house several years ago.  I was upset because at that time, even my husband and I couldn't really afford to do so.  I kept wondering how they did it.  I kept wondering what we were doing wrong that we were still in an apartment.  Now I know.  They were given a nice big loan with a nice big adjustable interest rate.  Unfortunately for them, they lost their house last year because of it, and had to go back to renting.  My husband and I, on the other hand, waited till we were absolutely sure we could afford it.  We did our research, and even though we were approved for alot more, we stayed with a fairly small starter home that wouldn't break our budget.  Now, even in this economy, if one of us were to lose our job, we would still be able to keep the house on one income.

When it comes to houses, many many people are living beyond their means.  Then when this housing situation came about, it put them in far worse shape than they should have been.

So would you think that of the people who are upside down in their mortgages, it's a small % who had variable rate, have less income than previously, or need to move?

I'm trying to get a sense of

what % of homeowners are upside down

what % of those are in one of those undesirable problematic scenarios

and what % just need to sit tight and ride it out

Original Post by nomoreexcuses:

So would you think that of the people who are upside down in their mortgages, it's a small % who had variable rate, have less income than previously, or need to move?

I'm trying to get a sense of

what % of homeowners are upside down

what % of those are in one of those undesirable problematic scenarios

and what % just need to sit tight and ride it out

 Well, it's been long enough since the bottom fell out of the Sub-prime mortgage market that I think most of the people that were going to be in trouble due to unwise loans know it already.  But the number of people that have lost income is still growning.  For example, Toyota employes 4500 people in my area.  So far they have avoided lay-offs but they just instituted the second wage cut.  The typical worker is probably making 3/4 of what they were before.  Some of them will be fine but other will struggle whether it is car, boat, or motorcycle payments or their mortgage.  I think it's impossible at this point to estimate how many people are or will be in trouble.

The thing is if you are upside down and can't make the payments then foreclosure is your only option.

edit: correct typos

The company I work for does mortgage mofidications, and work with lenders to lower rates. There are a lot of people going through financial hardships in their lives. A LOT of homes purchased during the booming housing market had adjustable ARMS, and most peoples mortgages are not a fixed rate. That's what caused the boom in the first place. People could make their mortgage for x amount of years, but after the rate increase they're effed.

Most people live paycheck to paycheck, and when you get a 10% pay cut at work, or when your partner loses his job, or theres an un-expected medical problem, you can get pretty far behind on such things.

Being upside down on your mortgage when you have a stable life is not a big deal (unless you plan on moving), but if you are upside down, you cannot refinance your home. Plain and simple, this economy sucks. :)

Original Post by x17star17x:

The company I work for does mortgage mofidications, and work with lenders to lower rates. There are a lot of people going through financial hardships in their lives. A LOT of homes purchased during the booming housing market had adjustable ARMS, and most peoples mortgages are not a fixed rate.

Most people live paycheck to paycheck, and when you get a 10% pay cut at work, or when your partner loses his job, or theres an un-expected medical problem, you can get pretty far behind on such things.

Being upside down on your mortgage when you have a stable life is not a big deal (unless you plan on moving), but if you are upside down, you cannot refinance your home. Plain and simple, this economy sucks. :)

most peoples' mortgages are not a fixed rate

??

wow, i did not realize this.

I was talking to a real estate agent that I know yesterday and she was telling me that people are willing to sell their homes to get out of mortgages simply because they're not willing to reduce their luxuries in other areas, such as buying coffee out all the time or eating dinner out.

Hello, anyone home? When I bought I stopped going out for coffee, eating lunch out, buying assorted stuff that I didn't need and taking vacations.  I still make my own coffee most days, bring my own lunch to work and don't buy a lot of stuff, my vacations tend to be rather modest most of the time.

I don't know whether or not it is statistically true the "most people have ARMs" but it is important to note that not all ARM are created equal.  Some ARM payment have gone down because the rate have dropped so those people have lower mortgage payments then they did when all this started. 

Sub-Prime mortgages are an entirely differentanimal.  Most of those mortgage were written so that as soon as the first 2 or 3 years were up the rate would automatically adjust upward by 5 or 6%.  Most borrowers didn't really know (although it was disclosed at closing) or didn't care but they had been sold on the idea of refinancing again when the fixed period was up.  These loans were called "Band-Aid" loans by the industry.  People with pour or no credit were give loans, often at 100% of the value of the house, at a payment that they could afford for 2 years with the idea of making their payment on time to greatly improve there credit score.  Then they could refinance and a low "bank rate" on a fixed rate mortgage.  This did work...for awhile and only for those folks that really did make all of their payments on time.  But when the bottom fell out of the mortgage business these folks were in trouble even if they did make all they payments on time because now they couldn't afford the new payment and couldn't refinance or sell because they had no equity.

Edit:  It was these home hitting the market in foreclosure that cause real estate values to drop exacerbating the problem.

Original Post by thmheh:

The people who DO have a problem, are the ones who bought into the extremely popular (at least in SoCal new subdivisions they were) interest only payments, whose payments ballooned after the 5th year.  I mean, why would you EVER commit to a house that you KNEW you could not pay for in 5 years if the house market crashed and you could not refi (which of course it did).    And my own sister is one of the idiots.  I warned her in 2005, but of course she did not listen.

Your sister isn't an idiot, she was just sold a bill of goods, because every where you looked in hot areas like SoCal the mantra was buy now or get priced out forever. Fear of a loss, the oldest and still most effective play in the sales handbook.

My guess is most of these people thought they'd flip in a few years and pocket the money or use it as a down on a similar place to lock in a lower fixed payment that they knew they could afford.

The problem is that nobody, including the ones who made out well, knew what they were doing. Everyone jumped on the wave and the sooner you jumped on, the better you fared.

However in your sister's case she may still come out okay, looking at what obama is planning (and you'll be paying for).

Some people cannot resist the lure of a "quick buck".  It is amazing to me that elderly people on fixed incomes got an ARM and had no idea what that meant - however I really have to wonder how many people just wanted the big house, and/or new house and thought it would just all work out in the end.  I really really do not want to bail them out.

The choice is no longer yours.

nomoreexcuses--I just heard this morning on the Today Show that 92% of Americans are still making their mortgage payments on time.  That doesn't tell you what kind of mortgage someone had, but does give you some idea about who just needs to sit tight right now.

Original Post by ignayshus:

The choice is no longer yours.

 Yeah, I know. 

Your point in the OP is correct. It's no skin off my financial ass to just sit tight. The one variable that has always applied is 'location'.

If you are in an economically depressed location to begin with, re-selling at any time will make trouble. That happened a lot to the victims of predatory lendors. They bought properties in areas that were so over-valued that there will never be hope of regaining equity.

Original Post by ehp1975:

nomoreexcuses--I just heard this morning on the Today Show that 92% of Americans are still making their mortgage payments on time.  That doesn't tell you what kind of mortgage someone had, but does give you some idea about who just needs to sit tight right now.

Thanks for that!