What’s the problem with underwater mortgages?
I keep hearing about people who don’t want to pay their mortgage because they owe more than the house is worth. Why does this matter? If you continue to make the payment at some point in the future the house will be worth a lot again. This is no different than a car loan. The minute you drive it off the lot you’re underwater because it loses value.
Tags: Mortgages, Problem, underwater, What's
the problem?<<<<<<
If the owner can hold on, you are likely right. But if they need to sell the house, to move, there is a HUGE problem. If one or both of the owners lose their jobs and cannot make the payment, there are problems. If they got an ARM or balloon and can NOT refinance because it’s underwater, it’s a Problem. Assuming that they are still employed and need a place to live in area, staying put and continuing paying makes sense.
the issues is with those who are strugging to make payment. they lose incentive to keep trying. they are tempted to take the short term gain by allowing lender to foreclose and wipe out debt.
it also presents a problem if trying to sell home. the borrower has to come up with cash from somewhere to pay off the loan at closing.
Two problems…one real one imagined
First, the people who can no longer pay the mortgage (balloon payment, lost job) can’t refinance since you can’t borrow more than the house is worth. This is the “real” problem – although some of this is of their own making (overspending assuming prices would continue to appreciate, not buying within a real budget, whatever) while others are truly hurting (lost job, pay cut, hours cut due to economy).
The false problem is as you note – folks don’t understand that underwater is not inherently good or bad – it is what it is. As long as you continue to make payments, you continue to pay down principle and eventually will get above water…especially if the housing market in the area starts to rebound. Unfortunately, some of these folks don’t look long term (or any term longer than 6 months) and just walk away for no good reason other than they currently owe more than the house is worth. IMHO, these are the folks that need to be held to recourse, since by walking away, the foreclosures help to glut the market and further drive down prices.
It is only a problem if they need to sell.
“If you continue to make the payment at some point in the future the house will be worth a lot again.”
That depends on where the home is located. There are places in the US where real estate was so overpriced vs. now that it may never come back to where it was. So, some of these people choose to walk away even when they can pay the mortgage, taxes and maintenance on the home. I know four people who did this. They sent the keys back and took a walk. Why? The home was no longer a viable investment. They also did it because we live in a nation that allows this both legally and culturally.