If your house is worth less than you owe, what makes that scary?

What is really scary is that jackjr asked that question!

Is America that disconnected from reality?

Here is what troubles me. I was one of those frenzied people looking to buy into the Florida market with the intention of flipping the home and making a nice tidy profit. It all sounded pretty easy, the values were rising so rapidly, all I had to do was make the first purchase and I would be on my way. Lucky for me it didn't happen. The one constant that kept crawling into my head was that the home prices couldn't sustain the increases and that the market would eventually collapse. Ok, good foresight... But where was the Federal government? They had to see what was happening, and their so called economic experts should have been standing on top of the Florida sand dunes yelling as loudly as they could. For a government that loves intervention into our daily lives, they clearly dropped the ball on this, and now they are saddled with the task of devising a plan to get the economy back on track. Good luck with that. If I were an owner of one of these severely underwater homes, I'd walk away today, take my lumps, and come back all the wiser from this debacle. Credit is not and never has been your friend....

You know what scares me jackjr? It is that so many people like you don't understand the frustration of "owning" a home that is worth less and less than you initially paid for it. What also scares me is that you don't understand that it (this falling price situation) is somebody else's fault -- at least in my situation. My wife and I bought our home in 2003 for $273K (actually a great price back then). Unlike most people, at the time, who paid asking price or over asking, I paid 11.5% less. I was able to do that because I was careful and didn't allow myself to get carried away with house buying fever. I basically had to tell everyone involved (both realtors and the seller that it was overpriced and the market was high and actually get turned down 2 times by them prior to them agreeing). In the 8 years that we have owned the house, we have done tens-of-thousands of dollars of repair and upgrade to the house. We have also done many hours of sweat-equity (that's a laugh now) to upgrade the house. We put about 8% down when we bought and at this point we have paid somewhere in the vicinity of $200k back to the bank for this home (while only reducing the original loan by around $20 – $25K). You may say I shouldn't have bought at the time, and maybe you're right, but there were few options other than continuing to rent.

So, we made all of the right moves to buy a home prudently. We had and still have great credit (6.5% fix rate mortgage.) We invested our own money in the purchase with a cash down payment. We have added value (NOT) by making improvements and maintaining the house. We make all our mortgage payments, in full and early. And yet (in an attempt to save $80k in interest over the next 20 years) we tried to remortgage at these new interest rate (don't forget that banks enjoy borrowing basically interest free money) and we were told that we would have to write a check for around $40K (only an estimate could have been more) just to refinance because of how much lower the value of our home is to the amount left on the mortgage.

My statement about the loss of value being someone else’s fault simply means that, I didn’t make the costs of homes go through the roof. I didn’t make the market crash by being so massively overleveraged. I didn’t get a bailout, thus guarantying no repercussions for making these gigantic blunders in search of greater profits and huge bonuses. It was greedy banks and Insurance companies who were either helped or allowed by the ignorant or, just as guilty politicians who made the market fly. If you don’t understand how that worked, please do a little reading about the housing bubble. Try to step back from the “it’s all the borrower’s faults” crowd and look at the whole picture. Yes borrowers also had a hand to play in the crisis, but they couldn’t have done much without the cooperation, and let’s be honest encouragement, of the money lenders.

So how do I not blame other people for my situation? I followed all of the rules as far as we knew them and almost 9 years after buying my house and sinking in a great deal more money and energy, it is worth 20% or so less than what I borrowed for it. Never mind all of the added money and energy I put into it. I’m tired of being the “unlucky” one in every deal. I’m tired of the wealthy getting all of the perks, bonuses, golf junkets and Gulfstream Fives. I would have preferred that the government bailed us out and let those rich bankers choke on their greed. I have nothing against profit. I have a problem with greed gone amok. My loss is a direct result of their greed and callous disregard for everything but themselves.

Every American in my situation should just get a good estimate of the current value of their home and simply do their own mortgage adjustment. Go ahead; give yourselves a “bail-out.” Send the mortgage holder a little card informing them of your new clarity of thought. Something like:

To whom it may concern,

You currently hold my mortgage. You are, I’m sure, aware of how bad the loan you made me was. You lent me too much money based on the true value of my house and since you’ve already gotten your helping hand from the government, I’m getting my piece from you. So you will immediately adjust my mortgage to reflect the current value of my home (at least 20-30% lower), at an interest rate that is no more than 3.5% of your government lending rate (not to exceed 4.5%). You will apply all past payments to this new adjusted amount, adjusting the interest and principal previously paid to the new “real’ mortgage amount. You will not collect any closing costs, or points or PMI or any other outrageous method of taking more of my money than you deserve. You will do the math, the paperwork, and footwork, and be courteous and respectful to us your customer. We are withholding any further payments until you make this adjustment. Oh and as a penalty for your previous avaricious behavior, you will lose all current and future payments until this proper paperwork is signed and completed. We’ll call that your grace period. But be careful, if you take too long (more than 120 days), we may add other penalties.

In closing this is your only deal. Take it or leave it. If you don’t take it, choke on the house. I’m done throwing good money after bad.

Sincerely,

You fed-up customer

John Q Public

Jobeau, well said.

I bought my home in 2006, at the high point of the housing bubble, but thankfully I was well aware of the bubble and well aware that the housing market where I live was one of the few in the country that didn't actually "bubble." The depreciation on home values in our area is only about 3-4% and ours may actually have gained a little value.

That, in no way, takes away from the gravity of the crime involved in this. However, this was not the insurance companies as an issue can be solely rested on the backs of the mortgage and banking industry. Having worked (back in the 90's) for a retail mortgage company for a while, handling strictly B-Paper loans, I have a pretty good insight into the difference between, say, 1996 and 2006.

In 1996, traditional 30 year fixed rate mortgages required 20% down. Under some programs and with special situations (FHA approval, VA approval) and very good credit, you might qualify for a 90% or 95% loan, but you still had to have seasoned money for the down payment and had to pay private mortgage insurance (PMI). Second mortgages for the actual "down payment" were practically non-existent. The mortgage system was set up to protect the *value and stability of the loan.* People with poor credit required significantly more paperwork, higher downpayments with no "helper loans," and generally were not able to get into a house. The net effect of this was that housing appreciation was maintained in check by the reduction in the demand of homes. If you didn't have money or didn't have good credit, you could not get into a house, so there were less competing buyers.

In 2006, the entire situation had changed. Mortgages were being bundled in massive loan groups and sold off to banks en masse as a package. Individual loans were meaningless because the stability and value of any single given loan was leveraged against all the others. Basically, if one loan defaulted, the profit of all the other good loans would make up for it, reducing the "risk." (It's very similar to the corrupt way that American insurance based medicine works. You pay $12 for a tongue depresser (yes, $12+ for a single popsicle stick... I see the bills all the time) to make up for all the people who can't pay.)

Because of this change, being a "B-Credit" homebuyer was no longer a significant bar to getting a house. Likewise, not having a proper downpayment wasn't a bar either. My wife and I have fantastic credit, but had no money, so we got an 80/20. Frankly, it was pretty stupid of us, but for 2006 that was par for the course. Instant gratification, no seasoned money required. Thankfully, again, our market is one of the few good ones. All the suddent a huge number of people who couldn't get a mortgage 10 years before are now "qualified home buyers." With a huge surge in demand came a huge surge in prices. However, the crash proved the bubble. People were qualifying for loans that they couldn't pay and as that became apparent through a major surge of defaults, the demand dropped and with it went the housing prices. This was all due, not to a mistake among home buyers (granted, some of us could have been smarter about it, but we're dealing it... too many people simply didn't know the difference and trusted their "expert" bank representatives and they tanked), but due to a banking industry change that was based entirely on un-sound economic strategies and corporate greed.

This all came about due to de-regulation at the end of the 1990s. Way to go for de-regulation. It clearly makes a better market when corporations get free rein.

Who did we bail out over this too? Mind boggling.

Jobeau1

You and your wife are just one of millions of American families in this housing morass. All of them have similar sad stories regarding home ownership recently. You both have a better understanding of economics. Since you put so much money into your home recently, you should just enjoy the improvements over the next 10 years. Hopefully, the other things in your life will remain stable and you won't be forced to sell your home. Probably a good idea to put off making anymore household improvements for a long while.

There's little sense in blaming anyone for your situation. The root cause of the current real estate problems is Credit Default Swaps invented by Wall Street financiers. These Wall Street products for investors, CDS's, have spread beyond domestic mortgages to Sovereign Debt in Greece and Italy. If you think you're in a bind wait until you see what Greece and Italy have to do to get out of their morass. If Greece and Italy are forced into default, the the Credit Default Swaps owned by US banks will trigger. The US tax payer will have to provide more bailout funds to the US banks too big to fail. We could be right in line with yet another recession much bigger than the last one.

Never fear. Obama handled the last financial disaster with a cool hand. He's got good, recent experience to handle the next one like a pro.