About half of U.S. mortgages seen underwater by 2011

[Newsjock]

Source: Reuters

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

... Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.

... Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.


Read more: http://news.yahoo.com/s/nm/20090805/bs_nm/us_usa_housing_deutschebank?sec=topStories&pos=1&asset=&ccode=

[Demeter]

1. Well, That's Just Lovely

Thanks for that.

[glinda]

14. LMAO! Your response summed up my feelings exactly.

[pnwmom]

2. If they don't have to sell their houses, it won't matter.

Eventually values will go up again, though hopefully not in a bubble, as before.

The reason so many houses are underwater is that so many people obtained mortgages with little to no downpayment. If you paid down only a few percent, it is awfully easy to go underwater.

What really matters isn't how many homes are underwater. What matters most is how much of a decline in values a market has experienced. Otherwise, we'd be in the odd position of saying that someone with a 5% downpayment mortgage whose value has declined by 10% is worse off than someone who put down 30% in cash and whose house is now worth 30% less than was paid for it. (The second purchaser isn't underwater, but has lost a lot more value.)

[FarCenter]

3. In quite a few states, a homeowner who is underwater can just walk away from the property

In states with "non-recourse" mortgages, the lender cannot sue the borrower for the deficiency, i.e. the difference between sale at foreclosure and the amount of the loan. Any other property that the borrower has, such as other houses, investments, a business, savings, cannot be attacked by the lender to make up the difference.

This is part of why there are so many foreclosures in states like California, Arizona, Nevada, and Florida.

[pnwmom]

4. Interesting. I didn't know that. nt

[JDPriestly]

9. And by some miracle, that "Depression legislation" was never repealed.

Lenders should share in the risk on large loans. Lenders should be more sophisticated and better able to assess risks than ordinary consumers.

[WriteDown]

12. What if you take a home equity boat and buy a boat...

and a few 4 wheelers?

Shouldn't a home owner have to wait 30 years before anyone can really assess the risks?

[JDPriestly]

15. What are you talking about? I don't understand your question.

[WriteDown]

16. Sorry...

It was late when I typed that. I meant to say, what if you take a home equity loan and by a boat with the equity and then the property value goes down. And how can you judge if something is a bad investment if you don't wait the full 30 year term. Property values could very well soar again in 5 years or at least have a modest rise.

[JDPriestly]

21. It's up to the bank to figure before it loans you money what its risk will be if it lends to you.

What you do with the money from the bank loan is your business. The bank shares the risk on the loss of value in the property it lends you the money to buy. That is pretty much always the case. Remember, banks loan money. That's what they do. They are supposed to be experts at calculating risk.

When tax rates on the very rich are too low, the very rich accumulate a lot of money. They try to get maximum return on that money. That excess money and the competition among the rich to get maximum returns on their excess money creates a boom. A bust cycle always follows. Because in the boom, the rich make a lot of stupid investments. Happens over and over. Since the Reagan administration, the balance between capital and wages has been terribly out of kelter. That leads to foolish investments, euphoria among the rich and especially among banks who are supposed to loan money and invest money and suddenly have too much to invest and too little demand. Some commodity or thing, be it housing or internet stocks or tulips or Ponzi schemes becomes the rage and banks and other investors start making stupid investments, start taking foolish risks. That is why the investors and banks in a just world share in the loss that everyone suffers from these bubbles in the end.

That is also why we need effective progressive taxes that even out and balance the relationship between capital, labor, wages, demand and raw material costs and investments. It will never be perfectly balance. (Think how awfully dull that would be.) Planned economies in which risk is minimized too much don't work either. We need a more balanced tax system. Taxes on the rich need to be raised in order to discourage euphoric lending during the boom times.

[WriteDown]

22. A lot of fallacies here.

"That excess money and the competition among the rich to get maximum returns on their excess money creates a boom." How?

"Because in the boom, the rich make a lot of stupid investments." How are they rich then? Are they smarter during the bust cycle?

We were originally speaking on home values, so I'd prefer to stay on that topic. I am just amazed at the # of folks who expect steep returns in their home values in 2 to 3 years. Its a 30 year investment!

[JDPriestly]

30. I assure you, the poor do not cause booms or busts.

The poor do not invest. The middle class does not invest much. The wealthy do the significant investment. It is when the share of money that is available to the wealthy for investment grows faster than the need for investment that frustrated investors, wishing to make their money "work" fall for get-rich schemes. Overzealous tax cuts caused an imbalance in our economy between investment cash and consumer spending. Outsourcing jobs also caused a problem in that the American middle class did not increase its income as fast as the "investor class."

The people who actually bought the houses made a common mistake in their thinking: they decided that the current trend would never end. They denied that they were seeing a never-ending real estate boom. They convinced themselves that the property values had really risen very quickly and, the common human error, they concluded irrationally that the values would continue to rise or at least hold steady at least for the foreseeable future.

Why people tend to believe that the current trend will continue is inexplicable although lots of people try to explain it. Maybe deluding themselves that the current trend will continue gives people a feeling of security. Maybe they knowingly take a risk and think they will outsmart the system and get out before the inevitable bust.

The number of people who expected steep returns in a couple of years is amazing. I agree with you on that. But then most people do not have business training or degrees or training or degrees in economics. Most people can barely balance a check book.

So what is not just amazing but absolutely astounding is that companies full of business majors and economists, some with advanced degrees like AIG and Bear Stearns, etc. as well as many, many banks could have believed that the boom would last forever and the houses would continue to increase in value at Olympic sprint rates.

Banks are supposed to invest their money, the depositors' money wisely. They should have known better. They are taking big losses for their unwarranted optimism. Unfortunately we all got caught in the bust.

I've lived in my house for over 20 years as has my neighbor. The two of us just shook our heads in disbelief at the stupidity of people paying the prices for properties on our block that they paid. It was insanity. How did we know? We compared the high rises in housing prices with the lack of commensurate wage increases. It was simple. We knew way back when that this housing boom was going to bust. The banks should have thought about it the way we did. It was so obvious. People are unbelievably stupid about money, even a lot of rich people.
I believe it was Greenspan who talked at some point about overexuberance in the economy.

"Because in the boom, the rich make a lot of stupid investments." How are they rich then? Are they smarter during the bust cycle?
The get-rich quick talkers get very active in booms. They are less convincing to people who have been busted. Having less money makes you spend what you have more wisely. That has been my personal experience. That is how most people react. Many of my friends at this time are cutting back on their expenditures. Makes sense. Yes, people spend and invest more carefully, more wisely in the period after a bust.

[FarCenter]

23. After finding out about "non-recourse" mortgages

I can't understand why investors bought bonds backed by mortgages from these states.

Either the investment banks completely misrepresented the risks, or the investors were complete fools.

[dixiegrrrrl]

28. The bank DID mis-represent, and the rating companies have been charged

with essentially "payola" to rate piles of shitty loans as good loans.
Sadly, no one in the government seems to care about this, and there are few prosecutions or lawsuits.

edit: spell

[WriteDown]

11. Not all states allow you to avoid the tax burden though...

A 1099C can ruin your day.

[PassingFair]

18. But the difference is still taxed, yes?

That is the case in Michigan.

[slackmaster]

19. I believe property tax is appealable in all states

In California, it's a slam-dunk to get your property tax reduced if you can show that your assessed value is 20% or more greater than the current market value of your home.

[PassingFair]

20. I'm talking about owing tax on a "short sale".

The difference is taxed.

At least it is here in Michigan.

[FarCenter]

24. Because the forgiven deficiency is taxed as income, that is an incentive to walk away sooner

In other word, you want to bail out of the house as soon as it goes underwater, so the deficiency is the smallest.

The best strategy seems to be to stop paying the mortgage as soon as the house goes underwater, live in it rent free until it is foreclosed, and minimize the amount of the deficiency that you pay tax on.

[WriteDown]

25. Same with your car...

As soon as you drive it off the lot you're underwater so you should stop paying. Keep it locked in a garage or at a secret location. That way you can get a BMW and basically drive it for free(not withstanding gas and maintenance of course.)

[FarCenter]

26. With an auto loan, the lender can come after your assets and income

The auto loan is secured by more than just the auto. It is a personal obligation of the buyer. The lender can sue you and get a judgement to secure the car, as well as to make you pay the deficiency or go bankrupt.

[WriteDown]

27. The same can be done with a mortgage in many states..

They are called "judgement" states. States differ in many ways. For instance, in many states your wages can be garnished for delinquent credit card debt. In Texas, you are safe from credit card debt garnishment.

[FarCenter]

29. Correct, but the states of CA, AZ, NV and FL are "non-recourse" mortgage states

That is part of why we've see such a high number of foreclosures in those states.

The prime mortgages going underwater in a lot of other states in the east or midwest will not have such high foreclosure rates because the borrowers can't walk away from them.

[PassingFair]

17. If you lose your job, you will likely lose your house.

Have you seen the double digit unemployment NORM?

[quaker bill]

5. I am not sure I buy this

Based on the news reports, I live in one of the more depressed markets in the country. Even in my relatively stable established in-town neighborhoods, prices are down by 30+ percent. That being said, median price for homes sold stopped declining three months ago and began to rebound last month. Resales are up and prices are beginning to rise, modestly.

The rise in home values locally over the last decade was not wiped out by any means. Prices declined a good bit, so my home has declined from 320 percent of my original purchase price at the peak to a mere 240 percent of what I paid for it. I did re-fi to a lower rate and pulled some equity out to remodel for energy efficiency, so I am now financed to near 50 percent of market value on a conforming fixed rate note. There is not a chance in hell I will ever go under water.

No doubt, people in the ex-urbs who bought in 2006 and 2007 are quite underwater, but they already are and will be staying there for quite some time to come. Many have already walked away, but most who will do so already have. Perhaps conditions are markedly worse elsewhere and in a few small areas I am sure it is true, but most reports indicate our market to be among the worst.

[FreakinDJ]

6. I beleive the "Economic Doom & Gloomers" less each day

Home values have turned the corner and across the country are starting to rise again.

The stock market rising rapidly and my investments have recooped well

[tridim]

7. It feels like prison.

I bet 90% of the condos in my complex are underwater, maybe even more.

Thought I was being smart buying a reasonable home.

[WriteDown]

13. You're not underwater until you sell...

Housing is for homes, not investments.

[spooky3]

8. First sentence of the article is misleading.

I think something like 1/4 of all homeowners have no mortgage. Their houses are paid off. So what the article means is that up to 48% of mortgage holders may be underwater in 2011.

[Blandocyte]

10. Eff them and their crystal ball

Can't nobody tell the future 'cept my Aunt Rosemary, and that's only about the weather via her rheumatiz.