Negative home equity

[mike777]

I read/hear that about ten million homes have negative equity with nonrecourse loans.

 

 

 

 

Negative equity means people owe more on the house than the worth of the house.

In the USA mortgage loans are nonrecourse. If you default you get to walk away from debt. Compare this to Car loans or credit cards which you can default on but still owe money when they take away your car.

 

If the average/median/whatever loan on a house is 200,000$ this is alot of money.

 

People walking away from ten million homes is alot.

 

 

There is a fear that this number may rise to twenty million negative equity homes in 12 months.

[bid_em_up]

The fallacy in this logic is that you assume just because someone has negative equity that they will automatically walk away from the home.

 

They still gotta live somewhere. As long as they can make their payments, and aren't able to sell the home without doing so at a loss, they may as well remain where they are and wait for the market to recover. The majority of the 10 million people will likely do exactly that.

[mike777]

The fallacy in this logic is that you assume just because someone has negative equity that they will automatically walk away from the home.

 

They still gotta live somewhere.  As long as they can make their payments, and aren't able to sell the home without doing so at a loss, they may as well remain where they are and wait for the market to recover.  The majority of the 10 million people will likely do exactly that.

Saying ten million people with negative equity will not walk away does not make it true.

 

The logic is it is cheaper to walk away...pay rent and buy later when prices fall. The logic is not to stay in a house with negative equity.

 

Keep in mind your monthly mortgage payment is almost all interest...zero principle for many many years.

 

If it is cheaper to walk away...pay rent and buy later...........then why not? Do what is most logical.

 

If housing has fallen 30% walk away and buy if it falls 50%.

 

Not my talking points...see:

 

feldstein.

 

http://www.nber.org/feldstein/

[helene_t]

In the USA mortgage loans are nonrecourse. If you default you get to walk away from debt. Compare this to Car loans or credit cards which you can default on but still owe money when they take away your car.

Ok so I can walk away from my $300,000 house with a $400000 mortgage and then buy a similar house (maybe even the same house, lol) for $300,000, thereby screwing the bank for $100,000? Strange system.

[Al_U_Card]

Nah....Mike must just be shilling for the rich landlords that need new tenants...

 

I bought a house for 68K in '81. Housing prices fell for political reasons for 5 years during which time the house could have sold for 55K or so. Interest rates rose to 18% during that time. I sold the house in 2003 for 175K .....not a great investment but it was a fine home for me and my family.

[PassedOut]

The logic is it is cheaper to walk away...pay rent and buy later when prices fall. The logic is not to stay in a house with negative equity.

Some will walk away, but a lot of us really like where we live -- that's why we bought the place. Plus, most of us do a lot of work on our houses after we buy them. So I don't see great numbers walking away unless they can't make the mortgage payments.

[pigpenz]

what i was told by a financial person, yes you can walk away from these homes but when you do it will stick on your credit rating for 30 yrs. Making it even harder to finance again when you do want to get back into the home market

[pclayton]

Yeah, not quite.

 

1. Walking away from a mortgage leaves you a huge black mark on your credit report for seven years.

 

2. While you don't have any financial recourse to the bank, you still get a 1099 from the bank on the debt they eat. Its still taxable income. I heard something about recent legislation that either deferred or wiped this out but I'm not sure.

 

3. Moving takes a huge emotional toll on a family. If the negative equity isn't much, its often better to ride it out.

 

4. For bad mortgages, most banks are willing to restructure the loans these days. We simply haven't had the great flood of foreclosures that everyone was expecting. Short sales are more common than not, but they do take time.

 

All in all, negative equity frequently isn't realized, so its a temporary paper loss that has no effect on anything.

[Lobowolf]

Yeah, not quite.

 

1. Walking away from a mortgage leaves you a huge black mark on your credit report for seven years.

 

2. While you don't have any financial recourse to the bank, you still get a 1099 from the bank on the debt they eat. Its still taxable income. I heard something about recent legislation that either deferred or wiped this out but I'm not sure.

 

3. Moving takes a huge emotional toll on a family. If the negative equity isn't much, its often better to ride it out.

 

4. For bad mortgages, most banks are willing to restructure the loans these days. We simply haven't had the great flood of foreclosures that everyone was expecting. Short sales are more common than not, but they do take time.

 

All in all, negative equity frequently isn't realized, so its a temporary paper loss that has no effect on anything.

Particularly #1. Good luck with that "Buy later when prices fall."

[TimG]

If the average/median/whatever loan on a house is 200,000$ this is a lot of money.

That does not follow logically. Some of the negative equity situations are likely only small negative positions -- $200,000 owed on a house that would sell for $199,000, for example. The amount could actually be pretty small.

[Lobowolf]

You'd also be walking away from a particularly large tax deduction - home mortgage interest.

 

 

Negative equity situations are particularly tricky, interesting, and problematic in my business - eminent domain. For the reasons Phil mentioned (and another one - to buy later, you'd have to come up with a down payment again, and in a stricter credit environment, depending on when you bought), making the payments and riding it out is the overwhelming preference of most people able to do so; eminent domain actions essentially created forced sale situations, though, and "riding it out" is no longer an option.

[sceptic]

If people brought houses as homes, which is what should happen, no one would worry about it as an investment.

 

Walking away from your house and debts and explaining to your kids that they no longer have a home and mum and dad will again never be able to borrow the money to buy another house, it is probably a very hard thing to do and something no one does lightly, I doubt even a large proportion of the 10,000,000 would take that way out

 

Mike from what I gather is part of a rich american family (possibly like the Kennedys) who have no idea what it is like for normal people (ones that do not understand the banking system etc etc etc)

 

Me on the other hand have been saying for some considerable time, that the greedy bastards are gonna have to pay the price (was taking crap) it looks like just ordinary people are gonna pay the price, not the well to do bufoons that cause all the problems and in that statment I class all the proffesional lawyers, bankers business folk, that put money before social responsibility

 

Just because you are well educated and succesful does not mean you are right, it just means you have taken advantage of situations for your own gain and could not careless about the consequences

 

The bubble has burst (and it was pretty obvious it would) I hope it is not just normal folk that get to pay the price for greed

[mike777]

http://www.charlierose.com/home

 

Here is the Charlie Rose show with Martin Feldstein discussing this.

 

His concern was that enough of the ten million negative equity homeowners would walk away/be foreclosed on which would force down prices even more to the point of 20 million negative equity homes.

 

I note on my tiny block of 12 houses 2 have been foreclosed on and another family sold when they could no longer afford the mortgage after getting laid off.

 

 

"Mike from what I gather is part of a rich american family (possibly like the Kennedys) who have no idea what it is like for normal people (ones that do not understand the banking system etc etc etc)"

 

 

:( btw Wayne, I guess my family was ok, my family never owned a car, let alone a house when I was growing up. :)

 

We were pretty well off compared to a girlfriend who grew up without electricity, indoor running water(they had a well), and an outhouse.

 

She had it pretty well off compared to my StepGrandmother who lived in the forest and a cave on an island during the Japanese occupation. :)

[sceptic]

mine did :) I am a kettle calling the pot black I am afraid, I really do hope that some sort of social resposibility is on its way from the politicians :)

[Lobowolf]

Not to mention social responsibility for the people who lied on their mortgage applications (yes, those applications should have been scrutinized by the lenders) and now want to be bailed out of the mortgages they never should have gotten, while the responsible people who continued to rent & save scratch their heads and say "WTF?!"

[pclayton]

Not to mention social responsibility for the people who lied on their mortgage applications (yes, those applications should have been scrutinized by the lenders) and now want to be bailed out of the mortgages they never should have gotten, while the responsible people who continued to rent & save scratch their heads and say "WTF?!"

This is the crux of the problem. I have a fairly simple solution.

 

Mortgage Brokers should be held to a very high standard of ethics and fiduciary.

 

If a stock broker puts your retirement into flimsy options, techhie flyers, and the Vanuatu Emerging Markets fund, and you lose your shirt, he's liable.

 

For most people, a home is the most significant asset they'll ever own. Because you are being peppered with solicitations to refi so that you can take that African Safari, does that mean that its prudent? No, I think a mortgage broker should be looking at your situation, and saying, "you have $100,000 of equity". You can tap into part of it, but a 10% (say) slide in the market will result in a lot of that disappearing. Maybe that's prudent.

 

Certainly they wouldn't be charging 8 points and garbage fees and be in such a hurry to bring the notary over to close.

[mike777]

Not to mention social responsibility for the people who lied on their mortgage applications (yes, those applications should have been scrutinized by the lenders) and now want to be bailed out of the mortgages they never should have gotten, while the responsible people who continued to rent & save scratch their heads and say "WTF?!"

This is the crux of the problem. I have a fairly simple solution.

 

Mortgage Brokers should be held to a very high standard of ethics and fiduciary.

 

If a stock broker puts your retirement into flimsy options, techhie flyers, and the Vanuatu Emerging Markets fund, and you lose your shirt, he's liable.

 

For most people, a home is the most significant asset they'll ever own. Because you are being peppered with solicitations to refi so that you can take that African Safari, does that mean that its prudent? No, I think a mortgage broker should be looking at your situation, and saying, "you have $100,000 of equity". You can tap into part of it, but a 10% (say) slide in the market will result in a lot of that disappearing. Maybe that's prudent.

 

Certainly they wouldn't be charging 8 points and garbage fees and be in such a hurry to bring the notary over to close.

Talk about a nanny state. Assuming the broker did everything legal and there is a ton of law that is applied to a broker, now if the client goes broke you want to sue the broker. :)

 

btw clients lie/tell half truths to their broker all the time. :)

 

Btw they get sued over this issue for decades.

Take your example, the broker does everything legal and you buy all this junk, you win you keep the profits, you lose you sue broker and get your money back...neat trick. :)

 

btw2 If I buy a house and the house goes down in value can I sue the seller now and get back my money, cool......:)

[pclayton]

Not to mention social responsibility for the people who lied on their mortgage applications (yes, those applications should have been scrutinized by the lenders) and now want to be bailed out of the mortgages they never should have gotten, while the responsible people who continued to rent & save scratch their heads and say "WTF?!"

This is the crux of the problem. I have a fairly simple solution.

 

Mortgage Brokers should be held to a very high standard of ethics and fiduciary.

 

If a stock broker puts your retirement into flimsy options, techhie flyers, and the Vanuatu Emerging Markets fund, and you lose your shirt, he's liable.

 

For most people, a home is the most significant asset they'll ever own. Because you are being peppered with solicitations to refi so that you can take that African Safari, does that mean that its prudent? No, I think a mortgage broker should be looking at your situation, and saying, "you have $100,000 of equity". You can tap into part of it, but a 10% (say) slide in the market will result in a lot of that disappearing. Maybe that's prudent.

 

Certainly they wouldn't be charging 8 points and garbage fees and be in such a hurry to bring the notary over to close.

Talk about a nanny state. Assuming the broker did everything legal and there is a ton of law that is applied to a broker, now if the client goes broke you want to sue the broker. :)

 

btw clients lie/tell half truths to their broker all the time. :)

 

Btw they get sued over this issue for decades.

Take your example, the broker does everything legal and you buy all this junk, you win you keep the profits, you lose you sue broker and get your money back...neat trick. :)

Mike, I'm not talking about the USA or California or North Carolina stepping in to enforce these laws. I think it can done through the civil courts. Rogue brokers should have their licenses pulled, although I'm pretty sure becoming a mortgage broker is not very difficult and does not require any degree of schooling or knowledge about finance.

 

***** happens. But when the problem is being perpetrated by an individual making obscene amounts of cash off of Mr. and Mrs. Blue Collar, with limited resources to pay back a loan, I have a problem with it.

 

Do you think anyone should have a fiduciary responsibility to another person? When they violate this should there be consequences?

[mike777]

I think if they break the law they should be punished. :) Who argues against that?

 

That is not the same if a broker sells a stock or a loan in a legal fashion.

For instance stockbrokers have a "know your client" law. You cannot sell your client that you know or should have known is an inappropriate investment even if they want to buy it. Short sell a Call option for instance to Donald Trump may be ok....but to my grandmother it would not be.

 

btw almost all brokers of any kind do not have a fiduciary duty....they are brokers.......and I doubt any of them would want such a high legal duty.

 

 

fiduciary duty [1] is the highest standard of care at either equity or law

 

http://en.wikipedia.org/wiki/Fiduciary_duty

[pclayton]

btw almost all brokers of any kind do not have a fiduciary duty....they are brokers.......and I doubt any of them would want such a high legal duty.

 

 

fiduciary duty [1] is the highest standard of care at either equity or law

 

http://en.wikipedia.org/wiki/Fiduciary_duty

?? Brokers most certainly do have a fiduciary duty, although this appears to be created by the courts.

[mike777]

"But when the problem is being perpetrated by an individual making obscene amounts of cash off of Mr. and Mrs. Blue Collar, with limited resources to pay back a loan, I have a problem with it."

 

Phil to use your example. You are going to sell your house to a Mr. Blue Collar. Assume you are going to make an obscene amount of cash. Mr. Blue Collar has an adustable rate mortgage/zero downpayment/limited resources to pay back the loan.

 

 

 

Now interests go up...that house you sold goes down over 30%

 

Does Mr. Blue Collar get to sue you now.....you are the one who made an obscene amount of cash......what was your duty?

 

You seem eager to sue the middleman but not blame/sue the buyer/seller?

 

No Phil almost all brokers do not have a fiduciary duty they are brokers....:)

 

In any case you can sue all you want but you cannot get blood out of a turnip. Lehman brothers broke Bear Stearns broke...Merrill Lynch, Countrywide, gone...Wash MU gone....employees.....out of a job.......

[pclayton]

"But when the problem is being perpetrated by an individual making obscene amounts of cash off of Mr. and Mrs. Blue Collar, with limited resources to pay back a loan, I have a problem with it."

 

Phil to use your example. You are going to sell your house to a Mr. Blue Collar. Assume you are going to make an obscene amount of cash. Mr. Blue Collar has an adusted rate mortgage/zero downpayment to pay you off with.

 

 

 

Now interests go up...that house you sold goes down over 30%

 

Does Mr. Blue Collar get to sue you now.....you are the one who made an obscene amount of cash......what was your duty?

 

You seem eager to sue the middleman but not blame/sue the buyer/seller?

 

No Phil almost all brokers do not have a fiduciary duty they are brokers....:)

 

In any case you can sue all you want but you cannot get blood out of a turnip. Lehman brothers broke Bear Stearns broke...Merrill Lynch, Countrywide, gone...Wash MU gone....employees.....out of a job.......

Mike, I don't have a fiduciary responsibility to someone I sell a home to. This is an absurd suggestion. I would even argue that if I take back a note as a seller, I don't have a responsibility toward the buyer.

 

The 'middleman' (i.e., broker) is counseling the buyer and has a responsibility.

 

By the way, read the wiki article again and brokers are mentioned.

[mike777]

Phil a fiduciary duty is not the only kind of duty.....

If the broker breaks the law of course he can be sued no one says he cannot be.

 

Most brokers do not offer counseling....they tell you the difference or facts between all the different type of mortgages, they tell you the facts........if they do offer counseling they should follow the law and their duty, fiduciary or not...:)

 

 

 

Are you saying the seller and broker both do not break the law but you want to sue broker but not the guy who made an obscene amount of cash of Mr. Blue collar?.......why not?

 

Phil please read your own quote..........

 

"But when the problem is being perpetrated by an individual making obscene amounts of cash off of Mr. and Mrs. Blue Collar, with limited resources to pay back a loan, I have a problem with it."

 

 

There are all kinds of duty...fiduciary is only one kind. You can sue if that duty is broken......You seem to want to sue the middleman who has no fiduciary duty but not the seller. Of course you can sue the middleman if he breaks the law or regulations.....no one argues you cannot.

 

You seem to have no issue with the seller who takes advantage of Mr. Blue Collar and makes lots of cash. :)

 

Let me put it this way, the broker tells you in writing what your mortgage is, your lawyer at the closing goes over the documents, the newspaper and tv tells you the economy and housing prices and interest rates go up and down.......no one breaks the law

 

:) Dont you think the seller should say hold on here big fellow....are you sure you can handle this loan if the rates should up and this house goes down in value? I am going to make a huge profit off of you..buddy......or do you think the seller has no responsibility but to take the money and run? I am the seller I got no Fidicuary Duty so bye bye sucker......

 

 

http://en.wikipedia.org/wiki/Stockbroker

 

Again Phil almost all brokers do not have a fiduciary duty...:)

[barmar]

I think he's saying that there's no law that requires the seller to confirm that the buyer has the financial means to repay the loan. But the mortgage broker works for the buyer, so he has a fiduciary duty to the buyer to keep him from getting over his head.

 

However, I think the problems that the buyer gets into have to have been foreseeable. Is he really expected to make sure that every buyer can afford to weather a 30% decline in housing prices?

[cherdano]

I think he's saying that there's no law that requires the seller to confirm that the buyer has the financial means to repay the loan. But the mortgage broker works for the buyer, so he has a fiduciary duty to the buyer to keep him from getting over his head.

 

However, I think the problems that the buyer gets into have to have been foreseeable. Is he really expected to make sure that every buyer can afford to weather a 30% decline in housing prices?

I don't understand. If I buy a house with a mortgage, what difference does it make to the mortgage when the house price goes down, as long as I can keep up with the payments?

 

Of course, if I cannot keep up with the payments, then the bank has a problem, as they can't recover the outstanding mortgage by selling the house.

 

Maybe I am misunderstanding something. What is the cause for the increased rates of foreclosure?