One in Ten (Homeowners with zero equity)

[marmar]

from TPMCafe:



One in Ten
By Elizabeth Warren - March 6, 2008, 8:19PM


The latest numbers are out: One in ten homeowners has no equity in the family home. The data show that about 15% will be below water if prices continue to slide, owing more than their homes are worth.

So what's the plan here? One in ten homeowners could just walk away right now. Indeed, most of them, if they were the rational maximizers so prominently featured in classical economic analysis, would stop paying now, put the money in a savings account, and wait the 90 days or two years or whatever until the lender could force them out by foreclosure. In non-recourse states, they could just pocket the money and walk away free and clear. In other states, they might need bankruptcy or a last-ditch deal with the lender for a short sale. The economics shift when the homeowner has no equity to protect.

If they walk, the national--and world--economy will seize up. Think about it: If millions of homeowners suddenly quit paying their mortgage, many investment funds would be bust. Corporations that bought those assets (and borrowed against them) would also go belly up. Sure, the investors would own the homes--eventually--but If millions of homes suddenly came on the market all at once, the price declines would be huge. Most wouldn't be able to survive long enough to pick up the pieces.

The investors who hold those mortgages can avoid that if they are willing to share the pain and acknowledge that their loans are only partially secured. Like practical lenders have done for thousands of years, they could decide that getting a steady, partial payment is better than no payment at all. So far, however, the investors are holding tight, even as Fed Chairman Bernake asks them please please please renegotiate these crazy mortgages.

The only proposal on the table that would make the investors renegotiate their mortgages and either get people into mortgages they can afford or get them out of the houses is the amendment to the bankruptcy laws. Last week, the Republicans filibustered the bill, and a cloture vote failed, but no one is giving up yet. Professor Lynn LoPucki had a terrific op-ed in the Atlanta papers this morning, and USA Today had one yesterday. .......(more)

The complete piece is at: http://tpmcafe.talkingpointsmemo.com/2008/03/06/one_in_ten/

[originalpckelly]

1. If they don't have equity call them what the really are: home renters.

:puke:

I'm so sick of the owners being so stupid and so greedy!

[Buzz Clik]

4. I think you're missing a really important point here...

This article is not necessarily talking about people who cannot afford their house payments. If the rapid decline in the price of houses has dropped the price of your home below how much you owe on that house, you have negative equity. It has nothing to do with greed.

[originalpckelly]

6. True, but there will be a massive mark on their credit for seven years.

It's not quite as easy as walking away.

[Buzz Clik]

8. You've lost me. I certainly don't endorse walking away from a debt.

[AlCzervik]

21. we have a lot of that here, 2 years ago the prices were stupid high and people would be

camping out for days to get a chance to buy, 2 years later those same house are for sale for way less, many homeowners are upside down not because they borrowed against their homes but because the housing prices have dropped so much. Don't get me wrong, their are also plenty of people that borrowed against their homes and are screwed as well.

I bought my house in 2000, paid $209,000 and that was that, never borrowed against it just lived here, 2 years ago i could have sold this place $450,000, if i was going to sell today i'd list it for $275,000 and hope for the best.

[ConcernedCanuk]

2. "If they walk, the national--and world--economy will seize up" - hmmm

.
.
.

If HomeOwners could form a "union" like we have for many labor positions,

HomeOwners could run the moneylenders, no?

So, HomeOwners . . .

UNITE!!!

[leftofthedial]

3. bring capitalism to its maggot-ridden knees!

wouldn't that be wonderful!

[Buzz Clik]

5. Excuse me for a second...

On DU, it's hard to tell "real" socialists from the sarcastics.

Assuming you're not being sarcastic, how exactly did you gain access to this site?

[leftofthedial]

7. sarcastic?

no. Bringing capitalism to its knees would be a good first step toward saving the planet and our species.

Anyone who can walk away from servitude to the oligarchy's corporate slave masters, should do it immediately. And if by so doing they can do real harm to capitalists, so much the better.

How did you gain access to this site, "newbie"?

[Buzz Clik]

9. So.. if you despise capitalism, and you'd like to see the maggot ridden system destroyed,

... did you make your computer yourself from organic products? Do you participate in a collective that established its own ISP?

Or, do you actively and willingly participate in all aspects of capitalism and just like tossing out socialist tag lines for DU cred?

No need to answer. My question is strictly rhetorical

[leftofthedial]

10. not rhetorical

nonsensical

and circular

[Buzz Clik]

11. Yeah, yeah. Give my regards to Hugo. Is he done invading Colombia yet?

[leftofthedial]

12. Give my regards to Rumsfeld

he done being a capitalist yet?

[Buzz Clik]

14. I've changed my mind about the rhetorical question --

How is it that you've rejected capitalism yet you embrace it? Does the implicit irony and incredible hypocrisy bother you at all?

[leftofthedial]

18. "embrace it"?

from what source did you get the "Buzz"?

[Buzz Clik]

20. Back to my question: if you don't buy things, if you don't work for money...

... how do you find your way to DU? Is your CPU made of hemp? Your monitor cobbled together from recycled aluminum cans? Who is your ISP -- Freedom Road Online?

You, my friend, are a capitalist. You are clearly a cog in the capitalist machine or you would have no means of getting here.

Your calls for the downfall of capitalism are as hollow as Clinton's call for the end of the war in Iraq or Bush's concern over high gasoline prices.

The last word is yours. Make it a good one.

[leftofthedial]

24. This is a capitalist country.

I don't "embrace" it. I live here.

I can have a cold, without "embracing" disease.

[unblock]

13. the idea that "rational maximizers" would walk away from a negative equity house is facile at best

first, most people, surprisingly enough, actually LIVE in their house. it's not just an investment, so walking away is an emotional and practical and expensive decision, not just a cold, calculating investment decision.

moreover, walking away trashes your credit for eons, which is hugely expensive on a practical and financial level.

finally, just because you have negative equity in your house itself doesn't mean you have no other assets. walk away from your house and the bank can still go after you personally even after selling off your house. the only way to duck the mortage obligation is via bankruptcy court.

a lot of people have negative equity in their house but have other assets. walking away doesn't make the debt go away.

[BR_Parkway]

15. Actually, in non-recourse states - the bank can't come after anything

else - they are bound by the deed of trust that the house is the sole remedy to collect the debt. Which is what the OP was pointing out, people who know they are going to lose the house anyhow would be better off banking the payment and living in the house until eviction, which could take months.

[unblock]

16. yes, but in non-recourse states, low-down payment mortgages are usually harder to get

precisely for this reason. hence, there are likely to be fewer negative equity situations in those states.

there are also ways to drag out foreclosures if you have a savvy lawyer.

in any event, though, there's still the credit score concern.

[OzarkDem]

27. Victims aren't all low-down payment mortgage holders

The mortgage mess has caused home values to drop so much that it even affects responsible homeowners. If you live in an area where home values dropped steeply enough, you could end up losing your equity even if you had a great deal tied up in the home and had lived there a long time.

[unblock]

28. i'm not calling low-down payment mortgage holders irresponsible

hell, i only put 10% down. but i have resources to pay my mortgage long enough to see my home value come up in the long run and i have no intention of moving anytime soon. we plan to be here at least until mini-unblock is off to college, so that's 15 years at an absolute minimum. most likely we'll be here until they ship us off to a nursing home....

[AP]

33. I may be wrong, but I think that, in non-recourse states there are limitations, eg

- non-recourse only applies to the first loan for the purchase of the house,
- you still take a hit on your credit rating, and
- you have to pay cap gains tax on the "forgiven" part of the loan the bank doesn't collect.

[coalition_unwilling]

29. LA Times ran a story about two months ago that reported that

bankers in Southern California are scared shitless that more and more homeowners are going to start doing exactly that, i.e., living in a house that is under water and making no payments on the mortgage while the foreclosure process takes place, banking the mortgage payments to use for move-in costs on renting a place.

[ellie]

19. Exactly.

I live in my house. I am not sure where they think I would go? My car? I currently owe $3,000 more than what it is worth. And no, I am not greedy like some people on DU seem to think. I live in an economically depressed area in the rust belt. Greedy my ass. People need to step away from their computers and see what life is like in the real world, and not make sweeping generalizations about situations they know nothing about.

[unblock]

22. in fact car loans are a good analogy, as they are often upside-down

cars drop in value quickly, then level off.
loans do the opposite; they have high balances until the drop quickly toward the end.

so the typical 10% down 60-month car loan is upside-down (negative equity) for the middle 18 months or so. do people just walk away from their cars? a few do, sure, but it's only a small percentage of the loans in that negative equity situation. most people do not want to doom themselves to sucky credit for the next 7 years, and i see nothing "irrational" in this.


for all i know i might be negative equity in my house. i just bought it with 10% down and prices have come down since then. but who cares? i'm not looking to move or sell any time soon. people who bought more than a few years ago still have positive equity (i'm making a huge profit on my previous house of 5 years; i just sold it notwithstanding the buyers' market). so it's only people who bought relatively recently who are in that situation, and most people who bought relatively recently aren't anxious to move.

[AP]

34. People buy cars expecting to lose money on them. It's part of the price to value calculation.

People don't expect to lose tons of money on their home. Part of the reason people spend so much money on their home is because they EXPECT to earn at least 1% a year on the investment. If people expected their home to be worth less over time, they'd pay less for it.

Also, it's not just people who bought recently who are in this situation.

There are something like 4 or 5 mortgages for every piece of property in the US. A lot of people who bought years ago are leveraged beyond the value of their home.

[Malikshah]

17. Waiting it Out.-- Why are folks ready to jump off the ledge?

Things are crap right now. It most likely will get worse. We're hoping all we can that we can remain in our home (2 income)--the market is so damn subjective in terms of prices anyway.

We've not planned our suicide pact just yet.

I'd suggest folks step back from the precipice, hunker down, and ride it out as best as possible.

There's a bit too much of this going on




Folks need a good ole slap in the face to stop the hysterics.

Panic and doom and gloom never solved any problem.

Planning. Careful assessment. Action.

[unblock]

23. i just bought up. much more expensive house

better school district, more land, bigger house, better everything.

if i had money on the side to invest in more real estate, i'd be buying up all i could. i couldn't tell you which month in 2008 would be the exact bottom, but i can damn well tell you you'll sell at a nice profit in a few years.

a down market is the best time to buy if you're in it for the long haul. it's only the flippers who are really screwed.

[Malikshah]

25. Preach it! Down here in South Florida, we knew the prices were

beyond artificial.

Folks were lining up to get a lottery ticket just to get a chance to place a bid on a new townhome. All in the hopes of Flipping it.

The hundreds of condo units being built on the coast-- People were buying them up pre-construction and then selling the contracts to the next line of bidders for a profit. To date, most of these places still aren't being built...or ever will be.

It's all funny money.

Us, we're in a cozy (read cheap, old, but fabulous ) home built in 1974...

We're trying like hell to hold our own and wait it out.

I've no sympathy for flippers.

[SoCalDem]

26. A "money-honey" just said that people pulled equity out to the tune of $40B a MONTH

for 10 months..and now they are out of equity, and have only credit cards to turn to.. and because they cannot spend, THEY may end up "hurting the economy"..

Hell.. I have been saying this ever since people started all the re-fi/equity stuff a few years back..

It's NOT rocket science..

[El Pinko]

30. This is a sad but unsurprising result of the speculative housing bubble.

But I also would like to point out that all of the handwringing over it is the result of incorrect thinking on the part of homebuyers.

In recent years people bought a home on the expectation that its value would appreciate 10 or 15 % per year and that they could sell it at some point for a tidy profit (or borrow against its illusory "value" in the form of a HELOC.

But that is NOT what you get when you buy a house. There is no more a promise of a windfall than there is with junk bonds.

When buying a house, you should spend the amount that is is WORTH TO YOU, not the amount you think it might be worth in 5 years.

None of these people who have "lost equity" have lost anything real. They agreed to buy a house, probably with little down payment and an ARM mortgage, but they got what they agreed to pay for.

I understand the rationale of these people wanting to "walk away" from these mortgages, but they are NOT victims. The ones who had intended to stay in their homes can still do so. Their payments would be jumping even if the house bubble hadn't popped. They should have known how ARMs work

The ones who were using a house as a casino or an ATM had this coming to them.


A house is a place to live, not an "investment". If there is a lien on it, it represents a large debt, not an "investment".

I hope that the ongoing crash will drill this point into people's minds and that it will stick for at least a couple of generations. (people always eventually forget and repeat history - this happened in 1925 in Florida, and long before that, it happened with tulips...)

[Thothmes]

31. a fresh breath of sanity

[fed-up]

32. BINGO-it is pirmarily "the investors" (that helped drive price up in the first place that lose nt