The negative equity epidemic

[TexasLawyer]

Interesting article-- and funny that the MSN web-page that this article sits on is otherwise covered with ads for home equity loans. Funny-strange that is.


The Basics
The negative equity epidemic

All those ARMs and teaser rates are coming home to roost. 1 in 10 homeowners has no equity or is even 'upside down.'

By Liz Pulliam Weston

Rhonda is in a panic.

The two-year introductory rate on her adjustable mortgage is about to expire and send her payments soaring. She thought she could refinance to a more-affordable loan, but the rates she's being quoted are just as high.

"So I then decided I would just sell the house and get out of it," Rhonda wrote in an e-mail. "WRONG! The houses in my area are selling for around $20,000 less than what I owe!"

Rising interest rates would put a strain on homeowners with adjustable-rate mortgages in any economy. But the situation is growing critical for millions of borrowers who are "upside-down," owing more on their homes than they're worth.

<snip>

Borrowers who chose ultra-low teaser rates of 1% to 2% in the last couple of years could be among those most at risk, Cagan said. One in five such borrowers who took out loans in 2004 and 2005 was underwater as of September. These borrowers face the sharpest payment increases as their loans reset to market rates.

<snip-- much more>

http://moneycentral.msn.com/content/Banking/Homefinancing/P148861.asp

[Redstone]

1. Another "elephant in the room" problem. Yes, indeed. I know several

people who are into the "negative equity" trap.

Hope your post gets a lot of attention.

Redstone

[bmcatt]

2. When people don't know their finances...

I've participated in buying houses twice. Both times, I wouldn't have even started to consider buying unless I could put the (old) standard 20% down. I can't even conceive of buying a house without starting out with some significant percentage of equity.

Even with 20% down, I've had to fight, every purchase and refinance, to carefully explain to the banks and mortgage brokers that, "No, I'm not paying into an escrow account, thank you very much. I'll take care of taxes and insurance on my own or I'll go find another lender." I've also managed to get away with no escrow accounts, ever. It's my money, I don't need the mortgager to hold onto it. That's why I've got a good credit rating - because I actually think that paying my bills is an important thing.

For that matter, I rarely buy anything on credit unless I can pay it off when the bill comes due. I don't *necessarily* pay it off (0% loans on cars were good - it was worth it to take a loan on those terms because I could use the money for an investment), but I damn sure want the option. The only exceptions I've ever made for that were houses and cars, and, now, I don't even make an exception for cars. Unless I can drive it away, free-and-clear, I just don't need it.

[pitohui]

5. you miss good opportunities that way

if we had waited until we had saved a down payment to buy our house, we would have missed a terrific bargain, we bought through a gov't program that allowed us to get away w. a minimal down payment, the feds paid our closing cost, put a new roof on the house, did a termite treatment and started our termite contract, and i can't even remember what-all just now

altho we had a 30 yr mortgage because of these benefits and the lack of a pre-payment penalty we were able to actually pay off our home in 9 years -- and our house is now valued at near triple what it was in the early 90s at the bottom of the savings & loan collapse

business and gov't extends you credit as a matter of trust, they trust in your future ability to improve your income, perhaps in your case more than you do yourself

sometimes trust is misplaced or they just put too much pressure on a person

but in our case they made all the difference to us financially

people who are afraid to take on debt for important purposes miss the power of leverage to improve themselves, be it by taking on education debt or by taking on real estate debt


the opportunity you miss may not come again

[napi21]

6. I've never been as good as you are, but I did manage to pay cash

for our last car, and although I use a credit card for EVERY purchase, I always pay them off each month. The CC co. even sends me $$ every time I spend so much.

I remember when I was looking for a house in 1992, I told the Realtor and the Bank how much I was willing to spend. BOTH of them said, "Oh, but you qualify for a lot more house than that!" I wanted a house for max $125,000, and they wanted me to buy one in the $200,000 range! I said NO because I knew what the employers were like...no more loyalty and all...and I didn't want to ever be in a position where I'd be contemplating suicide if I lost my job!

I stuck to my guns, and paid $123,500 for our home. Well, suprise suprise, I was layed off about 5 years later...after 10 years with the company! I had enough $$ to survive and get another job, which almost always takes time!

It scares me, how many people in todays economy got for the max, and seem to assume the future will be just fine! A few years ago, I predicted we'd see a lot of houses reposessed! I haven't seen as many as I thought, but I'm afraid we're getting close to that time now.

[Neil Lisst]

3. there are many who "own" a debt, not an equity

and many others who have zero equity

One big economic ripple for 6 months, and all those loans go bad.

[pitohui]

4. i seriously doubt it

where is this area where the price of houses are falling? north dakota?

i could not afford to buy my house today and i can't even afford to move because i don't know of any area within 100 miles where i could buy a better house for what my starter home would sell for -- which is getting damn near spitting distance of 3 times what i paid 15 years ago

yeah, katrina bumped up the price of all unflooded homes in louisiana but since louisiana did not enjoy the bull market of the 90s i think it evens out

houses are even more expensive in other coastal areas, in new jersey i was stunned to see people paying $1 million dollars for coastal homes just to knock them down! i'd sell in a heartbeat and if i couldn't buy something cheaper if nothing else i'd get a backpack and travel around nicaragua as one of my friends has actually been doing for a few years

[TexasLawyer]

8. If you start out with zero equity in a house,

prices do not have to drop very far before you're in the soup.

There are some subdivisions here in Houston where over 50% of the houses are in foreclosure. There was a big article about it in the Houston Chronicle two Sundays ago (I think). It's very scary. I'll look around for the link.

[pitohui]

10. if you start out with zero equity in a house

...prices do not have to rise v. far before you're in the gravy

that is the beauty of any time of margin investing

i think you are not thinking of the mathematics, if you can't afford to put a big down payment, it is prob. because you currently have nothing -- hence, have nothing financial to lose -- when we bought our house w. little down payment, at worst case, we would go bankrupt and be back where we started, it wasn't like we had anything to begin with, in other words, we had not a thing to lose

it doesn't make sense to be timid financially when you have nothing except a lot of nothing

think abt it mathematically, the worst we could do is end up where we were to begin with, as tenants in a slum, we had nowhere to go but up!


it is worth taking on debt to have a chance of a better future

the fear of debt is the fear of the future and a lack of faith in your ability to forward yourself

[Hissyspit]

7. Harper's has an article on this in the latest issue, I believe.

Very disturbing. I don't own a house, myself.

[Theduckno2]

9. The promotions for the "interest only" mortgages worry me also.

People could lose much of their downpayment should they be forced to sell in a collapsing market after having paid only interest, no principal, on their mortgage.

In all fairness though, some people need to realize that when you take on such terms, the monies you 'saved" shouldn't go towards buying a ski boat or entertainment center.

[TexasLawyer]

11. they won't sell

they'll walk away. That way, their loss will be no greater than costs to get into the house and their payments on the note.

It happened like you wouldn't believe around here (Texas) in the 1980s.

[Theduckno2]

12. No point spending good money after bad.

It just makes me wonder how much "bad paper" our financial institutions can absorb. Weren't plunging oil prices contributory to your areas troubles in 1980's?

[TexasLawyer]

14. Yes, lots of bad paper.

Some economists talk about how the new bankruptcy laws will protect holders of debt.

Conceivably, credit card companies could force a deadbeat into foreclosure, but that assumes the deadbeat has equity in the house and hasn't simply walked away from his/her obligations.

[pitohui]

13. right, exactly

if you don't have a lot of assets, you have nothing to lose by trying to buy the big house

if you win, if the job holds out and you can pay it off, then you end substantially ahead of where you would have been because of the increase in value of the home

if you can't quite make it and have to walk away, you are out NOTHING because you had to live somewhere and the cash would have gone into a rent shit hole anyway

i don't know why EVERYONE doesn't take a freeroll but americans are truly mathematically illiterate or such opportunities wouldn't exist