How do folks get upside-down on mortgages?

[gratuitous]

This is a pretty good story about a Phoenix AZ bedroom community. While the real estate bubble was inflating, people were moving to the area, but not everyone could afford million dollar McMansions. So developments in smaller outlying areas sprang up, like the one featured here in Maricopa:

http://online.wsj.com/article/SB123543721679054667.html

In Maricopa, Ariz., a Paradise Found and Lost

In 2005, her husband, Zachary Campbell, accepted a transfer from San Diego to Phoenix to manage a recreational-vehicle store. For the first time, the Campbells figured, they could afford their own home, though that meant moving to Maricopa, about 20 miles from Mr. Campbell's store. They scraped together a $50,000 down payment to buy a new four-bedroom home in Maricopa, for $250,000. It came with black granite countertops, cherry kitchen cabinets and a pool in back.

Today, Ms. Campbell figures, the home is worth perhaps half what they paid in 2005.

Even that might be optimistic. Along a nearby highway, young men hired by a local real estate brokerage wave red signs touting "Homes From $69.9 K."

The Campbells planned to sell their house for a profit after a few years and move back to San Diego before their daughter starts kindergarten. Today, they couldn't hope to sell the house for enough to pay off the mortgage. They fear the down payment they made on the house is money they won't see again.

These aren't speculators or flippers. These are folks who had a plan, saw an opportunity (or so it appeared), qualified and got a mortgage just four years ago, and then watched the value of their property go up 50% (yay!) and then plummet to 40% or less of its original value (uh oh). While I could afford to get into a $250,000 house, there's no way I could absorb the hit if the value of the house plunged to $100,000 or less.

And, as the story relates, while the Campbells are trying to make the lousy situation they're in work somehow, a whole lot of other people just up and left, and they're surrounded by vacant properties, making their lousy situation just that much lousier. These people and a lot of others just like them, were planning for their future, working toward a better life, just like millions of other Americans. And then the hyper-inflated prices of an overheated market dropped precipitously. In 2009, it's easy to see "Oh, you overpaid"; in 2005, it looked like a reasonable deal.

[dysfunctional press]

1. they were offering home equity loans at 125% of home value...

that's one way.

[NNN0LHI]

2. And not a dime of the money actually had to be put into improvements on the home

Thats just not right.

Don

[RB TexLa]

4. Why is that not right? If I want to borrow money with something as collateral

you think I should only be able to use the money I borrow to do something to the collateral property?

[NNN0LHI]

9. Because as the money is being spent elsewhere the house is not being updated

So as the debt on the home is increasing the value on the house may be going down because of going into disrepair. I have watched it happen. The money should go into things that pay for themselves in the long run like a high efficiency furnace, more insulation, new windows, etc to keep the value of the investment up. Otherwise taking money out of your house seems like a recipe for failure.

Doesn't that make sense? I can remember not long ago when "economists" were advising people to refinance their homes to play the stock market. You think that was a sound advice in hindsight? I know people who did it.

Don

[RB TexLa]

13. People borrowing money can do whatever they choose with it, unless the lender

puts restrictions on it.

I guess I took your saying it wasn't right to use the money for whatever they wanted the wrong way. Seems you were saying it wasn't a wise move on their part. And I'd agree with that in most situations. Of course there are situations where owing more than the value of the house doesn't have an effect, other than overpaying for a house by someone.

[JHB]

19. That would be true if it were supposed to be a home improvement loan...

...i.e. lending the money for things that would raise the value of the house. A loan made without that restriction might not be wise for either the borrower nor lender, but that doesn't mean they can't be made.

Of course, it it were a "home improvment (wink wink, nudge nudge, say no more) loan", then it's a case of fraud by one or both parties.

[Lost in CT]

22. But buying a new boat and putting it in the driveway

does improve the look of a home.
:banghead:

[NNN0LHI]

27. Thats exactly what I was trying to say but you said it a lot better

I took out a home improvement loan once. I had to indicate what the loan was for on the application. I made sure I kept the documentation showing where I spent the money. I was never asked for the info but if I had become delinquent on the loan I suspect I might have been?

Don

[SheilaT]

3. It's not all that hard,

and someone doesn't have to have been at all greedy to wind up this way. No matter how large a down payment (these people put 20% down, which is quite admirable), how reasonable a price you paid (and $250k with all those amenities doesn't sound out of line at all) if the price drops, you're upside down.

This is way restructuring loans like this to make the new principal what it is now worth, and taking into account any cash down put in, is highly sensible.

I have a friend who recently sold her home in the Minneapolis area, and she barely broke even, despite having lived there for about seventeen years. The reason? She kept on taking out home equity loans, and while she never wound up owing more than it was worth, in the end after all those years of payments she had no equity.

Meanwhile, anyone who has some money ought to buy up some of those homes for $69.5k and rent them out. What most are losing sight of at this point is that there's a lot of money waiting to be made in this market.

[bobbert]

8. That depends if you think we hit rock-bottom yet

Some areas are getting close to that, but I think we have a ways to go. I also think that 75-100k is a reasonable price for a house. I can't think it cost any more than that for labor + supplies. People were just so into making money on houses that the actual cost of the building itself was thrown away. The story also that they bought a small house far away from the city, where houses were generally closer to 100k before the bubble.

[SheilaT]

29. Trying to figure out where the exact bottom

will be is a fool's game.

How much a house actually costs to construct is dependent on lots of factors, not the least of which is how much the local labor was paid. There's a lot of handwork in most houses, and many years ago I read an excellent article making the case for a lot more off-site, in factory construction of many of the components of houses.

I've also been very bothered over the years by people being encouraged to buy the maximum house they could afford and take out the largest mortgage they could possibly make payments on. The real culprit here is the income tax deduction for mortgage interest payments. It's something that should have been eliminated many years ago.

I'm beginning to look for a house where I live, and I'm cautiously watching prices go down, and will buy when I find something I like well enough within the price range I know I can afford. I won't be held hostage to a mortgage payment.

[JVS]

33. What's wrong with someone breaking even or even having to pay for living space for 17 years?

Since when is having a roof over your head supposed to be profitable or at least free?

[TwilightGardener]

5. 250,000 for newly-built 4 bedrooms, nice neighborhood, pool? That's perfectly reasonable--

they should be able to recoup something close to that, if they just hang on for a while. Hell, there are some deals to be had in AZ, sounds like.

[Greyhound]

39. Not likely in their lifetime, Maricopa is a loooong way out from where

jobs and what money is left. It is a particularly bad location because there is nothing out there to support the community that was built, just houses and strip malls, an Intel plant that has all but shut down and a test track for GM (I think) in sort of nearby Casa Grande. Phoenix has basically no public transportation, I'd be surprised if there is even one bus that goes out that far.

Basically that whole "town" is screwed.

[LostinVA]

41. I wish our house was that nice for that price

[jmg257]

6. But they still own the home right? So live there, the value should go up again, eventually.

Why do people insist on taking a hit and selling if they can still afford the mortgage?

Why worry so much about being under water, IF the house wasn't primarily bought as an investment?

[TwilightGardener]

12. I agree--better to try to avoid moving for a while, let the bargains get bought up, and

values will eventually start to rise again. I plan to cling to my house like a little spider monkey--it won't fetch diddly-squat in this market. It's more valuable to me as a home.

[CoffeeCat]

7. I have a friend who lives in this area...

She took a job in Phoenix, moving from the Midwest.

She bought a house exactly like this for $300k. Granite, pool in back--the whole nine yards.

She mentioned that when she was looking for a home, the housing market was nuts. She would see
a new listing, and by the time she showed up to the house with her realtor--the house was sold.
Houses were listed for a day or two and they were snatched up.

Just like the person in the article--the value has significantly dropped.

This situation is a house of horrors in this economic environment. The people in the OP planned to
move and now they can't. But others in this situation are equally trapped.

In this unstable economy--people have to be flexible when job searching. A new job might mean
moving to a new part of the country. I know people who can't find a job in their area, but they
can't sell their house. They're trapped.

This entire "trapped in your own home" situation is catastrophic. The suburbs are filled with large
homes, and many of the people living in them are mortgaged to the eyeballs. They're living paycheck
to paycheck. So, when they lose a job--they can't sell. They're totally screwed.

This is more than a housing bubble--this is a complete implosion. It's a mess.

[SoCalDem]

35. Living on borrowed money is never a good idea, and eventually you always lose

If a person needs flexibility in their lives, they need to rent..It's just that simple..and if they are buying a house, they should always buy LESS house than they "think" they can afford.. Things always work out fine...on paper..but rarely in real life..and plan for a house than can be supported with the lesser of the two incomes..just in case..

[Fire1]

10. The loan to value is not what it was at the time of purchase.

The loan was initially based on the value of the property at the time. Since the value has dropped significantly since that time, we are now paying more for the property than it is currently worth. Therefore, under water or as I more aptly put it, it's 'upside down.'

[Lost in CT]

11. Just because you are "upside down" doesn't mean your mortgage is in trouble.

It has nothing to do whether you are paying it on time or not and only comes into play when you are looking to sell.

Every new car owner is upside down on thier loan and many new homeowners are as well(esp if they didn't put 20% down)

[gratuitous]

14. Unless, of course, you lose your job

Or if your job moves, or if any number of a hundred other things beyond your control happens. These people are going to have to adjust their plan to move back to San Diego next year, but if things go any more sour between now and 2015, they have no margin for error or misfortune.

And anyone can find themselves in this kind of situation; the teevee is trying to convince me that it's all the fault of a bunch of greedy poor people. Somehow, I'm unpersuaded.

[Lost in CT]

16. I don't disagree (which is honestly why people say don't buy a house if your

planning to move in five years)

From what I have seen foreclosure mess is the fault of a bunch of middle class and upper middle class wannabe landlords and real estate tycoons who bought at the top and have walked away.

If you live in a house the actual value of that house doesn't matter except for tax assessment and when you go to sell. Outside that it is just so much dick swinging.

[Fire1]

18. It's those two things that make the value 'matter.'

[Fire1]

15. The question in the OP is related to how people end up under

water. Not whether or not your mortgage is in trouble. Secondly, all homeowners with a mortgage are underwater and you can't equate a car, which loses value the minute you drive it off the lot, to a home, which is supposed to sustain or increase in value.

[Lost in CT]

17. Almost all first time homeowners are underwater for a while.

It is perfectly natural to be underwater for the first few years if you put little money down.

So unless you are planning to sell why does it matter if you are "under water" or not.

I mean for fuck sake my stock portfolio is fucking Jacques Cousteau. But until I sell (or retire) it doesn't really matter. (Well except for the stress and the likelihood that I won't retire anytime soon.)

[Fire1]

20. It matters when you DO sell! Regardless of when you decide

to sell. ALL homeowners with a mortgage are currently underwater, not just new buyers. The question is, will we be able to get a decent return on our investment?

[Lost in CT]

21. Its a home (and an expense) first not an investment.

Over a long period of time it can be an investment but with Baby Boomers retiring and downsizing the investment potential for housing is minimal (Hence the bubble)

Thinking of your house as anything more than cost effective shelter is what gets people into this mess in the first place.

[Fire1]

25. Well, that may be how you see it but most of the homeowners

I've talked to and some on this board, btw, consider a home, not only shelter, but the largest investment one will ever make. Too, 'cost effective' for me doesn't include pouring money into something that I'll never get back. That's the main reason homeowners put additions and upgrades into their homes. to increase the re-sale value.

[Lost in CT]

26. Yeah but not with a four year timeline like your OP had...

Come on they were speculating and they got burned.

[Fire1]

28. Granted, they are not the typical 'homeowner' example I was

referring to, but we all (mortgage holders) have the same concern. I, too, purchased investment property but decided to stick and stay until I can at least break even.

[hfojvt]

31. it would not bother me if I still had a mortgage

For one thing, I am not planning to move for another ten years or so. For another, my house payments were $215 a month which was far, far less than I would pay for rent even for a one bedroom, much less a house.

[Lance_Boyle]

23. how 'bout you get to LIVE IN your "investment" while you can pay for it?

If you truly view a house as an investment and not a dwelling, you should be prepared to see the value of your investment fluctuate, and be prepared to up and move the moment you achieve the "return" you're looking for. I don't think that's how most people view their homes. Except for the flippers and the would-be market geniuses who inflated the bubble in the first place. And screw them.

The couple in the OP thought they'd spend a few years in AZ (less than 5 years - they should've been renting), then flip their "investment" and shimmy back to CA with a few more bucks than they carried away when they left. Their "investment" lost value, so now they can either slink back to CA with a realized loss, or they can stick it out until their "investment" regains value - if ever.

[gratuitous]

30. Other considerations that occur to me

Suppose someone meets with Mr. Homeowner in Phoenix and says, "Young man, I like the cut of your jib. I'd like to offer you a job at my firm in Fresno" or some other such place. The job might pay better, have better benefits, and have all sorts of attractive amenities. But with this millstone of a property around his neck, he can't consider a move. If the home is worth only $70,000, it would be difficult to turn it into a property that would rent for an amount sufficient to cover the couple's mortgage payments.

Also, if this young couple was considering adding a sibling to their only child, this might mess up their family planning, thanks to the inflation of the housing bubble now going away.

It's difficult to overstate the impacts of this speculative bubble, and the nearly criminal negligence of the Bush administration in aiding and abetting its expansion.

[BlooInBloo]

24. Um... What do you think a speculator *is*? Those guys bet. Those guys lost the bet.

[ozu]

32. "These aren't speculators or flippers."

They wanted to buy a home, profit, and get out of the home and area within 4 years. They're pretty much the textbook definition of speculators.

[Midlodemocrat]

36. Or they knew their job would require them to move to a more expensive area.

[ozu]

40. It's still speculation.

They knew they would be leaving that home within a few years. And the only way to not be underwater in that scenario would be for the market for that home to appreciate. They bet on that, and it didn't.

It sucks for them, but they should have rented.

[Midlodemocrat]

42. No, it's living. Deduction and all that.

Plus, anticipating a move for work isn't laid in concrete. Your comments are unwarranted and inaccurate. Get a clue.

[SoCalDem]

34. "...The Campbells planned to sell their house..." ... that's the nugget of the "problem"

A home that's bought with the idea of BEING your forever-home , may-be/will-be upside-down many times during the life of the mortgage, and it does not really matter, but a home you BUY with the intent of selling soon, HAS to always stay OVER the price you paid, or you lose your investment.

[Avalux]

37. You're exactly right.

My parents bought their home 43 years ago and never had any intention of moving; they're still there and of course, the house is worth more than the 20K they paid.

Times have changed; people are more mobile and don't think long-term anymore. People that flip houses are in trouble too.

[billyoc]

38. The properties were overvalued to begin with and they believed they'd increase in value.

Besides, all the other kids are doing it.