Is it time for underwater homeowners to be given a get-out-of-debt-free card?

Los Angeles Times ^ | June 27, 2009 | Tom Petruno

[Zakeet]

Some housing experts believe there is no alternative but outright forgiveness of a substantial chunk of mortgage debt for many people who are at risk of foreclosure.

Government and private-lender attempts to stem the home foreclosure crisis so far have mostly focused on loan modifications or refinancing -- giving borrowers a temporary or permanent reduction in their monthly payments.

But some housing experts say the next wave of help will have to address the core problem for many homeowners: negative equity.

This camp believes that there is no alternative but outright forgiveness of a substantial chunk of mortgage debt for many people who are underwater in their homes and at risk of foreclosure.

If your mortgage is worth significantly more than your house, your incentive to walk away may rise even if your monthly payment goes down. The decision to walk becomes a matter of simple math: If you have no hope of having an equity stake in the home for years to come -- if ever -- trading your mortgage payment for a much cheaper rent payment may be an economic no-brainer.

Right about now, many readers' outrage meters no doubt are in the red zone. Forgiveness? Let them off the hook, permanently, for some piece of a debt load they shouldn't have taken on in the first place?

The response from proponents of forgiveness is the same just-suck-it-up justification offered for every housing bailout program: The rest of us will pay, one way or another, if home prices keep falling because more foreclosed properties end up dumped on the market.

Given the alternative, the argument goes, why not try to sustain as much owner-occupied housing as possible?

[Stegall Tx]

Before everyone gets all huffy n puffy over this, remember this also includes non-sub prime borrowers who were recently laid off and in current modification.It is all WRONG but let’s say both people in a household got laid off and are in reduced pay jobs fighting like hell? A common sense solution would be permenent modification plans.

If two parties who have willingly entered into a contract choose to modify the terms of that contract, that is their own business and I have no problem with them doing it. What gets my gander up is the government forcing one of the parties to modify a contract. When the government starts messing up the process, bad things usually follow.

So, you are right, the best solution might be for the banks to voluntarily take a temporary hit at this time in order to avoid a bigger hit later. But that would also require the lenders to grow a brain practically overnight, and I seriously doubt that will happen.

[Mister Muggles]

"Won’t they just use the “new” equity to go out and buy more stuff???"

I think that is the plan: reinflate the "bubble" again by getting consumers back into a spending orgy.

[Marie]

There is another issue that's bothered me: Owners who *didn't* overextend, but who's markets have fallen terribly. What happens when they need to relocate for a job? Retirement? Etc...

So you buy a house for $250,000. You put $25,000 down and get a 15 year fixed. You make it so that you're not terribly overextended and leave yourself a little wiggle room for emergencies or a monthly savings plan. Very good, responsible homeownership.

Then you loose your job and have to relocate to a new state. You want to sell your house, but now it's only worth $$180,000. You're short $35,000. (Assuming you've been living in the house for a few years and paid down some of the mortgage.) You've blown through your savings trying to stay alive for four months and find a new job. You don't have the $35,000 you need to sell the house and get out of the mortgage. You could get an unsecured loan for the difference at 19% interest, but your new job doesn't pay quite as well as your old one did.

I think that this scenario is going to become more common over the next few years. People are going to walk away because they won't have a choice.

[Oldexpat]

The writer forgets that many of these people cannot make the payments on the reduced amount. They will simply default on that..intentionally or because they can’t pay.
Many of these loans were simply fraudulent.

[Belasarius]

WSJ says one of 4 defaults is “strategic.” That’s when mortgage holders who could pay the mortgage dump it because they are so far underwater.

“The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.”

http://blogs.wsj.com/economics/2009/06/26/when-is-it-cheaper-to-ditch-a-home-than-pay/

They’ll lie about why they are doing it also.

[Dubya-M-DeesWent2SyriaStupid!]

Exactly. It is a huge mess all around.

[CottShop]

Is it time to give homeowners who have defaulted on their loans a ‘get out of jail free card’? Well let’s see- would that also mean that people who now don’t have a home can get homes for free too? Why should defaulters get free homes when there’s millions of people who work hard but can’t afford to get homes in the first place? Shouldn’t they be given the opportunity to get free homes as well as the defautlers? Heck- let’s just everyone free everythign from now on- let’s just pay off everyone’s outstandign debts, give them money, whenever they ask, free health care, free investing advice, on and on it goes. Why shoudl defaulters be the only ones getting free passes in life? Are the irresponsble people hte only ones these days entitled to prefferential treatment? If so, what a great incentive for everyone to becoem irresponsible, and to drive up their debts without a care i nthe world.

[[Some housing experts believe there is no alternative but outright forgiveness of a substantial chunk of mortgage debt for many people who are at risk of foreclosure]]

The majority of real rational experts beleive that peopel get what they deserve in life, NOT what they want- We EARN our way in htis life, but our socialist government apparently beleives otherwise- they beleive those who are rich should pay for hte irresponsible acts of millions of Americans who took out loans they KNEW they could NEVER pay back!

[Cinnamon Girl]

Is it time for underwater homeowners to be given a get-out-of-debt-free card?

"Yeay! Finally!"

[CottShop]

[[There is another issue that’s bothered me: Owners who *didn’t* overextend, but who’s markets have fallen terribly. What happens when they need to relocate for a job? Retirement? Etc...]]

These are calculated risks that every person must make in life- our government should NOT be in the business of rwarding us when we lose on risky investments-

[[So you buy a house for $250,000. You put $25,000 down and get a 15 year fixed. You make it so that you’re not terribly overextended and leave yourself a little wiggle room for emergencies or a monthly savings plan. Very good, responsible homeownership.]]

Let’s say I invest i nthe stock market- I buy into a company that is doing very well, and looks like it’s goign to do well for a long time- however, a storm blows through, damages the company, the company invests in risky proposals to try to get itself goign again, but htose investments go belly up, and hte company is forced to shut down, I try to get out in time, but end up losing say $35,000 before I can ge5t my broker to sell the stock- would it be the governments responsibility to reimberse me for my loses? I don’t see where it would be any different for any other type of investment, such as buying a home.

[sportutegrl]

I don't understand why 'underwater' homeowners need to be bailed out. Does your house note suddenly become unaffordable because the house decreased in value? Cars go underwater all the time. If anything, it should be more affordable because of the decrease in property tax (ha ha).

If you can't pay your house note it is not because you are underwater, it is because you got a home you couldn't afford, a loan you couldn't afford, or did a cash out refi.

[freebilly]

Yeah, this’ll solve our financial crisis....

[olivia3boys]

Even though I’m a homeowner I LOVE that prices are falling right now.

I have 7 yrs left on a 15 yr mortgage on a house that is too small for my large family in a neighborhood that isn’t the greatest with schools that aren’t the greatest (I have 4 kids, 4 bedrooms, converted the dining room into a bedroom and converted the living room into a home office; a huge auto dealership is being built next door).

I’d love to upgrade, and move, and now I finally can—we’ve saved up enough for 20% down on a better house with more land in a better neighborhood with better schools, and we don’t even need to sell our current house. Plan to rent it out to all the foreclosed people. Houses are renting out well in my area.

I couldn’t have done any of this without the price drop. Homes that were once unaffordable to me are now affordable.

[Oatka]

Some housing experts believe there is no alternative but outright forgiveness of a substantial chunk of mortgage debt

I read somewhere that the IRS looks on this type of forgiveness as "income" and taxes you accordingly, so even if you haven't been working a while, you still get hit. Mebbe I'm off on this, but the proposed "help" has the smell of Unintended Consequences.

[Melian]

Thank you, Marie. This is similar to what has happened to us.

We bought a condo in CA two years ago. It is now worth $250,000 less than when we purchased it. Meanwhile, we are paying the property taxes on the original value. There have been so many defaults in our neighborhood that the homeowners’ association has had to raise their monthly rates substantially to make up for them and the value of our home has decreased further. Our city has notified citizens that they are raising the rates for all utilities by a large amount. If we sell our home now, we will lose all the equity we built up over a lifetime. Our retirement investments have taken less of a hit than the average person’s, but a really sizable chunk is gone.

Most of my husband’s clients were homebuilders. They evaporated. The few clients he has left want to barter, take 90 days to pay him, or pay in tiny increments. Our income has plummeted by 75%. My husband is working 12 hour days trying to turn potential opportunities into something that will generate some income. Most of the offers ask that he wait until there is some kind of profit before he gets his share. He hasn’t had a good night’s sleep since November. Meanwhile, the school district I work for is talking about reducing the number of days we work.

We have a perfect credit rating and are responsible people. We have always paid our debts honorably and we are continuing to do so; but the world is crumbling around us. Our elderly parents are here and need us. We can’t uproot them or leave them here alone. Our children are here. We are stuck in CA for the time being and deeply frightened about what is happening to CA.

We, FRiends, are the people you are so callously commenting upon.

[Atlas Sneezed]

People are going to walk away because they won’t have a choice.

---

And the bank can rent out the house to another family.

[CatoRenasci]

Depending on the state you’re in (e.g. California), and whether you’ve refinanced or not (not under your scenario), the bank cannot pursue you for the deficiency. In California, and a number of other states, if your loan is a purchase money security interest (which, in California at least includes a construction loan) and not a refi, deficiency judgments are not allowed. You give the bank the keys and that’s it.

[Former War Criminal]

Politics, as in life, involves compromise. Many of the comments from FReepers reflect a “take no prisoners” attitude,which may make us feel good, but does nothing to solve any underlying problems.

Here is an idea that should be explored.

The reverse mortgage program is for homeowners 62 years of age or older. Essentially, it allows people to stay in their homes, but forestalls mortgage payments until the property is transferred, usually due to the death of the homeowner.

The underwriting requirements are still very strict, reflecting a financial mindset that goes back a decade or more. If the FHA would loosen those requirements, seniors could free up their own cash flow situation, with very little risk to the government.This would put money back into the economy, without phony tax rebates or other giveaways. It would be a win-win situation that Congress should look into. There are also hefty fees involved, most of which accrue to the private sector.

I still wouldn't (couldn't) vote for Barney Frank, but he would garner some admiration from seniors who would only be spending their children's legitimate inheritance.

Right now, the reverse mortgage program is about as popular as a Christmas Club account. Bringing it into the 21st century might attract more participants.

Bottom line, there are many homeowners who are well above water, but still cannot tap into their equity.

Just a thought, admittedly self-serving, but still worth a look.

[ziravan]

We, FRiends, are the people you are so callously commenting upon.

It's not callous; it's reality. Your situation is sad, and you do have remedies in contract law.

IF HOWEVER, we let the Obama Administration unilaterally negotiate contract laws, the result will be the end of contract law as we know it and our nation was built on a foundation of such rules.

This small reprieve will not resolve your underlying problems, it will continue to put strain on the economy that will only worsen your husband's economic prospects, and, at the end of the day, it will only cause the values of your properties to go even lower to offset the government's meddling.

The market needs to find a bottom. It cannot do so while the government interferes, or while people hold out in expectation of that interference. While those issues are in play, your economy will not improve and you will not move past where you are. These bailouts will hurt you far more than help. I'm not being callous to say that you should not be "bailed out" with my tax dollars. I'm being compassionate.

At the end of the day, if you must file bankruptcy and become a renter, that is not me being "calloused". That is a new economic reality for California generally, and you particularly. Ignoring that new reality, or waiting for a government bailout isn't going to change the underlying dynamics. In fact, it will only make them worse.

The best help the government can give you is to stop trying to help you.

[Mom MD]

I’m not upside down and have been working my butt off to faithfully discharge all my obligations. I cannot make MORE people’s house payment than I already am. I am sorry for them, but life has ups and downs, and they knew what they were doing when they signed their mortgage.
At some point the breaking point will be reached and taxpayers will simply walk away. I know I’m close.

[ziravan]

There was, in the past, a time honored concept known as the “Jubilee” from the Book of Leviticus in the Old Testament. After seven cycles of seven years, in the 50th year was held a Jubilee. All debts were forgiven and all sins were atoned.

You seem to suggest that the concept of Jubilee supports granting a reprieve on these loans. That would not be the case. Jubilee needs to be put into perspective, and indeed, that perspective explains much of our current economic ills:

Nikolai Kondratiev was a Russian Economist that proposed that capitalist markets have long term cycles of boom followed by depression. He described these cycles as 50-60 yr cycles. Kondratiev Waves, or Supercycles, as they are called, have a predictable cycle and their patterns can be seen and followed throughout history - in Europe, China, Rome, Greece, etc.

The thought is that an occasional forest fire is a good thing because it clears the underbrush and allows for future growth. The same is true of economics. It is expressed in another way by Thomas Stanley, in his book, the "Millionaire Next Door", states that wealth rarely passes beyond the third generation. 80% of American millionaires were "first generation" millionaires in 1900, and that percentage holds steady through to today. The question is, why?

The first generation that earns wealth knows the value of that wealth; it's why they are wealthy. As they pass that wealth to their children, those children grow up - not with the first hand respect of that wealth, but at least with a parental example and teacher of that respect. THEIR children (the grandchildren of wealth earners), twice removed from the source of wealth, have little respect for what it takes to earn - and maintain, wealth. If their parents didn't spend all the wealth, they certainly will.

Compare that with the 3 generations since the Great Depression. The first gen, our grandparents gen, were frugal. They knew the value of a dollar and never forgot the lessons of the Depression. THEIR children, the boomers, knew some of that value as passed down to them, but did not have memories of being burned, economically. And now, Gen X/Y, twice removed, is indeed an entitlement culture. Until the current bust.

This bust, in turn, will likely teach frugality to a new generation. It is the way of life. So Kondratiev predicted.

Let's tie that into the Bible. In Lev 13, God commands a "year of Jubilee"; a forgiveness of debt every 50 yrs. What would that do, if imposed today? If the "year of Jubilee" were 2012, do you think banks would let you take out a 30 yr loan today (knowing it must be forgiven in 3 yrs)? Of course not! But. They certainly would in 2013. Yes? If you had credit card debt, banks would be drawing down that debt to nothing by 2012, so as not to "hold the bag" on your debt during the time of forgiveness. It might hurt, but it would systematically enforce a lesson in frugality every 3rd generation.

The Jubilee Year wouldn't so much cancel debt as it would systematically contract that debt going into the Jubilee Year, drawing down lines of credit. But. That drawdown of credit would pave the way for an explosion of capital in the year following Jubilee.

Instead of a forest fire (depression), a 50 yr debt cycle ending in systematic debt contraction would be a clear cut - a systematic draw down of credit that would allow for renewal of the cycle without the outright destruction of a Depression.

~~~~~~~~~~Jubilee wasn't a forgiveness of debt - it was a systematic draw down of debt every fifty years: a reset.