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September 18, 2010

Underwater borrowers, and what to do about it

If you're underwater, you probably can't refinance without bringing cash -- potentially a lot of it -- to the table. And you might be paying a lot more for your mortgage than it would cost to rent something similar, one of the reasons some Americans are walking away and letting their bank foreclose.

Some of you folks took two polls here this week on topics related to that trend: Would it be a good idea for the government to help underwater borrowers refinance into lower rates? And is it acceptable or not for people to walk away from their mortgages?

The government-help proposal comes from financial publisher HSH Associates. If a home is worth $150,000 but the mortgage balance is $180,000, for instance, refinancing into a $150,000 mortgage would create a $30,000 "value gap." HSH suggests that Uncle Sam promise to cover any loss the lender would see if the homeowners end up selling before rising values or payments have made up that gap.

Two-thirds of readers who took the poll gave the idea a thumbs up. Most said it would help them refinance. The rest of the supporters said they wouldn't need it personally but think it would help others and/or the housing market.

Of those who said no thanks, most are against it because they're tired of government bailouts. "No" wasn't strong enough for one voter:

"Sickens me that this is even imagined," the reader said in a write-in vote.

Also this week, I noted that the Pew Research Center polled Americans about whether it's acceptable to walk away from a mortgage. So I put the same question to you.

As a group, you're a lot more sympathetic to walking than the U.S. as a whole.

The "yes" and "no" votes were equally split at 30 percent each. The most popular answer? "It depends on the situation," with 38 percent.

That's two-thirds saying it's OK at least in some cases, compared with just over one third of Americans who said the same in the Pew poll.

A few folks who took the Wonk survey wrote in their own answers:

"Not only is it acceptable, in many cases it is recommended."

"Yes, and we plan to do it."

"NEVER -- YOU bought it YOU PAY for it."

Definitely a heated subject.
Posted by Jamie Smith Hopkins at 7:00 AM | | Comments (9)
Categories: Walking away / strategic default


Yea I still don't know how I feel about this one. It's an excellent idea but I'd rather see that money go towards reducing the unemployment rate. When unemployment drops, inventory will drop and prices will rise naturally back up to at least 0% equity. Just my thoughts.

Prices rose much, much more quickly than they should have. Hence all the talk about the "housing bubble".

If someone bought at the height of the market, then they're going to have to either sell the house at a loss, or walk away from the mortgage.

As far as people walking away, it's a simple situation. When you sign a contract for a mortgage, you agree to make the payments and, if you don't, that the bank can take your house back. I don't believe these contracts put stipulations on your financial ability or inability to make the payments. It's a simple either/or; either you make the payment, or you don't. I don't think there is anything "immoral" about walking away from a house you can't afford to keep because you have serious negative equity. It's just a business decision.

Let the market decide. Prices are still way too high and need to come down, and the longer we put that off through artificial means, the longer it will take for the housing market to achieve equilibrium again.

I don't understand the reasoning behind letting people underwater refi.

your mortage payment doesn't change based on the value of your home - it's the same as it's always been, so what the problem?

You're just going to have to suck it up and keep the house longer than you had orignally planed. DEAL WITH IT

doube b, the argument I've heard for allowing underwater refi's is that these folks aren't currently able to lower their mortgage payments as other homeowners can with these low interest rates. And, the argument goes, lower mortgage payments will help them weather the rough economy better. (I'm not weighing in one way or the other, in case you're wondering.)

That doesn't seem like the end of the world to me. Too bad for them - there is always a risk in buying a home.

They will just have to wait until their values increase back to a point where it's feasible.

Double B,

Would you prefer your underwater neighbor to be able to refinance or to walk away and destroy the value in your neighborhood? I know it stinks and people need to own up to their mistakes but the reality is it makes fiscal sense to walk away from an underwater home sometimes. This refi option will keep the owners in their home and keep your values from decreasing even more

Again _ I don't see how their value falling effects their ability to make their current payment. You payment is the same regardless of your homes value at this current point in time. To walk away from a mortgage because you can't refi down to a cheaper monthly payment than what you originally agreed to is BS.

And lets say you let people do this - somebody refi the house they bought at $180K at the $150 value - what happens 10 years from now when the value is back up?

They just get to pockets the money? That's a nice little racket.

In the case of the HSH proposal, no, homeowners wouldn't get to pocket the money: "Any price appreciation would be committed to the value gap until such time as the value of the home once again exceeds the value of the original mortgage (per the example above, $180,000)."

I'm in this situation now. I moved here to Baltimore for work. My house is in Michigan. We all know how bad the economic situation is there. My Realtor told me that I will only get 40% of what I purchased the home for. I've been renting it to family and I'll continue to do that because I've decided to take it off the market. I haven't even considered "walking". Even if some feel it's a smart business move, I think it's my responsibility to pay for it.

I do have a question: I am currently renting here in Baltimore. How open are lenders to a second mortgage? I have excellent credit and minimal debts.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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