1 in 4 Mortgage Holders Underwater on Loans
December 23, 2009
Post Tags: Adjustable Rate Mortages , home owners underwater
A couple of weeks back CNN Money ran this article:
One in Four Mortgages ‘Underwater’
Many of those loans were option-adjustable rate mortgages, in which borrowers could choose to make minimum payments that were so low they did not even offset the interest being accumulated.
Not only that, but in some cases they could borrow to cover closing costs. Yes, there were loans that would let them borrow up to 110% of the value of the home. Which means they were “underwater” from the very first day they were in the home.
The Real Estate Paradigm Changed
The past 5 years saw major changes in the paradigm of finance and the real estate world. Yet there has been no change in the metrics used to measure the industry. This is one shining example. Here are a few things that used to be considered “The Norm”
- In the past 20% down payment was the norm. In a few cases the FHA loans had less than 5% down and the seller paying fees and other expenses for the buyers.
- In the past it wasn’t possible to get a loan with no documentation of income.
- In the past it wasn’t possible to get a loan that would adjust in a few years and interest rates would reset.
- In the past investors didn’t own the loans as securities, banks did.
- In the past you couldn’t borrow more than the home was worth.
Yet, we continue to use the same metric for measuring the market as we have in the past.
OF COURSE 1 IN 4 MORTGAGES ARE UNDERWATER
It is a wonder it isn’t 50% the way the real estate finances were so out of balance. This doesn’t take into account the number of people that are “underwater” because they used their home as an ATM and borrowed against the “Equity” in the home. Equity too is a term that have been redefined. In the past it was “value” in more recent times it has been “vapor or supposed value”.
Borrowing against the “value” to take a vacation, buy a new car, or even add a pool to the back yard puts more people “underwater”. And if they borrowed from the home equity to pay off credit cards, it might have seemed like a good decision at the time, but . . .
The thing that amazes me is that so many are “AMAZED” that so many are underwater.
Today while listening to a radio show on NPR I heard one commentator saying how the Christmas shopping season was being impacted because of the downturn in the housing market. It seems people can’t use their equity line of credit to fund Christmas shopping sprees this year.
If this seems like an abrupt end to a post, well, I guess it is, because that last one simply leaves me speechless.
December 24th, 2009 at 2:01 pm
Merry Christmas and Happy New Year to you and yours, Dave!
Thank you for your hard work keeping us informed.
December 24th, 2009 at 2:10 pm
Concerned,
Thank you, Have a Merry Christmas and Happy New Year as well. Blue Moon on New Years Eve. Special night.
Dave