NY Times: Underwater, but Will They Leave the Pool?

[marmar]

....(snip)....

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator — and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates. ..........(more)

The complete piece is at: http://www.nytimes.com/2010/01/24/business/economy/24view.html?em

[FreakinDJ]

1. and you "Regulate" Banking and all these problem go away

Gee... Who Wuld da Thunk it.....The Glassman Steagall Act was a good idea

[phantom power]

2. If people kept these mortgages, how are prices supposed to readjust?

I mean, isn't price adjustment fundamental to the Invisible Hand that we're all supposed to be worshipping? Walking away from overinflated mortgages is one of the necessary mechanisms for bubble deflation.

[sendero]

3. You'd have to be insane..

... to pay off a seriously underwater house. As time progresses, more and more people are going to figure this out.

Houses are going to get REAL AFFORDABLE in the coming years.

[KittyWampus]

7. ideally, the answer is re-negotiating isn't it? You just spent 5 years paying into a home

and your solution is just walk away?

That sounds more like a desire to punish than to solve anything.

[phantom power]

9. As I mentioned below, banks are not cooperating, for their own reasons.

The banks do not want this bubble to deflate. Of course, it is going to deflate one way or another. If they won't re-negotiate principle, then two things will happen: people will walk away, or it will be foreclosure.

:shrug:

[sendero]

10. If the bank is willing to lower..

... the PRINCIPAL BALANCE, then that would be a good idea to pursue.

Otherwise, it is crazy to pay hard earned dollars for an asset that may well never again be worth the purchase price.

As for punishment, it looks like the bank mobsters that HOBBLED OUR ECONOMY are not going to suffer in the slightest for their deeds, since our government has only rewarded them so far.

A bit of "punishment" from the people doesn't sound that bad to me.

[KittyWampus]

13. so, wouldn't it be ideal for the government to start using its Big Stick in getting banks

to lower the principle balance (thanks for the correct term)?

See, I thought when we bailed out these financial institutions, one of the things that was supposed to happen is an audit of THEIR balance sheets. And that was why some banks declined to take the money or are paying it back (somehow) as quick as possible?

[KittyWampus]

4. If I've been busting hump paying a mortgage for my HOME over the last 5 years,

walking away would be about a lot more than the balance sheet.

If I could rent out the basement or top floor to make payments, that would be a consideration.

Edit- isn't the ideal thing to re-negotiate the mortgage?

[Myrina]

5. I 'renegotiated' with Citi, and my payments dropped $30.

:( Not exactly much relief, I'd say.

[KittyWampus]

8. I am sorry, that isn't much relief.

[phantom power]

6. Sure, but the banksters don't want to re-negotiate...

Because then they would have to officially admit that their portfolios are worth what they really are. Can't have that: it might reduce their bonus. I guarantee you 99% of people underwater would dearly love to renegotiate. The banks are not cooperating. Mailing in the keys is the next best option. After that, it's basically foreclosure or bankruptcy.

[PassingFair]

12. Dead on...the same thing goes for the bank's "shadow inventory"...

the number of homes that are foreclosed, or
in foreclosure that DWARF the number of homes
on the market.

The banks don't want to sell them, because on
their balance sheets, they are worth much, much
more than they would sell for.

[KittyWampus]

15. doesn't the federal government have an interest in those balance sheets reflecting reality?

See, I'm trying to think pro-actively and what SHOULD be done.

Not cynical comments that just accept the situation.

[PassingFair]

18. Um...OK...let me know when they put you in charge.

Until then, FACTUAL comments that appear to
you to be "cynical" are all that I can muster
right now.

:eyes:

[Edweird]

11. Tried that. Bank of America told me to FOAD.

[KittyWampus]

14. So wouldn't it be better for Federal Govt to find a way to force banks to start the process?

[Edweird]

17. That would require the desire to pass legislation to do so. I don't see it happening.

All I see is them getting billions from our tax money AND the ability to foreclose at the time of their choosing.

Money for the predator corporations. The people can eat shit and die.

I'm over it anyway. My wife moved to NY 2 years ago and I moved out for good 4 months ago.

It was supposed to have been sold already, but the property appraiser still lists it in my name.

Whatever.

[madrchsod]

16. our loan officer has been working with for the last 6 months...

to keep us out of foreclosure. sticking by us has saved the bank and us from both of us losing. with his help we have finally got ahead of the curve.
the reason we were successful is our bank is a 5 star community bank with only a few "repurchases" in the last year.

the federal government could get off their dead asses and start getting people into homes...

my son and his wife both have excellent credit with a large down payment. after 3 months they still can`t get the fha to approve a 120,000 dollar loan application. i wonder how many others are running into the same situation?