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Posted by on Jun 5, 2012 in Market Conditions | 18 comments | Print Print

Underwaters Must Be Comfortable

There was speculation in yesterday’s comments that there must be plenty of people who are “underwater”.  The group included those who may not be over-encumbered (have some equity), but aren’t willing to sell until more of their down payment/equity comes back. 

One commenter said, “I think the low inventory is due to the fact the most anyone that bought in the last 10 years is underwater, or near underwater, and can’t afford to sell to move-up or relocate for better job opportunities.”

The common perception is that being underwater is the #1 reason for defaults.

But apparently those underwater today must be comfortable enough to stick it out.  Why?  Because it has never been so easy to walk away, without obligation:

A.  You don’t have to income-qualify for a Fannie/Freddie/HARP refi, and no appraisal is needed either.  They are now supposed to approve you promptly, and if you don’t make it, they’ll approve your short sale within 30 days.  The major banks have similar commitments in place, and include up to $30,000 bonus to cooperate with short-selling.  They are paying you to walk away!!

B.  The five-year exemption to taxing your debt relief is supposed to expire at the end of this year, but apparently those underwater aren’t too concerned about Congress extending it.

Or those who are underwater aren’t planning on using it?

Closed short-sales have increased 22% Y-O-Y for the first five months of 2012, indicating that the banks are getting more proficient. But new short-sale listings are declining in San Diego County:

Type Jan Feb Mar Apr May
Closed SS, 2011
Closed SS, 2012
New SS Listings

C.  Have banks given up on pursuing those who don’t make their payments?

I only know of my own experience with Wells Fargo – they start calling both the work and home phones the first day of the 15-day grace period!  They have a surly attitude, too, like I stole money from their grandma.  They don’t seem to be in a giving mood!

Are other banks more forgiving?  Maybe, but we have to be far enough along through the foreclosure “crisis” that bank personnel are better equipped to handle the workload.

I think that the most-distressed homeowners have worked themselves through the system by now – it’s been five years.  The group that is hanging on – however large it is – are folks that should be able to find a way to keep hanging in there as long as prices stay at least flat.

What topic next – rising rates, Europe, or worsening economy?


  1. Was that first hand experience or anecdotal? Was that home value above or underwater? I may be crazy, but I firmly believe there are a bunch of folks underwater not paying their mortgage. What incentive do the bank have in taking the property back? It is completely different if there is equity and the bank does have an incentive to take the home back when the mortgage isn’t paid.


  2. I know a few people that are underwater, some substantially, and none of them seem all that concerned about it. They figure as long as they can make the payments and nothing life changing comes up they just keep plugging along and hope that things will come back. If that life changing event does come up before things have recovered enough they’ll be in the position of having to short sale, or foreclose, but for now they just stick it out.

    It’s probably not in their best long term financial interest to do that, but paying the default game adds a level of stress that they don’t want to deal with. There’s a level of comfort knowing your monthly rent/living cost for a long period time.


  3. I think the government has done a good job with the multiple QEs to reassure the underwaters that the progressive decline in valuation of the dollar is in fact our future. You hold on long enough and soon enough you are no longer underwater.


  4. I built my house in ’06, will make my final mortgage payment in two weeks and will only ever be underwater if the Pacific breaches my seawall!


  5. Here’s an example of how much inflation has masked the decline.

    The house is asking for a mil, it was sold in 2003 for 1.07 mil. On the surface just a slight decline.

    But the upgrades were likely at least $150k, so total of 1.22 mil. Inflation adjust that cost, and we are looking at $1.5 million. In other word, the million dollar asking is at inflation adjusted 1/3 off.

    Looking at it from a Chinese investor perspective:

    In 2003, this house plus improvement would have cost him 10.1 million RMB. In 2012, this house now cost 6.2 million RMB. That’s a 40% off bargain for the Chinese.


  6. There is a world of difference being underwater on a 30-year mortgage versus an ARM which may come due anytime.


  7. Payments on Libor based ARMS can be lower than rent in some neighborhoods. If you can keep the loan current and like living there, why not?


  8. 1.Was that first hand experience or anecdotal?

    First-hand, and I don’t think I have enough equity to be harassed during the grace period.

    I’d understand that they would want to get a jump on people once the grace period was over, and the late fee was due.

    But aren’t they risking that they would alienate the good-paying customers by calling them on the 2nd of the month?

    If they are calling me, they have to be chasing around those in default.


  9. Re the issue of a thirty year and underwater. If you are able to pay the monthly bill the underwater status will cure itself over time. So if you like where you live and can afford the payment staying put makes eminent sense.


  10. Yeah, as everyone has noted, you can be massively underwater and still easily manage your payment. Most people like their homes or they wouldn’t have bought them in the first place.

    HOWEVER, by now a lot of them almost certainly would have moved on — up, down, out-of-town — had they possessed any equity.

    They don’t, so they stay.


  11. Union Bank does the same hounding during the grace period. They call around the 10th of the month. Receiving the first call was really odd – now I just reply with a curt “your payment will be received by the 15th.”

    Point being, Jim is right – not just Wells, but all the banks must really be going after people who are actually in default. Not that I don’t think there’s still some shadow inventory, but I do think this thing is being closed to wrapped up – I doubt there’s much more distressed inventory to be added.


  12. “You don’t have to income-qualify for a Fannie/Freddie/HARP refi”

    Actually, there *is* income-qualifying/documentation required for FNMA/FHMLC HARP refis. It’s the FHA/FHA or VA/VA refis that don’t require income qual’ing.

    I work for a regional bank in Portland OR, but since HARP is a national program, should be the same everywhere.


  13. Kick the deadbeats out.

    People with money will buy the foreclosures and rent them out.

    The free rent program needs to stop.


  14. Underwater doesn’t mean you should sell. Where will you live? Rentals are tight and if you have little or no equity than you most likely have nothing to buy a cheaper house with.

    It’s easier to stay put and hope for the market to comeback.

    That’s why I think there are no listings


  15. If you are underwater by 30% or more you should walk. I don’t care if you like the house or can afford the payments. You can buy the same house or similar one in a couple years for less. I have given this advice to many friends and co-workers. The ones that sold short or foreclosed are in a better position today. They are happily renting and waiting out the grace period to buy again or have repurchased a larger/better home for the same amount they owed. Some have bought similar homes and have a substantially lower mortgage and to top it off they have lower interest rates.


  16. If they are calling me, they have to be chasing around those in default.
    -Jim the Realtor

    No. You’re just on their shitlist because the extend and pretend is no longer necessary or expedient, and publicizing it. 🙂


  17. I don’t have a mortage ( paid off home) but want to move up. Can’t, no homes available.

    I know of a couple of friends who used thier homes as piggybanks so many times, that now they barely hang on. I do however think they are indeed “comfortable” with deep debt. They lived that way for so long now.


  18. From HW:

    In December 2010, the Congressional Oversight Panel, which oversaw the 2008 financial rescue, predicted that the Home Affordable Modification Program would only prevent 700,000 to 800,000 foreclosures. The report said the program’s prospects “are unlikely to improve substantially in the future.”

    Well, it was wrong. The Obama administration’s much-criticized HAMP eclipsed that prediction in April. The three-year-old program has helped nearly 802,000 homeowners avoid losing their homes, up from about 795,000 in March.

    Under the HAMP program, the government pays lenders incentives to help borrowers avoid foreclosure by reducing their mortgage payments. Because of low enrollment, only about $3.23 billion has been spent on the effort, out of a possible $30 billion from the 2008 financial industry rescue.



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