No bailouts for people who can pay their mortgages
A factoid on CNN.com states that 1 in 5 mortgage holders owe more on their houses than they are worth. Ouch. I like that the wording is “mortgage holders” and not “home owners.” It seems as if anyone who has a house and doesn’t rent is called a “home owner.” Sorry — until that mortgage is paid in full, you own a mortgage, not a house.
With 20 percent of mortgage holders upside-down in their mortgages, some people are questioning whether they should receive a bailout.
I don’t think a bailout is appropriate.
Some people who bought houses at way overinflated prices are considering walking away from their houses — even though they can still afford their payments — since their appraised value has dropped so much. Shame on you people! You signed a contract agreeing to pay your bill. Nothing in that contract stated you could walk away if you owed more than it’s worth.
Where will you go if you walk away? Good luck trying to get another mortgage ever again. If you can pay your mortgage, be happy that you have a place to live. Don’t abandon your house. Be responsible.
Say someone owned a house outright and paid $300k for it. It’s now worth $150k. Would they just walk away? Uh no, that makes no sense. They would stay put since they have a place to live, and if they wanted to sell someday, they’d hopefully wait until their house starts to appreciate again. That’s how the upside-downers who can pay their bills should carry on. Live in your house. Sell it on down the road and maybe you’ll break even or make a profit instead of deciding to be homeless and bankrupt.
Ashley at Wide Open Wallet compares being upside-down in a mortgage to being upside-down in a car loan. When people buy brand-new cars, it’s generally understood that the car will drop in value at a fairly rapid pace. If you took out a loan for most or all of the value, you’ll probably owe more than the thing is worth for awhile.
So why don’t you see more people abandoning their semi-new cars and just declaring bankruptcy? Because they understand that it’s a depreciating asset, and they probably would still like to have a car to drive around.
How is this different from walking away from a house? For one thing, a car is much cheaper than a house. Another thing: People often view their houses as investments. WRONG. Your house is a place to hang out in your pjs. It’s a place to park your butt at night. It’s where you keep your stuff.
For people who view their houses as investments, they must realize that investments might decrease in value. Sometimes that happens, and it stinks, but it’s how investments work.
Your house should not be treated as an ATM. And if you want to call it an investment, fine. But you’ll only be able to enjoy the returns on that once you sell it and get someone to pay a higher price than you paid.
Note: I do think that bailout money should be used to help people who cannot afford to pay their mortgages due to job loss or an unaffordable ARM reset. The lenders should lower their payments and maybe tack on a few years at the end of their loan, for example.
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A few years ago we were behind three months on our mortgage. We called the lender and got those three months tacked onto the end of our loan and my husband got a second job. I know that’s not going to work for many who lost jobs and have sky-high mortgages, but it will work for some. No one likes getting another job (especially if it’s something they think is beneath them) but you do what you have to do.
The ARM mortgages … I never understood those. It felt like gambling to me when we were offered one. We held out for a fixed rate.
I totally agree on being upside-down on the house. If the home-buyer thought the house was worth $300k why do they suddenly think it’s worth less just because the news or a website told them so? If your “dream house” was worth it then, and the payments were worth it then…what the hell changed? I mean REALLY changed? Nothing…just a few talking heads telling you things changed.
People who are not real estate investors for a living should not think of real estate as an investment. You are just so right on with this post beginning to end that I want to agree with specifics but would end up rewriting your post in this comment! LOL
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Right on with your post and *note. However just as the banks/investment firms got bailed out for thier risky behavior they need to take less profit and work with folks who you identified.
Thanks so much for the mention!!
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I completely agree about how silly it is to leave just because you’re upside down on your mortgage. So long as you can make the payments, at least you have a place to live, while you wait for the house to re-appreciate in value. I ranted about this subject for awhile — well, about upside down mortgages and taking responsibility for the gamble of buying a house, which didn’t work out — and a reader tried to rationalize her situation. (They were trying to sell a place they were “upside down” on, and they were basically giving up on the debt leftover.) I felt bad for her, but some of her reasons made no sense. You can read it here if you like: http://ipickuppennies.blogspot.com/2008/09/forget-respect-id-take-little.html
But overall, people should probably just get rid of the notion that they NEED to have a house. It’s nice but it’s not a right. And that belief got us into this mess.
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While I agree that people that walk away from a mortgage they can pay are only further hurting themselves and everyone else, you are making one faulty assumption, and the situation is more complicated that you make it out to be.
The bad assumption is that people felt that the houses were worth that we were forced to pay for them.
As a parallel example, did you think gas was worth $4/gal? But you probably still paid it anyway because you didn’t have a choice.
The American financial system has created an environment where what something is actually worth is unimportant, as long as you can make the monthly payment, and this has had a disasterous affect on our economy. The teaser rates on adustable rate mortgages let people ignore the price of housing and just focus on that low monthly payment. Then when those ARMs reset, people were reminded that the total price of something does indeed matter.
The side effect of the rapid increase in housing costs is that people aren’t spending money on other things, like cars and TVs.
As an example, I moved from a low-cost of living area in Western NY state in 2006 to Northern Virgina, a “high-growth” area, due to the loss of my job; There were no job where I used to live, and thus had to move to where there were jobs. Which unfortunately meant a growth area where housing prices had been rapidly increasing.
We bought a house that we could afford, with a fixed-rate mortgage. Unfortunately, coming from a low-cost area, our previous high equity position translated to a drop in the bucket, and the higher salaries here don’t match the increase in housing costs. Thus to be able to afford a house suitable for my family (and by suitable I mean a bedroom for each kid on a postage stamp lot, not a McMansion) …
we stopped spending money on other things.
Let me say that again. I and many, many of those other 20% of the population that living with artificially inflated mortgages due to housing prices that didn’t match value; people that actually have money or might otherwise have money to spend on non-housing stuff… we’re not spending it.
And thus the car makers aren’t selling cars, Circuit City is gone, all of the restaurants in my area are in trouble because people aren’t going out to eat, and on and on.
I used to be of the position that people that were in mortgages they couldn’t afford shouldn’t be bailed out. I will admit that it was partly out of resentment of seing all the McMansions around me while I’m stuck in a less than desirable house, and that was selfish and wrong on my part. We had a system, called forclosure, to deal with this. And for a while, it did.
However, while I do believe that there are and should be consequences for bad decisions, I have come to better understand the effect of the rapid forclosure rate on my area. While before, where a forclosure was a blip that benefited a very small number of people with minimal negative affect on neighboring properties, that is no longer the case. There are now enough forclosures that people are considering those prices the norm, and thus if you need to sell, you need to be competitive with forclosures.
Before, if you found a $5 bill lying on the street, it was an unexpected surprise. Now, buyers are expecting not just to find $5s lying around, but are actively looking for $10s and $20s.
What’s the right answer? I don’t know. Part of me says let’s do an across-the-board housing price reset, making principle reductions on something like a purchase price vs current appraised value ratio. Note that I didn’t say current mortgage balance vs current appraised value. If you got greedy and took futher equity out as the house “values” went up, then you still need to deal with that. And so yes, I want relief too.
The current mortgage relieve plans do nothing more than stop the slide (if even that). They do nothing to promote growth. If you want to promote growth, you need to put sufficient money back in people’s wallets that they feel comfortable spending it. That stimulus check we got from Bush? Insufficient. I don’t know anyone that went out and spent it. We all put it in the bank to try to build back up emergency funds.
Is this the right answer, I don’t know. Would this be expensive? Certainly.
Even if you disagree with this proposal, it should make it clear that things are a lot more complicated than you make it out to be.
As a further rebutle on Abigail’s comment.
You are correct, people don’t need to OWN a house, but people do NEED housing, and someone NEEDs to ultimately OWN the house/apartment. When housing prices go up, so do rental costs. And if the people that OWN the rental units are saddled with large mortgages on them, they can’t just drop the rent when costs come down, or they too would be in foreclosure.
As I said, it’s complicated and there are no easy answers.
We bought our house in November of ‘07, just as this all was beginning, so are probably upside-down on our loan just because we’ve had it for such a short time (we out 10% down). Does it matter? Not really, since we can still afford the fixed payments and aren’t planning on moving anytime soon.
Just as with my 401k, the value of my house doesn’t matter unless I’m planning to sell it. For those who have to sell, this is unfortunate timing, for everyone else, there’s no need to panic.
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We’re about to find out if we’re upside down in our mortgage. We’re refinancing after almost 2 years of mortgage payments. While we really hope the house hasn’t depreciated (since that will effect our closing costs), we’d never abandon our house. Yes, our house was an investment, but it’s also our home. We bought it because we love the location, the neighborhood, the floor plan, and the style. It’s too big for us now, but we plan to fill it up! I’m so glad that we bought the house we could stay in for years so we won’t need to move if/when we have another child.
The key in all this mess is personal responsibility. We bought a house (mortgage) we could afford. If my husband were to be unemployed for over a year we would be in trouble, but so would 90% of single-income households. The bailout money should go to those who bought responsibly, but can’t weather the long-term effects of this recession. It should NOT go to real estate investors who were gambling, anymore than it should go to someone who put their mortgage payment into a slot machine and lost.
Kacie, like you mention the car analogy is a great one… People deal with this everyday – but somehow the house is different?
BTW, thanks for the mention!
The difference between cars and houses if that you can still buy inexpensive cars. If someone on a janitors salary goes out to buy a Lexus, then it’s their fault they’re in mess.
But imagine if you went to the used car lot and and found that demand and poor practices pushed up the prices of even a 5 year old Chevy compact car to $30K. That janitor will either have to find some other way to get around, or buckle down and find a way to afford that car, sacrificing other expenses.
The car analogy is not great… it is absolutely stupid not even being close to the same case. The reason people would walk away from their home and not a car is because you can rent the same home for half the price you are currently paying in many cases. This is NOT the case with a car. Renting a similar car would probably cost you 70-80% more than the payments to buy one. If cars were suddenly half the price to rent that they are to own people would hand their keys to the bank I guarantee you that. As you state before you expect a car to lose 20% of its value the day you drive off the lot. No one expects housing to lose value as it is supposed to be an appreciating asset(unlike a car which everyone knows is a depreciating asset). 99% of the time if you hold onto your car for 10 years it won’t eventually regain its value. Like someone else said, you have a lot more options on ways to save money when buying a car… with housing you are stuck paying whatever the market says houses in your area are worth.
All you people who say people shouldn’t walk away completely fail to realize the magnitude of the bubble in many places. I’m guessing not many of you live in CA, NV, AZ, or FL. In many situations such as mine… people lost 60% of the value of a home they bought in 2 years. I didn’t pull money out of my house, I didn’t spend extravagantly, all I did was buy a home at the worst time in the history of the United States. Now someone can buy a home next to mine for half the price I paid and to add insult to injury, they will pay lower property taxes, and they will also have a much lower interest rate because rates are now at 4.5%. It would be nice if I could refi and get this rate as it would save me about $800 a month, unfortunately my loan to value ratio is 220% because it has fallen 60% and I had an 80/20 no money down loan.
Anyone in a situation like mine has absolutely no incentive to keep paying. To make matters worse CA raised taxes on everyone including middle incomes by about $1000 per family this year. So I’m supposed to pay my absurdly high price, high interest rate, extra taxes,pay to help other get into a home much cheaper than I did, and pay to help people who didn’t take nearly as big of hit that have LTV ratios at 105% or lower all while still paying my insanely high loan? Well don’t worry I am not even going to bother trying. Maybe I could do it, maybe I couldn’t, but at this point it isn’t worth even trying.
By the way you are not bailing people out if they walk away. The law is written and has always been written for people to have ways out of insurmountable debts like housing. The true fact is no one has done much to bail at any home owners so far. All the bailout money has help banks because they are taking such huge losses on homes rather than working with home owners to modify their payments to something affordable. If someone was paying you $3000 a month, but you found out they could only afford $2000 a month would you rather just take their home and then sell it to someone for $1200 a month? This is essentially what the banks are doing. Obama’s plan will do nothing to help those of us underwater… its really on their to help the people in the middle who aren’t underwater. They have already decided the underwater loans aren’t worth saving at this point.
I absolutely agree with this post. No one was holding a gun on these homeowners to force them to sign for these mortgages. Why didn’t we personally trade up to a huge house and a huge mortgage or take the equity out for other stuff? Because there is always a payday coming and it would have been stupid to sign for something that we wouldn’t be able to afford. If doesn’t matter if it’s in an area where the bubble has burst, if a borrower signed for a loan, you should pay it back. The Government and taxpayers shouldn’t be picking up the tab.
I don’t know how I feel about people with ARMs getting bailed out. Obviously they need assistance, and I don’t want anyone to end up without a roof over their head. It’s just that if an ARM was a person’s only option for purchasing a home it meant that person really couldn’t afford to be in a home. If you chose an ARM over a fixed rate, well, that is a consequence you should have to pay. A home IS an investment and carries risk… these people took a gamble when they chose to go forward with an ARM.
I also think it is silly to sell simply because you are upside down. My husband and I lost a little over 20k in the value of our home in only a couple months, and it’s frustrating. Yet when purchasing this home we knew that we would be here 5-8 years, so why sell when we planned to be here for that length of time? We are constantly told that if we are not close to retirement age to keep up with a 401(k) and wait it out… if you can afford the payment why not wait it out??
Scott,
I do feel for those of you who felt that the house you bought was worth it. I bought a house before prices had gone completely crazy, but even so paid $325,000 for a three bedroom plus MIL because it’s in Seattle.
But you say that while no one needs a house, people need housing. Okay. But that still doesn’t explain people buying houses rather than renting. Yes, rental prices will go up. That’s why you have to look hard. Each time I have moved to a new apartment, I’ve generally looked at 5-15 places, as well as scoured ads for a couple of weeks. I understand that in moving to a new city (especially in the case of job loss), you don’t have the luxury of time, per se.
But I guess the question is: Why did you buy a place you didn’t like? Why not rent? I know a few people who shared a room with siblings without incident. I understand it’s preferable for kids to have separate bedrooms, but while salaries are low, sacrifices are made.
And you said you didn’t believe the house was worth it, equating it to gas prices. Um, why on earth would you BUY a house if you didn’t feel it was worth the money you paid? Why not rent? A 2 or 3 bedroom apartment? Or, yes, even a home. There are plenty of owners out there who have had homes for awhile and thus are able to charge different prices. Here in Seattle, you can sometimes find 2 bedroom houses in the northern part of the city for $1000. You can also find them for $1900. It just depends on the house and the owner.
And when gas prices were so ridiculous a lot of people found alternatives. Bus transportation skyrocketed. People drove less. they generally found as many ways as possible around the prices that they found so ridiculous.
I am sorry that circumstances forced you to live in a city with a high cost of living. I am sorry that you couldn’t really get your family a nicer house. But again, no one deserves a house. There’s nothing wrong with renting. Perhaps the argument is that rentals were almost as much as a mortgage. Even so, while I’m sure times were very difficult and I can’t imagine the pressure you were under after a job loss, I wonder if it was the best idea to move to a city with such a high cost of living, given that you knew what your salary would be and how much your equity would translate to.
The fact is, you went from a house to a house. I wonder if you even considered an apartment or renting. I think once you have had a house, it’s very difficult to go back to apartment life. I know this from experience. But I also know that choices, however unsavory, are still choices.
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