What is an Under Water Hoboken Condo Anyway?

There was an article in the NY Times last week about the housing fiasco that struck a chord. There were many innocent home buyers swindled by unscrupulous mortgage brokers, others who have adjustable-rate mortgages with payments that have ballooned and they can no longer afford, and still other home owners with good intentions who have fallen on bad times. It has always seemed to me that something was missing at the heart of the explanation of why we are in this mess. This column by David Leonhardt insightfully addressed those home owners who are said to be "under water". Now in Hoboken, an under water condo may have a literal meaning every time we have a heavy rain. In this case, however, that's not what is meant by an under water Hoboken condo. Homeowners whose properties have lost enough value so that the property is worth less than the underlying water is said to be "under water" or have negative equity in their home. That is what the article addressed. It's also what has always made me feel unease about the mortgage crisis.

Do Property Owners Get To Choose Not To Pay?

If you read about the mortgage crisis, it is often assumed that just because an owner is under water, he or she cannot afford to make the mortgage payments. That is simply not always the case. A property owner with negative equity often has a choice to make. Many of them could continue to pay their mortgage in a timely manner. Just because the value of a Hoboken condo has gone down on paper, that does not necessarily mean that the condo owner cannot afford the payments. Nor does the owner always have to sell the property. There are home owners with negative equity who could stay put and keep paying and many do. These people might like their condo, want to stay in Hoboken or feel a moral obligation to keep their side of a bargain. After all, many of them knowingly and willingly with the representation of counsel chose to enter into a contract and agreed to make the payments. Nothing in that agreement provides them with an automatic out if the value of the underlying property falls. That would be similar to buying stock on the premise that if the price goes up the owner can sell at a profit but if the price drops the corporation is somehow obligated to absorb the shareholder's loss. While some of us might wish that were true, that's not the deal. Why should it be any different with a mortgage? In fact, when stocks bought on margin decline in value, the owner gets a margin call and has to put more money down. Why not do that with real estate, too? As the article aptly points out, there are home owners who look at their purchase purely as an investment vehicle that may not pay off. They choose to walk away from the mortgage and the real estate because they can. With the prospect of a homeowner bailout, these owners may not have to worry about their credit rating being hurt, declaring personal bankruptcy or even taking a loss. With help from the federal government by way of your and my tax dollars, the condo owner who could make the mortgage payments but chooses not to will get the same relief as those who truly cannot pay and face foreclosure. Many of the home owners who would receive help by choice rather than by necessity are likely to be investors. The Hoboken condo buyers who may have bought pre-construction as a speculative investment with the hope that the market would continue to skyrocket often planned to flip the property. They bought with little or no money down and no intent to ever live in the condo. With a primary residence somewhere else they often have no ties to the community. Is that who we should be helping? What do these condo buyers contribute to the future health and prosperity of Hoboken?

There Are No Easy Answers

Of the $700 billion bailout fund the Treasury Department has structured, it seems that because of reasons like these, little of that money will go directly to homeowners regardless of their need or circumstances. I always believed that if you make a promise you should do your best to keep it. To me, that includes paying your mortgage when you can afford to do so regardless of the value of your home.