One in Four Borrowers Are Underwater

Well this has certainly become an interesting string of conversation. There are differing views on whether the institutions involved - government, lenders, Wall Street, etc. - or the homeowners themselves are more to blame for the mess that we find ourselves in right now, There also seems to be quite a difference around the country in how this crisis is impacting various local markets. As usual there are many different approaches suggested on how to work our way out of the mess - from massive government intervention to "let the market work it out" lazzie farie approach (which I believe got us into this situation to begin with). Both approaches have downsides to go along with any potential benefits.

 My state (Michigan) also has the additional issue of a declining population. We are projected to have lost between 2-3% of our population when the new decade census numbers are complied. There's no mystery as to why - there's no work for many here in Michigan. We have seen our manufacturing jobs shipped overseas and our main industry - automotive - take itself down the pooper.  Our state politicians spend their time arguing with each other and can't even come up with a way to balance and fund the state budget - a task that a bunch of local housewives were able to do recently (they got some national TV attention for that).

There seems to be strong sentiment for the "just wait until things get back to normal" approach to the crisis. Folks, this is the new normal! We have already lived through much of the wave of foreclosures that were caused by toxic loans and are now into the wave being caused by high unemployment and the remainder of the ARM resets. We are just going into the expected wave of commercial property defaults. Property values continue to fall in many areas and will likely do so for much of 2010 and into 2011. The greedy lenders whom we bailed out earlier this year have rewarded themselves with fat bonuses and have now started introducing new and more exotic derivative products (many of them real estate-based again), which a not quite so fat, but just as dumb, market is snapping up. It's Ground Hog Day all over again!

So, is all gloom and doom? Is there no future? In order to live in the future, we must let go of the past. We should try to learn from history, but we cannot relive it. Our children, for whose benefit we always said we were doing all of those excessive things, have already learned to live with less, to expect less and to be happy with less. The less here are the material things that we all splurged upon and went into debt to get. The so-called Millennial generation has adapted better to the current conditions that most of us in the older generations. They'll be fine; it's us that we need to worry about. How will we ever get along without our McMansions or boats and motorcycles and country club memberships and so on and so on and so on? Heaven help us. Wait; maybe that's the answer!

I'm a little amused, although not surprised to read remarks with such timeline inaccuracies as are in this string. Let's be honest folks, it was 24 years of largely unconstrained capitalism at its worst - from Ronald Regan through Clinton and the Bush years - that got us into the mess we find ourselves in now. We can all judge in a little while whether President Obama does any good at trying to get us out, but he did not get us into this mess. Whether you choose to also throw greedy or unwise homebuyers under the bus with the politicians is up to you. I didn't do a lot of the stupid things that are mentioned either as homebuyer mistakes; but, now my home is worth less than what I paid for it 10 years ago, too. I am fortunate that I do not have to do anything with it for now.

 I wrote another post several weeks back entitled "Just Walk Away Renee" that discussed the topic of whether it makes sense to take yourself totally down the tubes in order to "do the right thing" and keep trying to pay on an upside down mortgage with a lender who refuses to look at a loan modification with you. We have been raised to try to hold on, to be stoic in the face of adversity and hang in there, to do whatever it takes to get through adversity.

 My position then was NO it doesn't make sense to go down with the ship. Don't strip your retirement savings and your kids college fund to try top save an asset that is now worth less than what you owe. If you can't get a loan mod, walk away. Alternatives like short sales just don't make all that much sense and the lenders have been given every incentive by the government to try to work with you. If your lender won't discuss working with you to get to a program that you can afford, dump him and the house and move on with life.

 I would expect to get lots of pushback on this position from people, like me who were raised by parents who were the children of the Great Depression and who had that hang-tough mentality drummed into them by those parents. It's often referred to as a part of the American ethic, although its application to economic hard times is a modern adaptation of an ethic that likely served the early settlers well in their day-to0-day struggles just to survive.

 Certainly there were and are a number of homeowners who deserved what they got, because they made stupid decisions; however, there were many more who have found themselves mired in the muck of a mess that they had no part in making. These are people who bought within the last 10 years who have seen the values of the property that they invest in drop below what they paid.  Maybe they bought using an adjustable rate mortgage, since that made sense at the time or maybe their lots in life have changed and they now need to sell or refinance and find themselves trapped in upside-down situations. They didn't really make stupid decisions, they were just buyers at the wrong time and in the wrong places.

 Are we to tell those people, you must stand tall, salute and go down with your ship? No, I say. We must tell them that they must do the right thing for their families and for their own good. If that means walking away, then so be it.

It's interesting to see empathy for a fellow agent/investor who got swept away by the events of this great recession. That's basically what happened to the vast majority of the people who have been foreclosed. I know that there are those who were just stupid or greedy or whatever, who overreached in the face of their better common sense (if any); however, most of the people whom I have met who are in pre-foreclosure condition or beyond, actually made buying decision that are defensible when they are reviewed.

I've always though that the idiots who build houses in known flood plains (along the Mississippi River comes to mind) or on the beaches along the southeastern coast get what they deserved when the inevitable flood or hurricane comes and wipes out those homes. What did they expect? But those who are impacted by the "hundred year flood" or maybe a rare tornado have my empathy - it was through no fault of theirs.

So, now, along comes our "hundred year" recession (nobody wants to use the "D" word) and all of a sudden many of those defensible decisions have gone bad. Something that hasn't happened in the lifetimes of most people and certainly of most loan officers has happened - home prices have dramatically dropped. They have dropped so far that most homeowners who have purchased in the last decade would find themselves under water.

For most, as has been pointed out in this discussion that is not a problem. They will go on making their payments and waiting out the turn-around. However, for many whose fortunes have also been impacted by this hundred-year recession it is a disaster, just as surely as if the floodwaters had risen to where they never have risen before. Is it important that the culprit is a resetting ARM loan? Does it matter whether the issue is a loss of overtime or maybe the loss of a job by one of the working spouses? Should your decision on whether to feel empathy or not hinge upon whether the buyers perhaps reached a bit too far for the house that they are now losing?

No! Something has happened to our economy that has not happened since the Great (close your eyes if you can't stand seeing the word) Depression. Housing values have plummeted, not just dropped - plummeted. All of a sudden, the homeless are not just the bums sleeping in doorways in the city, they are your next door neighbors (or at least they were - tsk, tsk isn't that sad?).

And what about the rest of us - the "we's" as opposed to the "they's")? Could the flood waters be lapping at our doors too and maybe we don't even know it? You bet they are. While we were busy tutt-tutting about our neighbors our fiends at our credit card companies and our banks were busy raising our loan rates and adding new and improved fees, all in the name of the current economic crisis. Maybe the lenders haven't figured out a way to raise the interest rate and increase our payments on those 20-30year fixed mortgages, yet; but I'll bet they're working on it. And heaven help any of us who might find the need to refinance right now - just wait until your appraisal comes back. Perhaps in this case we need to replace the we's and them's with a big dose of US. All of US are in this mess together.