Everyone knows that your boat is supposed to stay on top of the water, not under it. But sometimes things just don't happen the way you planned it too. So Mr. Lender you financed me, and like the Titanic my loans market value sunk to the bottom of the frigid dark ocean floor. Well, maybe not that far, but it sunk under the book value. And if Mr. Lender decided to sell that loan on the secondary market, he would suffer a loss.
That is pretty much an underwater loan, but what makes it sink? Well, there are a number of ways to sink a loan.
- The borrower become delinquent on payments
- The Coupon interest rate is below the rate of similar loans
- The loan collateral is worth less than the loan principal
An example would be a Mr. Lender is holding a long-maturity home loan, a 30-year would suffice, and the market value of the home is below the remaining unpaid principal.
2009 holds much in store for the real esate industry, and I am anxious to see what will transpire over the course of the new President's first year in office. Are you looking for a turn quick turn around, or do you believe we will see a slower progression?
Matthew B O'Shea