Help a Reader: House Underwater

Here's a comment a reader recently left:

Read in the paper a couple of weeks ago (didn't save it) that there was talk about loan programs with GOV assistance (??) that essentially allow a person to get back to the 80% loan to value ratio, which means the lender is forgiving part of the debt, (I assume).

My house was worth $600,000 when I bought it. I owe $450,000 after putting $150,000 down. Now it's worth $410,000 and I need to refi and can not. If the values do not go up and I do not qualify for an upside down loan, I will lose the house. I am making payments and will continue until the balloon comes due then I'm history. Does anyone know about a government sponsored program or other? I put all I had as a down thinking that it was equity.

Anyone know any details on such a program that's actually in use (I've heard of suggestions for something like this, but I'm not aware of an actual working program)?

Comments

[Kevin]

I'm not aware of anything definite, but didn't the Senate and House just pass something on mortgage relief recently? I thought I heard it was going to the President relatively soon.

[David]

Please excuse my ignorance but can you explain the balloon thing and when that comes due?

[FMF]

David --

Info on balloon payments:

http://en.wikipedia.org/wiki/Balloon_payment

[Servius]

Talk to the bank. Foreclosure is not an optimal solution for the bank. You may be able to negotiate terms that will save both you and the bank time, money and hassle. But only if you talk to the bank.

[Steve]

Are you freakin kidding me?! Where do you think this "forgiveness" comes from? If the bank forgives the value, that cost is recouped as paid interest by the other account holders. If it's the government, then you are talking about tax dollars. Either way, you are asking the community to pay your debt. So YOU want ME to give you tips to let ME help pay for YOUR big fat house that you can't really afford?? And I am guessing that this house -- that I will help you pay for -- is probably nicer than what I am living in... because I bought what I could easily afford! And I am supposed to bail you out?! This has to be a joke!!

[Kevin]

I find it hard support bailing out people with $600k homes when there are people in this country that have no home. I hope this reader gets things straightened out with the bank, but to expect outside help is a little ridiculous.

[Jimmy]

@Steve:
Normally, I'd be ranting right along with you, but I'm trying to understand why the reader is in this situation. By putting 25% down, he certainly wasn't interested in flipping the house, at least not in the short term. I am guessing that he currently has a 5-year, interest-only balloon mortgage. And the reason that he got it this way was that he was expecting to move after 5 years and make a nice profit off the appreciation of the house. And by going interest-only, he could afford/maximize the house he bought. And who, in their right mind, would expect to see a 30% decline in housing values? So, he was, in effect, gambling in the housing market. Yeah, too bad. I wonder if there is a gov't program that will pay me back for my stock market losses in my IRA because I need it for my retirement. They can pay me now, or support me later.

[mrm]

How about we skip the middle man and just each send you a big fat check for that genius mortgage you chose to get yourself into.

[Kap]

I think I agree with some of the angry posters above. When you say I "need" to refinance what you are basically saying is that you took a mortgage that you knew you wouldn't be able to afford, and just hoped that the value of the house would go up allowing you to sneak by later. Well guess what, you got caught, and that was the risk you took. I'd try to sell the house asap and pay off the difference in the mortgage remaining, it's better than foreclosing. Then you can buy a house you can actually afford with a reasonable down payment and a 30 YEAR FIXED MORTGAGE that you are sure you can make the future payments on.

The one exception here is if you already had reasonable mortgage but lost your job or had some family medical emergency that is causing you to fall short of making payments. If this is the case I feel for you, but there probably isn't much you can do.

[Jennifer]

Bashing the poor guy for asking for help isn't going to solve anything. He probably made the best decision for his situation at the time and his circumstances may have changed. Yes he gambled in hoping that the house's value would increase, but he lost that gamble. Lots of people I know took interest only loans with 5-10 year balloon/adjustable payments with the hope that each year their income would increase, the value of the home would increase and they could pay each month what they could afford in order to pay down their mortgage before it became a fixed payment. I have one of those loans and it fits our situation at the moment. We still have 8 years left on the 10 year interest only part and we are hoping that in 8 years our financial situation has increased.

As for asking for government assistance to "forgive" a part of the mortgage, that is dreaming. If there is time before the balloon payment becomes due, talk to a loan officer or bank officer and see what you need to do in order to qualify to refinance. Perhaps you need to increase your credit score, or need to lower some other debt to make your debt to income ratio better, or the bank thinks you are too far extended. Find out exactly where you stand and find a good loan officer who can look at your credit report, income and debt and give you sound financial advice. Check your budget and make sure that you have shaved it as far as it will go to allow for the extra money to pay on the house. If you can make it a few months with the new payment, sell some things or tighten your budget, then you just might make it through until you can qualify to refinance.

[Kap]

The reason some of us are upset is that it's not just his/her problem. It has a serious effect on those of us who were fiscally responsible and didn't take loans we couldn't afford.

First there is the higher price of homes. I make what I would consider a very good income for someone my age, I'm financially stable, have only a small amount of student loan debt which I am managing fine, and I continue to save and invest. Were it not for these irresponsible loans, I could likely own property of my own, but due to the crazy speculation, home prices are still way way above my affordability level. Obviously I'm going to get upset when I find out entire households who make tens of thousands of dollars less than I do, are taking risky loans for 500+ thousand dollar homes.

The effect on the economy is also devastating. My investments are down due to the economic crash, which was caused by the real estate bubble. So yeah my investments are effected and I didn't even take advantage of the crazy mortgages banks were handing out. Now I'm supposed to let my tax dollars and bank dollars go to bail our irresponsible folks who didn't understand their mortgages (or more likely didn't care thinking prices would go up for ever).

If people choose to speculate that's fine, but don't expect a bail out or handout when you speculate incorrectly.

[Mark B.]

I am in a similar situation. I bought my house for $192,000 in 2004 and put a 5% down payment (FHA Loan), so I now have a mortgage of roughly $178,000. Now I have to move, and my agent thinks I could reasonably get $149,000 for my house, leaving me with a deficit of $37,940 after real estate fees.

If I do not have the cash to cover this difference, what are my options? I am not the only person I know that is in this situation (I live in Michigan and thousands of people are leaving the state for jobs, but are upside down on their houses due to the TERRIBLE housing market in this state.) Many people are just getting houses in other states and then walking away from their homes here. It destroys their credit, but there are no other repurcussions. I don't want to do this. Are their loans available to cover the difference, etc??

[Duncan]

Mark B,
You need to look into a short sale. Basically, you sell the house for a loss and the bank agrees to consider your mortgage paid off even if you aren't able to pay off the entire balance. Banks often look to listen option as preferable to the high costs associated with a foreclosure.
Good luck

[TC]

Just a few points:

1. Just a year or two ago, and for much of America's financial history, one did not look at property as a gamble. It was a given that property values always increased. Then, The Bubble happened. There is much to read online about why this happened-check it out. (Hint: combo of lender and borrower greed, the declining dollar, disasters affecting the US's most profitable property, and so on.) But don't think of this guy as a total idiot/greed monster because he thought that his property values would increase. Only in retrospect are you guys slamming him for believing in this idea.

2. Servious is right. Foreclosure (especially in hotspots like FL or CA) is not in the best interest of the bank. Talk to your lender early and often. Lenders are (slowly) learning that there are going to be some painful losses in this. The government is "helping" by creating legislation on the fly. The rules are changing literally week to week. A lender who might brushed you off in April might be more willing to work with you in May.

3. Duncan: I agree. A short sale may be just what is needed in this case. However, please don't think that a short-sale absolves the borrower of further collection activities. If they can, lenders will try to get the difference between the short and what you owe. So, you're free of the home, but they may want you to work with them on making monthly payments on the difference. You sold short by 75K? You may find yourself being pursued for that amount.

4. Lastly, mass foreclosures hurt us all (including you righteous folks). You really want the home next to you sitting empty for months because your neighbor was living above his means? Tax revenues go down, crime goes up, and communities' values are reduced. And exactly how many paychecks are YOU from needing a little relief? We need to all step back and think about what direction we are all moving in here in America, still the best country on the planet.

--Tandy

[kitty]

@Tandy: "Just a year or two ago, and for much of America's financial history, one did not look at property as a gamble. It was a given that property values always increased. "

Why was it a given? Where were you in the 90s? The property values haven't always increased. The property values in 1994 were significantly below the property values in 1987 at least here in NY State. In my area (Westchester cty), for example, the drop between 1987 and in 1994 was a whole lot bigger than today. It took more than 10 years for property values to recover. When I bought my townhouse in 1997 when the market started to pick up, the sellers had to add their own money to pay off their mortgage. Real estate prices are cyclical - have always been.

I do agree that foreclosures affects all of us in one way or another which is why I am ambivalent about bailouts. I have no problems with your other points, but it was indeed stupid to believe that the values would always increase. By the way - this is what I was told in the 80s too; then came the 90s. Everyone forgets.

[Joe]

Everyone seems to forget that the housing "bubble" was largely written about for more than a year (or two) in every newspaper and magazine you could pick up before it actually busted. It's not like we all woke up one day and home values were down 10%, 20%, 30%, etc. So the handwriting was on the wall for a long time, and it was incumbent on the leveraged to prepare for it.

[Todd]

I don't really want to pile on, but taking out an ARM is an indication that 1) the buyer can't afford the home and 2) he knows he can't afford the home. So I find the notion of asking for a government bailout to be fairly obnoxious.

Why is it that folks can't just face up to the consequences of their own actions and stop looking for a handout from those who behaved responsibly and bought homes they could afford? Indeed, if the original poster had purchased a home he could afford, then he wouldn't have trouble paying the mortgage and wouldn't lose his equity because he could ride out the housing market bust.

It's an unfortunate situation, to be sure, and I wouldn't wish it upon anyone, but in the final analysis the poster has only one person to blame - himself.

[Cathey]

It would make finance sense for the mortgage industry to "forgive" short falls and refinance at the current true worth of the homes, where the home owner can prove fiancial hardship and cannot make the current mortgage payments, I say this because it would be better to keep these people in their homes and the bank would save money not having to proceed with foreclosure and continue to drive home prices down. Because this you sell your home in a short sale the short fall is forgiven by the bank anyway!!!!!!!

[Tim]

Indeed, there are those of us who bought homes in 2005 or 2006, have mortgages we can afford, and yet are getting our money (equity and downpayment) ripped from us because some other buyers/borrowers and and some lenders do not act responsibly.

Those who can't pay their credit cards can seek foregiveness. Those who can't pay their mortgages get assistance. Banks who are involved in dodgy loans got their bailout. Where is our bailout?

Nothing for the real victims yet, I guess.

[Brad]

Guess what you bunch of turkeys....when your neighbors are foreclosed on....you will all lose money right with them. Why do you think housing prices in high foreclosure areas have plummeted?? Is it all this climate change you hear about??

You can try to be holier than thow but you have two choices...help thy neighbor and lose money or loathe thy neighbor and lose more money.