Sunday, December 6, 2009

32% of all mortgaged properties in the US are worth less than the mortgage.

As of June 2009, more than 32% of all mortgaged properties in the U.S. were “underwater,” meaning that the homeowner owed more on their mortgage than their home was worth, according to Brent White of the University of Arizona in his paper Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

Caveat: before you read this blog and react, make sure you live in a non-recourse state. That's one where if you default on your mortgage the banks can only take the house and are barred from coming after your other assets to make up the difference.

While he doesn't quite come out and say "WALK AWAY YOU IDIOT", I will do it for him: if you are a slave to your bank for their blessing of a roof, run away. You don't owe them your soul. If you can continue to pay the drowned mortgage, continue to do so. (I am able to, so I do.)

In my world view your contract with your bank is just that a "contract" and not a moral obligation to a life of servitude. We had that before with the plantation owner making the slaves build their cabins and stay obligated to the master for food and clothing. We rejected that notion 150 years ago.

If shame and fear are holding you in mortgage slavery, shake it off, there are plenty of rental properties out there and over time you just might be able to save a ton of money.

For the sake of honesty: I am completely underwater on my main residence. Its worth exactly zero dollars. How do I know that? Half the homes in our subdivision are for sale, some for over two years. There are no buyers, nor are there any lenders, so the market value is zero.

Realistically, I am sure if we auction it, we might get something. Maybe about 1/4 of its former price point. I can afford to live in this home because the payments are under control, for the next four years anyway (and then I retire). I expect we will sell it for the mortgage amount or maybe a shade over/under.

I have no fear of having crappy credit. I have great credit and half my credit card banks have raised their rates to the state usury limits (or nearly so). I am lucky that none have cut my limit, so I have plenty of credit but at rates that make loan sharks look like a kinder and gentler business model.

PS I just bought my last car (should last the rest of my driving life) and I have a significantly diminished stash of cash for my impending retirement.

I would guess that if you are considering walking away from your mortgage, you already have nearly wrecked your credit. If you are safely making your payments and you like your house stay, its not worth the hassle.

However if you have $25,000 in credit card debt, no savings accounts, an income of less than $30,000 and a negative home equity of $100,000, then I can't see the downside of becoming a renter. Maybe you should have been a renter all along. If you need to be a mortgage slave to feel good, then I suggest finding a financial life coach to work through the issue of bonded servitude.

In the bloggers humble opinion, we should expect single digit increases in home equity over the next decade: so factor in that the boom is over and the "value" of your home will never go back to the heydays of your youth.

In a nutshell here is what Brent has to say about the non-walkers...This norm asymmetry has lead to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse. (WHITE ,2009)

If you want to read the whole paper, and I highly suggest it you can get it here.

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