LibertyMaryland

Upside-down mortgages

I want to point out this one tiny factor that crops up in every single news story about the recession, housing prices, gas prices, inflation, taxation and probably Obama.

Upside-down mortgages. For those who are blissfully ignorant, an upside-down mortgage is when someone owes more money on their mortgage than the house is “worth.”

In other words, Mr. and Mrs. Nervous J. Panic decide, at the very height of the housing market, to buy a house for $500,000. A year before, the house was $410,000, and 5 years ago, it was $250,000 - but no matter, Mr. and Mrs. Panic are happy to buy the house for $500,000.

They’re enthusiastic, in fact, because in 5 years, the “value” of the house has doubled. Now that’s an investment anyone can bank on. In another 5 years, they’ll be sitting on a million dollars!

And it is a nice house. After all, it’s half a million dollars, ipso facto.

But then a year later, they go to refinance their mortgage because they’ve just discovered that their adjustable rate mortgage has somehow adjusted itself higher. That’s strange. Well, no matter…

But oh no! Their house is only “worth” $380,000! That rotten bank screwed them out of $120,000! What happened to their equity? Their investment?

Their in-house-retirement-account is gone!

Well, what the hell should they do?

Wait…I know. They should default. There’s no sense in throwing good money after bad, after all.

Okay. That’s fine. It’s not illegal to default on a loan. But here’s the problem:

A house is a place to live. It’s not an investment, and people who treat a house like an investment deserve to get burned just as much as the people who went waaay upside-down leveraging sub-prime mortgages. (Bear Stearns debt-assets ratio was 30-1)

So, if you don’t like a house at 500 grand - don’t buy it. Only your willingness to pay half a million dollars makes that asset worth half a million dollars. That’s how every single (legal) monetary transaction has ever transpired. The buyer agrees to the price.

A house is not a CD, a bond, a stock or a piggy bank. It can lose value, and even if it doesn’t, if you own the house for any period of time, you will end up paying a multiple of its value in taxes, repairs and other related expenses.
You wouldn’t default on a car loan because it’s not worth what you’re paying for it. And all cars lose value when you drive them off a lot - guess what - you’re upside down on your car loan within minutes.

Almost everything loses value once you buy it. There are few exceptions, like collectibles - but even the world’s safest savings account can suddenly lose value - and the FDIC only insures balances up to $100,000.

Now, you’ll likely start hearing about vastly generous plans from Obama and McCain on how to “fix” the problem of “hardworking Americans not being able to afford their own homes.”

There will be lots of calls for reform. And once again, it will be heartwrenching to hear about the thousands of Americans who have lost their homes. A little less so because the prices are starting to come back down to levels that make sense for someone like myself who still rents.