02 December 2009

One in four borrowers is underwater: now what?

According to a Wall Street Journal article from last week, 23 percent of US homeowners owe more on their homes than they are worth. That's nearly one in four, and by any measure it doesn't bode well.

Those figures reflect the 10.7 million US households that had negative equity in their homes in the third quarter of 2009. Fully half of those households, 5.3 million households have negative equity of at least 20 percent. Further, 520,000 of those borrowers are in default officially. Those numbers were compiled by First American Core Logic, a real estate information company in Santa Ana, CA.

I ran an article on Monday that was a reprint from the St. Petersburg Times and the article discussed what's becoming known as a strategic default on a negative equity mortgage. People are beginning to walk away from these so-called bad mortgages on purpose. These are not isolated instances either. According to a study conducted last year by Experian and the consulting firm Oliver Wyman; 588,000 borrowers who could afford to pay their mortgages walked away in 2008.

The US has exported its major manufacturing capabilities over the course of the last 30 years and such manufacturing as still exists, exists to serve the housing industry. That's a gross simplification of course, but it's not untrue either. So if housing is the new bedrock of our economy, how can all of this negative equity and a loosening stigma against default be anything but a bad thing?

My post on Monday spurred a really interesting series of comments, it's had me musing about ethics and morals ever since. I still maintain that the mortgage crisis, the financial meltdown and all of signs and symbols of the current recession are symptoms of a deeper problem. Such fixes as have been proposed and implemented seem to be slowing the slide into something truly horrific, but I don't think they're addressing any root causes. Chasing short term gains is what let to the current mess and throwing short term fixes at it is just paving the way for the next bubble.

So again, am I out to lunch with all of this? Is the mortgage meltdown an isolated event? I'm not in a negative equity situation mercifully but I know a lot of people are. If you are you have my sympathies and I'd love to hear what that's like. I mean that genuinely. It's easy for me to wring my hands over strategic defaults because it's not something I have to entertain. What's it like to walk in those shoes I wonder.


  1. -Paul,
    You should read this article http://news.bbc.co.uk/2/hi/business/8323991.stm

  2. Wow. How large a bank was DSB Mel? How serious has the banking meltdown been in the Netherlands?

  3. It was a rather big bank, where a small country so we don't have much banks.
    Most of the other banks have gotten financial injections by the gouverment... and where talking about billions of euro's. Their is also a lot of controversy about these financial injection because the big bonuses to high placed bank personnel are still being given. It's something people are really mad about especially because the financial injections are being paid by us THE TAX PAYERS.
    The so called bad mortgages are being bought up by the other banks and the people still have to pay their mortgages. Not paying means that your house will be sold and your stuck with a remaing dept to the bank because a lot of people go a mortgage much higher then their house was worth.

  4. That's pretty much the exact situation here, just add a few more zeros. From what I hear it's worse in the UK and Iceland's in a rut I don't think it will ever get out of. I wonder if there are any western countries that are doing a good job of repairing the damage.

  5. I must say you don't hear much about the economic crisis from countries like Sweden, Norway and Denmark!?
    It's gonna take a very long time for we are out of this mess.

  6. Italy seems to have sailed through it too, but I think that's due to their primitive banking system!

  7. I seriously don't understand how or why anyone would commit to something they can't afford. It just doesn't compute in my head which results in me having zero sympathy for people who think they deserve a McMansion. Things in our house are simple - we don't buy something if we don't have the money for it. No exceptions.
    I think it all boils down to the overwhelming sense of entitlement that so many Americans have. An economic meltdown would really be a bummer, but it seems that the only thing that incites action in people is a blow to their wallets. I don't know that a kick in the financial nuts would be all that bad for this rampant imprudence.

  8. I think the underwater mortgage thing is more complex than the sub prime mortgage fiasco, even though they're related. I nearly bought a townhouse two-and-a-half years ago for a hair under $200K. Considering what was going on in this neighborhood at the time, that was a reasonable price and it was something I could afford without having to rely on a shady mortgage. Not that shady mortgages didn't get waved under my nose, but that's a topic for another day.

    I thought long and hard about it and I was convinced that we were in a housing bubble despite assurances to the contrary that were coming from the Bush administration. I balked at the last moment and cancelled my contract.

    Those same townhouses are now selling for about half what I nearly paid for one in 2006. Had I gone through with my plan, I'd be a statistic right now. I would have a serious negative equity problem on my hands and all for just doing my thing and trying to buy a home I could afford.

    I think about that a lot. Had that transaction gone through, I would not be in default. I would still have an affordable mortgage payment. But what I would have too is a black hole into which I'd be throwing my money.

    I don't think that the situation I just described is unusual either. Most of the people who are upside down bought into the message that was coming out of George Bush's "Ownership Society." Remember that expression? Many people were sold a bill of goods that turned out to be bad.

    I don't think people who are upside down should be relieved of their obligations and I don't think the impulse to walk away can be excused, but I do have some empathy for those folks.

    I see the whole thing as a conundrum. There is blame aplenty to go around, but there are just as many people who got caught up in a ponzi scheme though no fault of their own as there are thieves who caused it.

    What pisses me off more than anything is that the architects of these ponzi schemes are getting away with it and their patsys are being stuck with the bill.

  9. I clearly have zero aptitude for finances and business, so forgive the stupid question, but if you plan on staying in your home for ten years or so, then what's the big deal if its value has dropped? If you're not planning on selling it, maybe the market will rebound in ten years' time and you'll have suffered no loss. Market fluctuations are the natural course of things and I realize that this latest one is of muhc greater magnitude than normal, but if you stay in a house long enough, it will appreciate...right?
    It's a good thing you're as sensible as you are!!

  10. We chose not to move up when we could and paid off our house instead. I am a gardener. I have turned over every inch of soil on our under 1/3 acre lot myself. It matters to me that my roots run deep with trees I planted that were so small the root ball would have fit in coffee can. Today, they are over 30 feet tall. My husband is the treasurer for a university endowment and understands this mess to a fare the well. I think it is important to find our what is truly important and celebrate that and let go of the need to have more and more. That said, I just turned 60 and just this year will demo my kitchen! I plan to buy the best appliances I can—and hold onto your socks—use Gladiator tool boxes for my cabinets! I know it's not for everyone, but it works for me.

  11. Melody: I am not excusing the shenanigans engaged in by bankers and by homeowners. But there's a lot to this and it involves just about every aspect of the society we've become since the early '80s. The US jettisoned its manufacturing base in order to become what was billed as an "information economy." I say that the "information economy" was a ruse to consolidate power and money at the top of the food chain and to eliminate that pesky and demanding factory job class.

    Hordes of people bought into it. They believed the lie that eliminating a career paradigm of a lifetime's employment with a pension was somehow a positive step. In the place of that came a lifetime of zero loyalty and a self-funded retirement. There is an entire class of people in this country who move around and follow their jobs. These are the same people who are in the middle of the mortgage mess. Add to that an insane method of development in the shape of sunbelt suburbia. Then throw in a housing bubble that was manufactured to make the last administration look good and you have the mess we see today. There is ample blame to go around and it's a mess so profound I can't see a way out of it. Suburban sprawl is unsustainable. Treating jobs as a disposable resource is unsustainable. Allowing people to buy homes beyond their reach is unsustainable. That list could go on for days.

    What I find so exasperating about all of this is that what's been put in place is an unsustainable model of what constitutes a good life and that model has collapsed utterly. No one seems to be willing to make the hard choices it's going to take to come up with a better model.

    It would be of endless benefit to put an end to sprawl, to reconnect people to one place, to get people to buy only what they can afford. Doing that though will require a virtual revolution and since no one's willing to suggest it, we're left tottering toward the edge of the abyss.

    I say all the time that the US is the reincarnation of the Roman Empire and the complicated and convoluted current mess in housing is the equivalent of the system of patronage that did in the Romans. The barbarians at the gate got all the credit, but Rome destroyed itself long before the Barbarians arrived and they did it by following an unsustainable economic model.

    I have zero sympathy for anybody who willingly gamed the system. But for every system gamer, there are ten people who just thought they were doing the right thing.

    Home before Dark: Thanks for your comment. I envy your connectedness. I climbed off the corporate merry go round more than ten years ago and it was the best thing I've ever done for myself. It's my sincerest hope that the current mess will convince people to look inward rather than outward when they're looking for happiness.

  12. Home Before Dark: Gladiator tool boxes?! That sounds fun. Send me photographs when it's completed, you have my curiosity piqued.

  13. paul, you are correct, we are the verge of collapse as the current model is unsustainable. we'e witnessed the decline of the american empire since the 1980's even as our empire has been touted as the last global superpower.

    what i don't understand is, what is the end game? power and wealth have been concentrated in a tiny minority, but to what end? they've cannibalized the very thing that leads to economic security and stabilization: a large middle-class. without it, the economy of our nation will sputter and die, as a tiny minority just can't fuel growth, and when our economic collapse is complete, what will they have gained?

    honestly, it makes no sense to me, whatsoever.

  14. Thanks Christian, sometimes I think I'm the only one who comes to that conclusion. I don't get what the end game is either. But when I listen to the Dick Cheneys and Karl Roves of the world it occurs to me that there is no end game. I think the whole ball of wax was sent down the river for a short term gain.

  15. Hello, Paul! Great topic here. I will address your comments on sprawl and how it has affected my town of Scarborough, Maine. This once charming farming community a few miles south of Portland had (and for the most part still has) it all...beaches, open space, good schools and proximity to shops. However, in the '90s the developers came to town. Farmland was turned over to Mcmansions, Walmart and overflow growth from the Maine Mall. Traffic increased, tempers started to fray at intersections and if there was an accident on the Maine Turnpike, Route 1, the only alternative to those heading north or south came to a standstill. There was a plan to build 'The Great American Neighborhood' in the Dunstan area of town (where I live). I went to all sorts of meetings and workshops and was all for it. Some busybodies in town decided that such a development would make their taxes go up, increase traffic, bla, bla bla, The resolution was defeated by townspeople who didn't even live in the area and had not been to any meetings. It was petty small town politics at its worst. Seems these people prefer the safety of their SUVs and big houses (on lots with not one mature tree), to the idea of being able to walk to a corner store or interact with their neighbors. While I am able to walk my dog along the Eastern trail and Pine Point beach, I prefer to drive (!) into Portland or South Portland where I can walk, admire interesting houses and gardens and stop in locally owned shops. I have friends in town who are afraid to drive into Portland and parallel park (but that's another story!)
    Keep up the great blog and even greater topics...

  16. Thanks Anne. If it weren't so late I'd go off on another tear but I'll leave it with a thank you for telling everybody that story.

    Some day I'll write about the horror show my beloved downtown St. Pete has become at the hands of a couple of developers. Urban planning is a joke.


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