Wow:
More than four in 10 South Florida homeowners who bought in the last five years owe more on their mortgages than their homes are worth.
For those who bought in 2006 -- the year prices peaked -- the situation is even worse. A startling 76 percent of those homeowners are ''under water,'' meaning their mortgage debt exceeds their property's market value. ...
The median negative equity of borrowers who bought at the market's peak is $38,321 for buyers who put down the median 10 percent, according to Zillow.com. Median is the midpoint at which half the values are more and half are less.
So basically every new condo building in Miami, Lauderdale and the southwest coast communities like Naples are three-quarters underwater.
Some homeowners find themselves wondering if they'd be better off if they did default. They are frustrated because they can't take advantage of lender programs to cut interest rates and, sometimes, principal balances to keep people in their homes. To qualify, homeowners usually must be in default or in foreclosure. ...
The $300 billion, federally sponsored Hope for Homeowners program, which took effect Oct. 1, also refinances homeowners at risk of default or in foreclosure into more affordable loans.
To participate, lenders must agree to write down the loan to 90 percent of the home's current market value, giving delinquent homeowners instant equity -- something current homeowners may not see for more than a decade.
If I were very underwater or thought I would need to move before my equity would become positive again, I'd seriously consider defaulting to get out from under it. But would I get caught?
[J]ust as tax evasion is a crime, some borrowers who try to beat the system may also face penalties. The Hope for Homeowners program carries up to five years of jail time and hefty fines for people who fall behind on purpose.
However, the dubious defaults would be hard to prove, some have said -- especially in places like South Florida where so many homeowners are already on the financial edge.
That idea panics some people:
William Hardin, director of real estate programs at Florida International University, said he fears such incentives will tempt boom-era buyers to choose to fall behind, even when they have the means to pay.
''That is the scariest scenario,'' Hardin said. ``Our whole economy is based on people fulfilling their contractual obligations. And, for an individual to arbitrarily choose not to fulfill their obligations when they can, to me creates a big problem in our system.''
I think what really scares someone like Mr. Hardin is the prospect of all these people being able to put their houses on the market, something they can't do now because the purchase price won't cover the mortgage, so they can't sell the place without getting a new, unsecured loan to pay off the balance (which is unlikely). If they were all written down, the wave of properties coming onto the market would mean an even faster downward spiral to pre-bubble prices.
If you're concerned with the human cost, as Mr. Hardin clearly is not, a rapid decline to pre-bubble prices would be a disaster. People now at par or with some equity would be dragged under, which would lead to more defaults. The ever-increasing loss of wealth and abandonment of homes would deepen the local recession. Jobs would evaporate, leaving even more people unable to pay their mortgages and rent. Government revenues would drop at the same time that demand for police and fire services would skyrocket due to the number of empty structures.
But if you have compassion, you have to weigh the possibility of a sudden catastrophe against the hidden costs of a slow-motion one.
First, there is the toll imposed by keeping people locked into properties that they would like to sell, but can't. To the extent that these purchasers bought these places as primary residences, we are creating a large army of people who cannot build any savings and cannot move to take a better job elsewhere. They'll be stuck there for a decade or more paying down debt, unable to save for retirement, almost wishing they get fired so they can declare bankruptcy. Arson would spike, both in abandoned and occupied homes. The problem is even more acute for seniors who have watched both whatever stock they own drop in value and have lost money on their homes.
To the extent that the purchasers are either second-home buyers or investors, the problem is different. If the investment in the property represents a high proportion of their wealth, it doesn't matter whether they live there or not, it's still a savings pit. At least those kinds of people are able to follow economic opportunities where they might lead.
But even if you are a free-market absolutist, there is an argument that government should intervene in what is essentially a market that won't clear. The problem is that homeowners can't negotiate writedowns from the banks on their own, because the entities with which they deal are the payment processors, not the holders of the mortgage. Ownership of the mortgages is spread over a large number of entities in the bond market. Essentially, the transaction costs of getting all those people together to create a writedown deal for these homeowners is preventing the real estate capital these houses represent from flowing again. The economic result is that people who want to buy property in southern Florida can't, and the people who currently own property in southern Florida who want to buy elsewhere can't. The pain is spread out over the entire country, rather than being localized to southern Florida.
If everyone is going to pay a price whether underwater mortgages are written down or not, then the rational thing to do is whatever rectifies the situation faster. Steps can be taken to address both the perceived inequity of such breaks and the spillover effects of adding to the overhang of unsold properties. For example, buyers who enter the program could be prioritized on the basis of when they bought, their income level, and whether they hold the property as a primary residence or as an investment. Depending on where they fall, owners might receive less of a writedown or none at all. Those who receive some break but are still underwater could be assisted in securing a personal loan to cover the balance. Writedowns could be given over a period of time to allow the market to soak up the extra properties without causing a cascade of prices for everyone else.
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