November 20, 2009
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It is pretty common knowledge that foreclosures and other signs of mortgage distress are at record
levels. Indeed, according to the Mortgage Bankers Association a whopping 14.4% of all loans are either
housing market like the one we’ve seen the last five years; a wild bubble followed by a harsh adjustment
downward.
Unsurprisingly, now we see some news reports of what’s being called strategic defaults. A strategic
default is one in which the borrower voluntarily stops paying the mortgage, even if in some instances the
borrower can financially still afford to pay, in other words “walking away.”
Walking away from a home is a very difficult decision, and all the benefits and costs of doing so should be
considered. If you (or someone you care about) are dealing with a difficult situation regarding your
mortgage then I very highly recommend you read this paper from Brent White, a professor at the
University of Arizona: Underwater and Not Walking Away: Shame, Fear and the Social Management of the
Housing Crisis. The paper prints 54 pages but it is a quicker read as a lot of it is footnotes.
For the interested, here is the abstract:
Have Housing Prices Bottomed?
There have been some news reports recently that housing has “turned the corner.” While some markets
(and mostly lower priced homes) may have indeed reached a bottom of sorts it is not likely that we see
robust housing price gains for some time. There is still a relatively large excess inventory of homes and
unemployment is very high. This may serve as a drag for some time.
Also, we may be experiencing more mortgage distress in the future (unfortunately) due to the substantial
number of mortgage rate “resets” in 2010 and 2011. A massive amount of borrowers will see a spike in
their payments in the next two years as “teaser” interest rates expire and borrowers must make regular
amortized payments at higher interest rates.
It's also important to realize that one of the reasons housing figures are looking better today is due to
government intervention. A housing tax credit and questionable lending practices sponsored by the
Federal Housing Administration are acting as artificial supports to the market. (For an interesting read on
a likely future bailout candidate read FHA: Digging Out After Loans Sour and With FHA Help, Easy Loans in
Expensive Areas.)
While many markets may have found a price bottom, in general, housing prices will likely be stagnant for
quite some time. Typically, the aftermath of a bubble requires many years before prices recover. For
example, the last great bubble before housing was the stock market. In 1999, investors were celebrating
the Dow crossing 10,000, which is about where it is today!
Please Note: This is for informational purposes and is not a recommendation regarding your specific
situation. Consult a qualified real estate attorney before making any decisions regarding your mortgage.
levels. Indeed, according to the Mortgage Bankers Association a whopping 14.4% of all loans are either
housing market like the one we’ve seen the last five years; a wild bubble followed by a harsh adjustment
downward.
Unsurprisingly, now we see some news reports of what’s being called strategic defaults. A strategic
default is one in which the borrower voluntarily stops paying the mortgage, even if in some instances the
borrower can financially still afford to pay, in other words “walking away.”
Walking away from a home is a very difficult decision, and all the benefits and costs of doing so should be
considered. If you (or someone you care about) are dealing with a difficult situation regarding your
mortgage then I very highly recommend you read this paper from Brent White, a professor at the
University of Arizona: Underwater and Not Walking Away: Shame, Fear and the Social Management of the
Housing Crisis. The paper prints 54 pages but it is a quicker read as a lot of it is footnotes.
For the interested, here is the abstract:
Have Housing Prices Bottomed?
There have been some news reports recently that housing has “turned the corner.” While some markets
(and mostly lower priced homes) may have indeed reached a bottom of sorts it is not likely that we see
robust housing price gains for some time. There is still a relatively large excess inventory of homes and
unemployment is very high. This may serve as a drag for some time.
Also, we may be experiencing more mortgage distress in the future (unfortunately) due to the substantial
number of mortgage rate “resets” in 2010 and 2011. A massive amount of borrowers will see a spike in
their payments in the next two years as “teaser” interest rates expire and borrowers must make regular
amortized payments at higher interest rates.
It's also important to realize that one of the reasons housing figures are looking better today is due to
government intervention. A housing tax credit and questionable lending practices sponsored by the
Federal Housing Administration are acting as artificial supports to the market. (For an interesting read on
a likely future bailout candidate read FHA: Digging Out After Loans Sour and With FHA Help, Easy Loans in
Expensive Areas.)
While many markets may have found a price bottom, in general, housing prices will likely be stagnant for
quite some time. Typically, the aftermath of a bubble requires many years before prices recover. For
example, the last great bubble before housing was the stock market. In 1999, investors were celebrating
the Dow crossing 10,000, which is about where it is today!
Please Note: This is for informational purposes and is not a recommendation regarding your specific
situation. Consult a qualified real estate attorney before making any decisions regarding your mortgage.
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Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC. Comments and
questions are welcome. Please contact him here.
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