The World turned up-side-down

The Coming Negative Equity Problem

Sgt. First Class Nicklaus Skaggs is among those looking to walk way. Mr. Skaggs bought his home in April 2005 shortly after returning to California from a one-year tour of duty in Baghdad.

The $455,000 three-bedroom home he and his wife purchased in Vacaville, about one hour northeast of San Francisco, is worth an estimated $285,000 today, well below the $453,000 he owes on his mortgage. The monthly mortgage payment, which jumped after its interest rate increased, is now $4,000, up from $2,980 when he bought the house.

Mr. Skaggs expects to be redeployed to Iraq again later this year. But he can't sell his home, since there are few buyers, and he can't refinance because lenders require a large down payment he doesn't have. Now, the 18-year Army veteran has decided to walk away from his mortgage. He hopes in a few years lenders see his decision as a unique situation created by the housing meltdown. "I don't think that house is going to recover in value any time soon," said the 40-year-old. "I'd just be throwing the money away."

From today's WSJ:

Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country's outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and Alt-A -- a category between prime and subprime -- will be attached to negative equity.

More after the click ...

My comment:

The sad thing is, where ever Congress puts the emphasis, the predatory lenders will be rewarded for making bad bets. If Congress targets bailouts at the lenders, they're rewarded for bad behavior at tax payers expense. If Congress targets the homeowners who were talked into taking on more debt than they could in the real world, the homeowners will pay on their mortgages which, in effect, will bail out the lenders who made the bad bets ... at tax payers expense.

This is not about people who couldn't read the fine print in their mortgage contracts. This is about people who were victimized by a system that told them repeatedly that housing prices would continue to climb ... forever. They were told that they could take variable rate mortgages and either refinance or sell their mortgaged property at a higher price when the escalator kicked in. Their sin was to believe what they were told by "experts" in the business.

This is the "fiscal responsibility" in action that we've been hearing about for the last two decades. This "fiscal responsibility" stood by, watching asset inflation and labeled it "growth". The sad thing is that you're paying the price. The one who ends up holding the bag is the one who ultimately bears the responsibility and they've left YOU holding the bag.