It’s an upside down world
If you asked me a year ago what an upside down house was, I would have told you it was one where the bedrooms were on the first level and the living area on the second. Well a lot has changed during the past year and the term upside down house has taken on a meaning far more ominous than a simple floor plan.
In today’s upside down financial world, if the outstanding mortgage on your home exceeds the value of the home you have an upside down property, and you’re certainly not alone. An estimated nine million households own a home worth less than its mortgage debt an understandable number when you consider that in 2007, 29 percent of mortgages had no down payment. This has occurred partly because at the peak of the housing boom lenders often required little or no down payment. At that time a mortgage for 100 percent of the purchase price could be obtained making these properties upside down as soon as the bubble burst.
Federal agencies like the Office of Thrift Supervision are moving closer to a possible plan to help homeowners who are caught between higher interest rates on their adjustable mortgages and falling home prices. In an effort to keep homeowners in their properties and avoid a foreclosure, the agencies are proposing a plan that is based on a so-called negative equity certificate.
Participating lenders will be offered a chance to refinance a new smaller federally insured mortgage for qualified homeowners. In exchange a lender would receive a negative equity certificate entitling the holder to a payback if real estate recovers and the home is sold for a price greater than the original mortgage. The homeowner would be allowed to remain in his home and avoid a foreclosure judgment, and the bank would also avoid the expenses and certain loss incurred by taking the property back. When the property is sold, if there is equity beyond the outstanding mortgage the lender would receive a payback or take their loss at that time.
Sounds like a workable plan, however, such a program would address only a small fraction of the millions of homes facing foreclosure. In order to qualify the homeowner would be required to have had enough income to afford their payments before their mortgages reset to the higher adjustable rates, and not be able to refinance in the conventional manner because of dropping property values.
The Federal government is naturally not interested in bailing out investors and speculators who may well be able to afford paying the reset mortgage rates, but chooses to walk away from the property. Their goal is to encourage lenders to work out new terms voluntarily by providing some share in a future price recovery.
The mortgage lending industry in the United States is certainly complicit in the mortgage crisis. As recently as a year ago a potential home buyer with a credit score in the low 600s would be able to receive a mortgage with no money down, if they simply stated their income. Today credit scores below 700 could be subject to higher rates and deeper scrutiny making obtaining a mortgage especially for a first time buyer a lot more difficult. Unfortunately lenders suddenly acquiring a conscience are just adding to the housing slowdown by making financing tougher to get.
It may take a while but I have confidence that eventually the housing market will be right side up again, and that everyone will have learned a difficult lesson. The real challenge will be to avoid the temptation of easy money when the market is back on an upswing. In the meantime, if you run into any upside down houses, let’s hope it’s just because the bedrooms are in the wrong place.
Correction: The website listed in last week’s column should have been www.rivercitiescondo.com.