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Coming Soon to Your Neighborhood: Falling Home Values Mean More Underwater Mortgages

Guest post by: Bud Gragg

Article Overview: If you think the tidal wave of underwater mortgages has receded, think again. The fact is that the underwater mortgage situation is almost certainly going to get worse before it gets better. Why is that? In part because of an ugly little mortgage product called adjustable rate mortgages, or ARMs. You see, ARMs look great on paper. The homeowner gets a nice, low monthly payment for the first 1-7 years, depending on the terms you get. But then . . . well, then the loan payment resets to reflect inflation.

Coming Soon to Your Neighborhood: Falling Home Values Mean More Underwater Mortgages

If you think the tidal wave of underwater mortgages has receded, think again. The fact is that the underwater mortgage situation is almost certainly going to get worse before it gets better.

Why is that? In part because of an ugly little mortgage product called adjustable rate mortgages, or ARMs.

You see, ARMs look great on paper. The homeowner gets a nice, low monthly payment for the first 1-7 years, depending on the terms you get. But then . . . well, then the loan payment resets to reflect inflation.

The payment doesn't just reset that one time, either. No—that mortgage payment resets every year after that.

Now, ARMs might not be such a big deal today if they had been given to universally sound mortgage applicants with stellar credit and good incomes who just wanted to get a head start on their retirement funds. Instead, ARMs were one of a few tactics that lenders used to get millions of people into mortgages who really shouldn't have had them.

You already know what happened when a glut of bad mortgages went bad in 2007. Rising foreclosures led to huge drops in property values, which led to people with underwater mortgages.

Well, the bulk of the ARM mortgages—something like one in five mortgages written in those years—were given out between 2005 and 2007.

Do you see where we're going here? What do you think is going to happen when the people who shouldn't have gotten mortgages in the first place are suddenly faced with huge increases in their monthly payments? Especially if they've lost the job they had when they applied for that mortgage in the first place?

That's right—we're going to see another huge wave of foreclosures every year while the ARM situation sorts itself out. And while these won't be strategic foreclosures where people are just leaving underwater mortgages behind, they will have the effect of helping create even more underwater mortgages!

In other words, even if you're not underwater with your mortgage now, you may well be there, and be there soon. And if you're already underwater—well, the ship hasn't stopped sinking yet.

So what can you do? First, find out whether or not your mortgage is currently underwater. While you're doing that, you'll also be able to see how many houses are listed in your area—just go to Realtor dot com. Be sure to research the asking prices for homes just like yours in your area as well as get a feel for how many houses are up for sale. Then go to your city or county Tax Assessor's website and find out what houses in your area are actually selling for.

This will give you a good idea of your house’s current value. Compare that number to the total amount you'll end up paying on your mortgage by the time you're done with it. If that second number is higher than the first, you're underwater and it's time to start making some decisions.

If you're not underwater yet, keep your eyes open and re-do your research on local housing prices from time to time. You don't want to wake up one day to find that you are 25% or more underwater and didn’t even know it!

A lot of things caused the current flood of underwater mortgages, from government stupidity to just plain greed. But right now that doesn't matter. What matters is getting through this situation with our finances and our families intact!

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