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How Did We Get Here? Why Underwater Mortgages Are at an All-Time High

Guest post by: Bud Gragg

Article Overview: Homeowners weren't supposed to be drowning in a tsunami of underwater mortgages in 2010. Up until 2007, everyone-the government, the economic experts, and certainly the mortgage lenders-told us that property values were supposed to keep rising, not fall so hard! So what happened? Why are 24% of US homeowners dealing with underwater mortgages, with another 5% facing that prospect soon?

How Did We Get Here? Why Underwater Mortgages Are at an All-Time High

Homeowners weren't supposed to be drowning in a tsunami of underwater mortgages in 2010. Up until 2007, everyone—the government, the economic experts, and certainly the mortgage lenders—told us that property values were supposed to keep rising, not fall so hard!

So what happened? Why are 24% of US homeowners dealing with underwater mortgages, with another 5% facing that prospect soon?

No. We're not kidding. There's a better than ever chance that roughly one third of all homeowners in the U.S. will be saddled with underwater mortgages in the next year.

Almost one quarter of homeowners are dealing with underwater mortgages right now!

How did this happen?!? We'll tell you—but you're not going to like it.

We know that you know that our country has been in a recession. But do you know what started it?

Well, back in the 1990s, the Clinton administration and Congress told mortgage lenders that they had to do more to make sure that almost anyone who wanted to could buy his or her own home.

That sounds nice and egalitarian, doesn't it? But what if those people didn't have houses for a good reason—like, they couldn't afford to keep up a mortgage?

So that's one part of the puzzle—a well-meaning but ultimately stupid bunch of politicians making moves that made them popular but that didn't make economic sense.

Here's the other part. This one won't surprise you—it's all about greedy mortgage lenders.

You see, the mortgage lenders came up with all sorts of interesting tactics to write the loans that Congress and Clinton told them to write. For example, they were giving mortgages to people based on their stated income. That's right—they weren't even verifying incomes!

Next they came up with a little gem called the adjustable rate mortgage, or ARM. Adjustable rate mortgages come with a nice little up-front monthly payment.

That resets to reflect inflation after 1-7 years, depending on the terms you got, and then continues resetting every year after that. We don't know about you, but we've hardly ever seen inflation go down, have you?

But wait! That's not all! Faced with all of these bad mortgages, what did the investment bankers do? They lied! That's right—they bundled these bad mortgages together and labeled them good investments! Then they sold (and re-sold and re-sold and re-sold . . .) those huge bundles of bad mortgages all over the world.

So why are bad mortgages bad? Because eventually people can't pay them anymore. People defaulted, then more people, and then still more, and suddenly we were looking at the real estate meltdown of 2007 and the recession of 2009.

Take all of the houses on the market and couple it with millions of unemployed people who can't buy houses, and you get underwater mortgages—mortgages where people owe more on their houses than their houses are worth.

Now, I guess we could all become very mad—and we should—at the people who led us down this thorn-strewn primrose path. But those of us who let ourselves be fooled by the experts share some of the blame. Regardless, the tsunami of underwater mortgages isn't going to recede any time soon.

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  Tsunami 2012: Why More of Us Will Find Ourselves with Underwater Mortgages
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  Short Sale? Foreclosure? Options for the Underwater Mortgage Holder
  The Most Common Underwater Mortgage Mistakes-And How to Avoid Them
  Rebuilding Your Credit after Foreclosure on an Underwater Mortgage
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  Underwater Mortgage? Here’s What to Do
  How to do a Short Sale on Your Underwater Mortgage and Avoid Foreclosure
  LTV: The Key to the Underwater Mortgage
  Don’t Look Back and Other Tips for Life after Foreclosure

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