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Underwater Mortgages: The Inside Story

Guest post by: Bud Gragg

Article Overview: So how did so many American homeowners end up with underwater mortgages? Let us tell you a little story . . . In the beginning, there was the Clinton administration. And that administration, and the Congress that went along with it, told the banking industry that they had to find a way to make home ownership possible for people who couldn't afford it.

Underwater Mortgages: The Inside Story

So how did so many American homeowners end up with underwater mortgages? Let us tell you a little story . . .

In the beginning, there was the Clinton administration. And that administration, and the Congress that went along with it, told the banking industry that they had to find a way to make home ownership possible for people who couldn't afford it.

The banks, being banks, were eager to squeeze money out of anyone they could. And they pushed mortgages, including creative mortgages that would bite people in the ass later, with the kind of vigor you usually see among the greedy.

Meanwhile, the increased demand for houses drove property values up, and up a little higher, and then higher. By the middle of this decade, almost everyone, including Realtors like us, felt safe in assuming that we'd be able to pay off any mortgage we took out with our rising property values!

But you know what happens when you ASS u me anything, don't you? That's right—you make an ass out of you and me. And so we all went happily along, assuming the mortgage lenders and the media were right and that this happy merry-go-round would just keep spinning.

As you know, though, the merry-go-round didn't just stop spinning. It exploded and sank into the ground in 2007. Why?

Because the mortgage lenders who made all of those loans to people who couldn't afford them didn't hang on to those mortgages. They created bundles of those bad loans and sold them as though they were good ones.

And when the more creative of those bad loans, called ARMs, started resetting to higher payments, people started foreclosing on their mortgages. So many people foreclosed that property values started falling. And the more people who have foreclosed, the lower our property values have gone.

At the same time, the banks and other mortgage lenders started going under. But we couldn't let that happen, could we? Some bank CEO might have to take a pay cut! So the federal government bailed out Wall Street. Not that that saved Main Street—unemployment rose to 10% (or 17%, if you understand how the government is not reporting all the unemployment) and is still almost that high today.

And what has that led to? More homes for sale, even lower property values, and you guessed it—even more underwater mortgages!

Today roughly 24% of homeowners are faced with an underwater mortgage, and one in ten of them owe 25% more than their houses are worth!

So what can people do about underwater mortgages? There are several options available, from loan modification to short sales to foreclosure itself. Loan modifications aren't much help, even if you can get them—most loan modifications mean you end up paying more on the mortgage than you would have otherwise!

But a new federal program just might help with short sales, and it is possible to navigate a foreclosure without losing the shirt off your back.

So while the situation with underwater mortgages isn't a pretty one, and none of us are going to get out of this mess with million-dollar yearly bonuses like those bankers, we will come out of it OK. And in the process, maybe we'll learn the best lesson of all—never trust a mortgage lender again.

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