Questioning the Panic Over Under-Water Mortgages

So President Obama has another plan to help out the housing industry.

In synopsis, this revision to the Home Affordable Refinance Program (HARP) will allow ‘struggling homeowners’ with good credit history, no late payments in the last 6 months, and have a mortgage backed by Fannie Mae/Freddie Mac to refinance without a credit check or home appraisal. (Other exceptions do apply.) One article said that the purpose was to alleviate the pressure on ‘homeowners who are underwater’.

Now, don’t get me wrong, I totally sympathize with those that bought their home at a high price and the house is now worth 50 percent of the original purchase price.

However, why is there pressure on these under water homeowners, and why do they need to be rescued?

Don’t Hate Me Because Of My Opinion

When we bought our home, we paid what the market would bear at that point in time. The market soared after we bought our house, and we could have made a lot of money on our home had we sold it about 2 years after we moved in. But, we didn’t view our home as an investment, we viewed it as a place to live and raise our family, so we stayed put.

Flash forward 8 more years, and the value of our home has dropped to below what we paid for it. We are not under water because we aggressively paid down our mortgage, and we did not do a cash-out refinance when our home was worth a lot during the housing boom. What we did do was bought a home that we could afford on one income, and we paid our bills responsibly.

That should not be a novel idea!

So Why Do People Who Are Under Water Need Bail Outs??

Paper gains and paper losses occur all the time. Why are mortgages treated differently than stocks? Does anyone care that my 401k was down 10 percent for the third quarter of this year? After all, my retirement account is now worth less than it was in June, shouldn’t someone be worried about my retirement and be willing to provide a special program for me? Nobody promises when you buy a house that it will appreciate in value. Buying a house can be a risky proposition, and should be treated as such. That is why you should not buy more home than you can afford.

Keep in mind, in theory I think it is just fine that homeowners that qualify will be able to refinance and lower their overall mortgage bill. I just don’t understand why so much attention is paid to under water homes when really, the value of a home does not really matter unless you absolutely have to move. Also, if you purchase only what you can truly afford, then being ‘under water’ shouldn’t affect you at all. (Exception given to those who are forced to relocate.) Whether my house is worth half a million or a hundred thousand really doesn’t affect my monthly cash flow. My mortgage payment is static for the term of the mortgage, and the revised ‘value’ of the home does not matter. As a matter of fact, if people did not know what their house was currently worth and just went about paying their bills, would the housing crisis be as bad? Is the mere fact that people KNOW that they owe more than their house than the house is worth causing panic and encouraging people to walk away from their mortgages? Just because your home is worth less than you paid for it doesn’t mean you are suddenly in financial distress!

So, is a lot of the housing crisis really just on paper? Really, this new mortgage program is aimed at people that do not have much equity in their home, and are not in foreclosure or dire straits. In other words, it is designed to help those that have a ‘paper loss’ on their home but are not at risk of default. Is that any different than having poor returns in your 401k? What do you think?