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> you think people are going to pay mortgages they are massively underwater on? Yes? Why wouldn't you? It seems pretty short-sighted to just put your arms in

> you think people are going to pay mortgages they are massively underwater on? Yes? Why wouldn't you? It seems pretty short-sighted to just put your arms in the air, give up, get foreclosed on, lose your home, and have your credit be absolutely wrecked for the next 7 years. Just keep making your payments and ride it out. The market will eventually recover. I think the only reason to give up is if you fell for the scam that is an adjustable-rate mortgage and your payments are skyrocketing and you can't afford it anymore.

Turing_Machine 4y ago
> Why wouldn't you? Well, you could ask the very large number of people who defaulted on their underwater mortgages in previous housing crashes. Does everyone do it? No. Do a significant number of people do it? Absolutely.
andsoitis 4y ago
Concur. As a relatively new first-time homeowner (a year), do you know whether a mortgage lender requires higher or additional insurance coverage for an underwater property?
- avgDev 4y ago
  No. Why would they? You are required to have insurance when you have a loan on a property. The insurance rates could actually drop due to lower cost to replace your house. Underwater property just means you owe more than it is worth. However, if your interest rate is low, you might be paying less than someone who is not underwater.
- toast0 4y ago
  I don't think so. The time for requirements is when the loan is originated. I think it's typical to require mortgage insurance when the loan is more than 80% of the value, and it's very uncommon to loan more than 95% of the value. If the loan goes underwater later, usually because of market conditions, maybe because of creative loan features, then the lender has no leverage to require anything.
pchristensen 4y ago
I bought a house in the Chicago suburbs in August 2007 for $275k. I short sold it 4 years later for $115k. It sold 2 years ago (13 years afer I bought it) for $210k. "Eventually" is doing a lot of work in your comment.
- mywittyname 4y ago
  People seem to look at aggregate housing, and pretend that every buyer's experience will be "about average". Buying a house is akin to putting your retirement into the stock of a single company. In that situation, it doesn't matter what the S&P500 tends to do on a long enough timeline.
- supertrope 4y ago
  Which is why buying a house should be considered consumption. It's to own a residence. Asset appreciation in real estate is a very long game and is not guaranteed. Strategic default will wreck your credit.
- lotsofpulp 4y ago
  Chicago metro real estate is unique in its price changes due to outlier amounts of debt for state and local governments. Both Chicago and IL are multiple standard deviations above the norm for projected tax liabilities, so accounting for that reduces the amount people pay for the real estate.
- Sohcahtoa82 4y ago
  Really, I think I'm making three incorrect assumptions: 1. People that buy a house will stay in it for 10+ years. This assumption being wrong means you're more likely to be affected by market swings. 2. Market swings won't be massively significant, for some definition of "massive", and I consider 275k -> 115k massive. Meanwhile, the Z-estimate of my house peaked at $618K this April, and is now at $561K. I would not consider that one massive. 3. That people stopping making payments because it's underwater, and not some extenuating circumstance, like losing your job and being unable to afford payments, or having a need to relocate that is unrelated to your home being underwater. But it's #3 that really gets me. I fail to understand the "My mortgage is underwater" -> "I should stop making payments" logic jump. I think it's because I do not see my house as investment or even an "asset". It's my HOME. I agreed to pay $338K in 2015 to have a HOME. If there was a real estate crash immediately afterwards and I was underwater, my only regret would be that I could have bought the house cheaper if I had waited a little longer. I would not in any way feel incentivized to stop making payments and walk away, because not only would that mean I would still owe the bank money, but I wouldn't have a home and my credit would be destroyed, making it hard to get another mortgage.
taylodl 4y ago
That's not what happened in 2008. This exact scenario was the primary cause of the financial meltdown at the time. The prevailing wisdom was people would always pay their mortgage, so the securitization of real estate mortgages were viewed as a safe investment - and invest they did! When the housing bubble popped a lot of investment banks who thought they had safe assets suddenly found themselves upside down, further compounding the problem and turning it into a full-fledged crises necessitating congressional intervention. Perhaps you're too young to know this story, but this is what happened. There's no reason to believe homeowners won't behave in the same manner today. We can argue whether this behavior is rational or not, but we're rather infamous for not being rational creatures, are we not?
- b3morales 4y ago
  This is true, but it's also missing the key part where leading up to 2008 lenders offered mortgages to people they were pretty sure wouldn't be able to keep paying, and then laundered those into the so-called "safe" investment when it was anything but. Is that part repeating now too?
  - taylodl 4y ago
    I think the laundering is a bit overstated. Yes, there were "risky" loans being made but those risks were being mitigated by bundling those loans with "safe" loans into a new securities product. No one was really surprised by the risky loans going under. It was the presumably "safe" loans going under that caught everybody off-guard and created the financial storm. The entire mortgage risk model turned out to be wrong. Your second question is interesting, I really don't know whether the securitization of mortgages is still happening today at the same level it was then. I would presume so? With a different risk model being employed to assess those mortgages, maybe?
    - theGnuMe 4y ago
      The securities rating folks basically rated subprime crap as prime. Nobody could trust anything so everyone want to sell and not buy.
HWR_14 4y ago
> Why wouldn't you? Because it's upside down? You can buy another place and owe less on it?
- supertrope 4y ago
  Unless you can buy the next house in cash you'll be waiting seven years for your credit to recover.
- Sohcahtoa82 4y ago
  No, because no matter what, I'll still owe the bank the difference between the value of the house and the mortgage balance. If I was foreclosed on, then my credit is wrecked and I wouldn't be able to get a mortgage on the new house.
  - frumper 4y ago
    I know several people that walked away from homes in 2008 and if they had a good job they bought another home for half the price down the street. Your fears didn't materialize for them. Every one of them bought nicer homes as well.
  - polski-g 4y ago
    Have your spouse pay for the new house.

Turing_Machine 4y ago

> Why wouldn't you? Well, you could ask the very large number of people who defaulted on their underwater mortgages in previous housing crashes. Does everyone do it? No. Do a significant number of people do it? Absolutely.

andsoitis 4y ago

Concur. As a relatively new first-time homeowner (a year), do you know whether a mortgage lender requires higher or additional insurance coverage for an underwater property?

avgDev 4y ago
No. Why would they? You are required to have insurance when you have a loan on a property. The insurance rates could actually drop due to lower cost to replace your house. Underwater property just means you owe more than it is worth. However, if your interest rate is low, you might be paying less than someone who is not underwater.
toast0 4y ago
I don't think so. The time for requirements is when the loan is originated. I think it's typical to require mortgage insurance when the loan is more than 80% of the value, and it's very uncommon to loan more than 95% of the value. If the loan goes underwater later, usually because of market conditions, maybe because of creative loan features, then the lender has no leverage to require anything.

pchristensen 4y ago

I bought a house in the Chicago suburbs in August 2007 for $275k. I short sold it 4 years later for $115k. It sold 2 years ago (13 years afer I bought it) for $210k. "Eventually" is doing a lot of work in your comment.

mywittyname 4y ago
People seem to look at aggregate housing, and pretend that every buyer's experience will be "about average". Buying a house is akin to putting your retirement into the stock of a single company. In that situation, it doesn't matter what the S&P500 tends to do on a long enough timeline.
supertrope 4y ago
Which is why buying a house should be considered consumption. It's to own a residence. Asset appreciation in real estate is a very long game and is not guaranteed. Strategic default will wreck your credit.
lotsofpulp 4y ago
Chicago metro real estate is unique in its price changes due to outlier amounts of debt for state and local governments. Both Chicago and IL are multiple standard deviations above the norm for projected tax liabilities, so accounting for that reduces the amount people pay for the real estate.
Sohcahtoa82 4y ago
Really, I think I'm making three incorrect assumptions: 1. People that buy a house will stay in it for 10+ years. This assumption being wrong means you're more likely to be affected by market swings. 2. Market swings won't be massively significant, for some definition of "massive", and I consider 275k -> 115k massive. Meanwhile, the Z-estimate of my house peaked at $618K this April, and is now at $561K. I would not consider that one massive. 3. That people stopping making payments because it's underwater, and not some extenuating circumstance, like losing your job and being unable to afford payments, or having a need to relocate that is unrelated to your home being underwater. But it's #3 that really gets me. I fail to understand the "My mortgage is underwater" -> "I should stop making payments" logic jump. I think it's because I do not see my house as investment or even an "asset". It's my HOME. I agreed to pay $338K in 2015 to have a HOME. If there was a real estate crash immediately afterwards and I was underwater, my only regret would be that I could have bought the house cheaper if I had waited a little longer. I would not in any way feel incentivized to stop making payments and walk away, because not only would that mean I would still owe the bank money, but I wouldn't have a home and my credit would be destroyed, making it hard to get another mortgage.

taylodl 4y ago

That's not what happened in 2008. This exact scenario was the primary cause of the financial meltdown at the time. The prevailing wisdom was people would always pay their mortgage, so the securitization of real estate mortgages were viewed as a safe investment - and invest they did! When the housing bubble popped a lot of investment banks who thought they had safe assets suddenly found themselves upside down, further compounding the problem and turning it into a full-fledged crises necessitating congressional intervention. Perhaps you're too young to know this story, but this is what happened. There's no reason to believe homeowners won't behave in the same manner today. We can argue whether this behavior is rational or not, but we're rather infamous for not being rational creatures, are we not?

b3morales 4y ago
This is true, but it's also missing the key part where leading up to 2008 lenders offered mortgages to people they were pretty sure wouldn't be able to keep paying, and then laundered those into the so-called "safe" investment when it was anything but. Is that part repeating now too?
- taylodl 4y ago
  I think the laundering is a bit overstated. Yes, there were "risky" loans being made but those risks were being mitigated by bundling those loans with "safe" loans into a new securities product. No one was really surprised by the risky loans going under. It was the presumably "safe" loans going under that caught everybody off-guard and created the financial storm. The entire mortgage risk model turned out to be wrong. Your second question is interesting, I really don't know whether the securitization of mortgages is still happening today at the same level it was then. I would presume so? With a different risk model being employed to assess those mortgages, maybe?
  - theGnuMe 4y ago
    The securities rating folks basically rated subprime crap as prime. Nobody could trust anything so everyone want to sell and not buy.

HWR_14 4y ago

> Why wouldn't you? Because it's upside down? You can buy another place and owe less on it?

supertrope 4y ago
Unless you can buy the next house in cash you'll be waiting seven years for your credit to recover.
Sohcahtoa82 4y ago
No, because no matter what, I'll still owe the bank the difference between the value of the house and the mortgage balance. If I was foreclosed on, then my credit is wrecked and I wouldn't be able to get a mortgage on the new house.
- frumper 4y ago
  I know several people that walked away from homes in 2008 and if they had a good job they bought another home for half the price down the street. Your fears didn't materialize for them. Every one of them bought nicer homes as well.
- polski-g 4y ago
  Have your spouse pay for the new house.