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The American Homeowners Quagmire -

Homeownership - America's Romance...

Who made up the rule every American family should own a home anyway? Once what most experts would consider the safest investment, homeownership comes with a price these days. And that price could be turning into a slave to your mortgage payment with no return for many years. 

Actual loan scenario:

Client purchased his home for $930,000 in 2006
Client owes $697,500 - (75% of 930k)
Client has an interest only arm that is due to reset in 2011
Client has great credit, reserves and the ability to repay
Client's home value in today's market: $550,000

Three foreclosures that sold for peanuts at auction in the same neighborhood in the past six months have crushed property values for everyone who lives nearby.

The Quagmire: 

Due to excessive loan to value there is no chance of refinancing. My clients existing lender has shown no intentions of modifying their loan. When the interest only loan resets next year, the payment will increase almost 40%. It would take 7 years to pay this loan down 100k. Let's assume the homes value will increase 50k in seven years. This mean my client will be paying a mortgage for seven years before the mortgage loan and the equity break even at 100%. This assumption is based on property values not falling further....  

Slave to the Mortgage...

At what negative equity position does the American homeowner decide they are simply too far upside down and it just does not make sense to continue to pay the mortgage? I believe everyone would make that decision, it just may have different trigger points as to how far upside down you would have to be. Lets say it would take 15 years to break even on the example above? 

Pride and Ego take the back seat...

Past generations were taught to buy a house, pay it off and never borrow from it again. Could that have been a lesson by survivors of the great depression? Well here we are in a new decade and we have quite a mess on our hands. "As the number of homeowners who strategically default increases, pride and ego begin to fade away". - LP , When you add together the expected new wave of foreclosures to hit and the increasing number of strategic defaulters you gotta ask yourself - is the American Dream worth it anymore or do I want to go rent the same house for half the price? ....


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