New York Times Article addressing the Housing Slump

[nico08]

I read the following NYT article in regard the housing slump. One part of the article, I did not understand. The author writes that millions of homeowners remain at risk of defaulting on their mortgages if they experience a payment shock because they owe more than their house is worth. Can you explain how lower home value leads to a payment shock which leads to a default on a mortgage.

Assuming you have a fixe rate mortgage, whether the value of your home goes up or down, you still have the same monthly mortgage payment, right? So where is the payment shock coming from? Thank you for your help.

I bolded the particular area in the article that confused me.

U.S. Tackles Housing Slump

The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president's re-election in 2012.
Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.
One Crisis, Many Responses: A Timeline

Past efforts to tackle the ailing housing market.



Reuters




Housing "hasn't bottomed out as quickly as we expected," President Barack Obama said at a White House town hall last week. Mr. Obama said housing remained the "most stubborn" problem facing the country and conceded that a raft of federal mortgage-aid programs were "not enough, and so we're going back to the drawing board."
Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.
Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.
The White House is weighing ideas to strengthen the feeble housing market. Pictured, emptying a foreclosed home in Lawrenceville, Ga., this year.









Discussions are in early stages, and there isn't consensus around particular ideas. A spokeswoman said the president and his advisers "are always looking at new ways" to strengthen the housing market but wouldn't disclose details. "While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time," White House spokeswoman Amy Brundage said.
Home-buyer tax credits worth up to $8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.
"As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today," said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.
Most of the administration's housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won't be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.
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President Obama's signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.
More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $1 billion program is set to begin providing interest-free loans of up to $50,000 for temporarily jobless borrowers this month.
Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. "There are a number of things that we can look at on the GSE side," said Austan Goolsbee, departing chairman of the Council of Economic Advisers.
Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers.
Others outside the administration have pushed for federal entities to lend more freely to mom-and-pop investors or to create public-private initiatives that would allow institutional investors to buy more foreclosed properties. "Because we have limited credit availability, we need investors to help soak up the supply," said Ivy Zelman, chief executive of housing-research firm Zelman & Associates.
Fannie and Freddie also could rent, instead of sell, some of their huge inventory of foreclosed homes, which could take some pressure off prices. The firms owned about 218,000 properties at the end of March, and sold around 100,000 during the first quarter, or more than one-third of all foreclosed property sales, according to analysts at Barclays Capital. The firms could take back as many as 700,000 homes over the next year, according to estimates by economists at Goldman Sachs.
That idea has generated interest among some housing officials but could meet resistance from Fannie and Freddie's independent federal regulator. Renting out homes hasn't been tried on a wide scale and is "riddled with risk," said Ed Delgado, a former Wells Fargo executive who leads the Five Star Institute, a mortgage-industry group. "Essentially you're converting the [firms] from providing liquidity to a glorified national landlord for distressed assets."
All these options could boost lending and attack the overhang of foreclosures, but would put more risk on federal agencies and Fannie and Freddie. The mortgage giants have cost taxpayers $138 billion and counting.
They also would require the blessing of the Federal Housing Finance Agency, which is charged with limiting losses at Fannie and Freddie. The FHFA last year refused to go along with an Obama administration initiative to reduce loan balances for certain borrowers who were current on their mortgages but heavily underwater. The agency has typically resisted programs which produce substantial, upfront losses designed to offset potentially larger but harder to quantify long-term losses.
The same skepticism that prompted advisers last year to push for giving the market room to heal on its own could prevail once again. Simply focusing on the broader economy is "one of the best things we can do for the housing market," Mr. Goolsbee said.
Still, the high-level housing discussions are significant because Mr. Obama hasn't put much emphasis on his housing policies over the past year. The administration has taken fire from both sides over its housing-relief plans, with Democrats saying the administration has let banks off too easily while Republicans have said the programs wasted money. The housing market could be a top election issue for voters in swing states such as Florida, Ohio, and Nevada.

[W2R]

I think it means that if the homeowner loses their job or has big medical bills or other financial setbacks, they can't just sell the house, pay off the mortgage, and buy a lesser house or rent. So, they go into default.

You're right - - it was poorly phrased.

[ziggy29]

All the suffering it's causing sucks, but there's a silver lining for us -- many of the areas that we were priced out of in 2006 are now well within reach again. We're thinking this may be the last Texas summer we can endure, so we're starting to look at our options elsewhere.

[2B]

You left out the option of a strategic default. If you're seriously underwater in a non-recourse state, you can walk away without endangering your other assets or risk getting an unpayable judgement.

[Midpack]

Midnight: May not answer your question but the risk is greater when you're underwater on a loan because when you are not underwater you can presumably sell the house, payoff the loan in full and pocket the difference. When you are underwater you're going to have a lot of problems with whoever holds the loan.

2B: Except, good luck getting a mortgage again, better plan on renting for a while. And it can't help your credit in the future much either...

[2B]

Quote:

Originally Posted by Midpack 2B: Except, good luck getting a mortgage again, better plan on renting for a while. And it can't help your credit in the future much either...

If you are underwater a couple hundred thousand like many are, the upside of a strategic default is probably well worth it. After not paying your mortgage for a year or more, you might actually get forclosed on. You pocket all your unpaid mortgage payments and walk away from the liability. With all that freed up cash, you can probably rent a pretty nice place for several years.

I'm not sure whether a foreclosure sticks on your credit report for 5 or 7 years. I suspect that after 2 or 3 years of steady rent payments (and no other problems) that it will be possible to get a mortgage if you have the downpayment.

I consider home ownership overrated. I'm currently renting after selling my money-pit around 2008 for a little profit. From a cash flow basis, renting is cheaper than buying at this point in the cycle.

[ziggy29]

Quote:

Originally Posted by 2B I consider home ownership overrated. I'm currently renting after selling my money-pit around 2008 for a little profit. From a cash flow basis, renting is cheaper than buying at this point in the cycle.

Well, I certainly don't want to beat the "rent or buy" dead horse for the gazillionth time, but I would just say that there are definitely advantages to both, and one needs to examine their own motivations and situation.

Do you put a premium on being able to do what you want to your living space, how you landscape, that sort of thing? Do you own pets and/or smoke? These would tilt one toward buying, but if these aren't the case -- and if one puts a high value on not being "tied down", on being able to move with relatively little hassle and extra costs -- then renting makes more sense, especially in some markets where prices are still 300x the monthly rent or more. Of course, the other market factor at work is that nosebleed housing prices (and falling prices) have made renting look better, thus correcting the imbalance between prices and rents. When the dagger stops falling in many markets, I suspect buying will look better again as the prices and rents reach more of an equilibrium.

[FUEGO]

Quote:

Originally Posted by Midpack 2B: Except, good luck getting a mortgage again, better plan on renting for a while. And it can't help your credit in the future much either...

Buy a new house, get a loan on that and then the day of closing on your new house, list your old house with a real estate agent as a short sale candidate. Or send some jingle mail to the bank. Sure you have taken a big dump on your credit history for probably 7 years, but just stay put in your new house for that period of time.

A consultant I work with just did this in order to allow himself to relocate for job reasons. He is leaving a non-recourse state FYI.

[rescueme]

Quote:

Originally Posted by ziggy29 We're thinking this may be the last Texas summer we can endure, so we're starting to look at our options elsewhere.

Well, you have other "options" if the summer heat is getting to you:

'Blizzard-like' weather shuts schools - National - NZ Herald News

[Midpack]

Quote:

Originally Posted by ziggy29 All the suffering it's causing sucks, but there's a silver lining for us -- many of the areas that we were priced out of in 2006 are now well within reach again. We're thinking this may be the last Texas summer we can endure, so we're starting to look at our options elsewhere.

Sorry to hear that as Texas has a lot to offer. But my parents in San Antonio are having real problems with the heat and water rationing the older they get...

[kaudrey]

midnighter - as others have said, it means that if someone couldn't pay the mortgage because of a lost job or whatever, they couldn't sell the house to repay the mortgage, because the house is worth less than they owe. Hence, unless they could otherwise come up with the money, they'd have to default on the mortgage.

[ziggy29]

Quote:

Originally Posted by Midpack Sorry to hear that as Texas has a lot to offer. But my parents in San Antonio are having real problems with the heat and water rationing the older they get...

It does. But yeah, I thought the more summers I endured here, the more I'd get used to it. But the opposite is turning true -- the more I endure, the less I can tolerate the thought of another one. Especially this year with the worst drought in well over 50 years not showing any end in sight.

[Jay_Gatsby]

The premise of the article is that the homeowners in question don't have an emergency fund or savings that they can tap for paying their mortgages. Needless to say, many folks bought homes they could barely afford, only to find out a few years later that they grossly overpaid for their homes. I don't wish such a fate on anyone, but those who went down this path did so voluntarily. If they're so worried about a "payment shock," then NOW is the time to do something about it, not when it happens. One would think that such individuals have cut down on unnecessary expenses, but we all know that's not true. Again, another voluntary choice....

[ronocnikral]

Quote:

Originally Posted by ziggy29 All the suffering it's causing sucks, but there's a silver lining for us -- many of the areas that we were priced out of in 2006 are now well within reach again. We're thinking this may be the last Texas summer we can endure, so we're starting to look at our options elsewhere.

Ditto. I'm to the point where I would rather take a beating or be tazed than endure more of this lovely Houston climate. The good news is, with the Houston housing market ("inner loop"), there are excellent deals to be had where we are looking to relocate (Rocky Mountain Region). Hopefully...

[2B]

Quote:

Originally Posted by ziggy29 Well, I certainly don't want to beat the "rent or buy" dead horse for the gazillionth time, but I would just say that there are definitely advantages to both, and one needs to examine their own motivations and situation.

I don't want to beat it again either but we neither smoke or have a pet. My decision is based entirely upon the math. When I factor in the cash price of a house, reasonable return, maintenance, taxes, home owners association dues, I find that home prices are 10-15% higher than what would be a breakeven price for the rent we pay. This ignores commissions which really should be considered.

There are many rental properties in our area. Sometimes they sit for several months before renting so I don't feel like the landlord thinks he can raise our rent in the foreseeable future.

I'm in what I hope to be a retirement endgame. I was in Houston in the 1980's when the real estate market collapsed. I had a bad feeling in 2007 and I knew we were going to want to sell in a few years. I knew many people that were crushed in the home values and trapped. I didn't want to not be able to move without a major financial penalty.