Thursday, March 5, 2009

"Underwater" Mortgages; Someone Please Tell Me Why I Should Care?

Yet another in an endless series of stories bemoaning the existence of poor mortgage holders whose house is worth less than they owe on it. Wow! 8.3 Million headed to 10 Miliion--that's really too bad. But please, someone tell me why this is a meaningful statistic?

Some portion of these people are trying to sell their houses so they can move. I see their issue.

Some portion of these people got Macdaddy subprime's with ARM's that are now expiring into straight interest mortgages that they can't afford--and they can't re-finance because of the lower appraised value of the house. I see this issue (but have little time for it).

And some people (the bulk of this number, I would imagine) are simply unlucky enough to have purchased when they did at the price they did (we call this "risk"). They are not moving or planning to move, they are simply in an unfortunate situation. I have absolutely no time for these people (heard a lady on the radio the other day whining about her "interest only mortgage on a house now worth $50,000 less; it is just UNFAIR." Unfair? To whom?

But guess what? My Thrift Savings Plan is "underwater". So is my IRA. As a matter of fact, a goodly portion of my portfolio is worth less than I paid for it. Is anyone riding to my aid? Are there bailouts in the offing for me? Of course not--because the thought is absurd. All investments carry risk, including houses.


Doc Milnamo said...

"All investments carry risk, including houses."


Lietzy said...

You should care because a default on these crappy subprime mortgages is an "event" that triggers the counterparty obligations in countless CDOs and CDSs that have this subprime debt as the underlying "security". An "event" is going to cause banks, insurance companies, bond funds, pension funds, college endowments, etc. to have to make huge payments to counterparties, or to take huge writeoffs (and potentially end up with balance sheets that have a negative value after). Look at the aftermath of the Lehman bankruptcy for an example, and the Lehman bond auction. Saving the idiot subprime mortgage holders is the same as saving AIG -- you might not like it, but the cost of the ripple effect on the defaulting CDOs and CDSs is too great for the system to currently bear.

And do you really think that the idiots who bought themselves way too much house in the first place would be responsible enough not to simply walk away from an "investment" that is underwater in the neighborhood of 25% negative equity? Unless we prop these knuckleheads up, they will simply "dine and dash," triggering all sorts of defaults on the derivative instruments.

The Conservative Wahoo said...

Lietzy--thanks for helping me understand. I think I get all the complicated finance; what I don't get is the message sent in reinforcing/saving/propping up people who seem to have no problem making their payment--they simply have an asset on their hands worth less than it used to be. I understand what you are saying--that it is a bad thing for us to prop them up, but a worse thing for them to play "jingle mail" and walk away. But are these the only two courses of action?

Where is the public service campaign designed to discourage this? Where it the government message saying "if you walk away from a mortgage you can afford, your financial future will be in ruins and you'll never be able to get another loan again--for anything. And we--the people of the United States, will get our money back from your irresponsible act." Where is the public shame? How about jail time?

I don't see saving idiot subprime mortgage holders as the same thing as saving AIG--a mortgage holder going belly up is a bad thing--AIG going belly up is a catastrophe. Size matters, especially in this case. At the heart of each I'll grant you is irresponsibility; but that's where the similarities end for me.

Lietzy said...

There are at least two kinds of idiot subprime mortgage holders. The first is the group that can make their higher payments, but aren't doing so out of choice (and are now just whining and looking for a handout). Shame and possible jail time should definitely inure to these folks, but maybe more constructively strict income and asset guidelines should be applied to any bailout, to weed these folks out.

The second group are people that never should have had any loans, because they were never going to be able to make the payments after the mortgage reset. While they aren't blameless, they had some help from a mortgage industry that aggressively marketed loan products to them. And I'd like to save the shame and possible jail time with this group for those people responsible for writing millions of dollars of derivative contracts, all with the same crappy mortgage as the underlying security. A defaulting subprime mortgage holder will only personally inflict a few hundred thousand dollars worth of loss on a bank. However, that default triggers a multi-million dollar loss for all those who were sold the bill of goods that the same subprime mortgage was AAA debt, because of those who sold derivative contract upon contract. By writing those derivatives, someone* put multi-million dollar financial time bombs in the hands of subprime mortgage holders. Really comforting to know that the country's financial fate is in the hands of those people who never should have qualified for a mortgage in the first place, isn't it?

(oh, by the way, that "someone" is the smart investment banker who created all the derivative financial instruments, and who repackaged the subprime debt as AAA rated bonds -- see, e.g. Goldman Sachs, Lehman, Bear Stearns, AIG, Citigroup, BofA/Merrill Lynch, etc., etc.)

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