‘Underwater’ mortgages hobble the economy

Wednesday, June 29, 2011

According to a recent newspaper article (Arkansas Democrat Gazette, Friday, June 24, 2011, Business and Farm), 10.1 percent of mortgages on Arkansas homes were underwater earlier this month. The article quoted CoveLogic, a California-based company that keeps track of those numbers. According to their figures, there were 243,134 mortgages in the state with over 24,000 of them in this condition.

Being underwater in real estate mortgage jargon means the individual (or owner) owes more in mortgage payments than the house will sell for on the open market. This seems to be another (yet another) sign of the economic times we live in. Several years ago in the housing boom, with almost unlimited credit available, it was too easy to buy a home beyondthe budget of the buyer in expectation of the price of homes going up faster than the cost of living - i.e., interest rates were low and the prospects for the futurewere unlimited.

Today, as a nation we are paying the price for the lack of self-control exhibited by our government which led to the individuals who have lost homes, and will continue to lose homes, due to the economic downturn. This is truly evidence of our uncontrolled and unsustainable growth during the golden period when things were too good to be true.

And, as the old saying goes, they were.

There is something of a bright spot in this because apparently over 218,600 of the state’s mortgages are not in immediate danger of being underwater. Reflecting back to the period of time in question, it is not difficult to see how this problem could arise even without speculation onthe part of the buyer. The Benton County Assessor’s Office raised the appraisal on my farm by 25 percent before I objected to the Equalization Board. That was at one appraisal period with 10 percent to be applied for the first two years and 5 percent on the third year. The answer I got when I questioned the increase was, “that is the current value.”

The house and property never went on the market and the appraised value was reduced by the Equalization Board. However, if I had been wanting to buy a house for $300,000 and had a minimum down payment it would be an advantage to have a higher appraisal to get the mortgage. Because money was readily attainable (the brokers of some of those loans became wealthy off their commissions) a 5 percentdown payment would be $15,000 and the low down payment with minimum monthly payments for three years would look great even if the sellingprice was inflated due to the building boom. Due to the easy money loan process, apparently some loans actually had no downpayment requirement or it was blended into the loan to look like a downpayment.

As we have seen, when reality sets in and the economy starts to sputter, the interest rate on the ARM (Adjustable Rate Mortgage) goes up, and suddenly things don’t look so good. The house becomes too big for the budget.

America will probably be hobbled by these years of robust economic growth for many years in the future. Hopefully, this will be a period of learning and a return to the basic principals of our forefathers.

◊◊◊

Editor’s note: Leo Lynch, a native of Benton County has deep roots in northwest Arkansas. He is a retired industrial engineer and former Justice of the Peace.

He can be contacted at [email protected].

Opinion, Pages 4 on 06/29/2011