You’re a well-paid professional with a stable job. You have deep roots in your community. Three years ago, you bought your dream house. It’s a five-bedroom, three-bath home in a new development with nearly an acre of ground. You paid a little more than $550,000 for the home, putting down $120,000 to avoid paying the jumbo loan premium. The plan: stay in the house for another two decades, benefit from gradual appreciation, and eventually sell for a substantial profit.
Too bad for you — your community is located in Arizona, or Nevada, or Florida, or California or any state where home values have collapsed. Three of 11 houses on your block are in foreclosure or bank-owned. Your equity has evaporated, since your house is now worth around $240,000.
What do you do?
You doubt whether the local market will ever recover. It makes no sense to throw good money after bad, especially since your once-secure job is looking a little iffy.
You decide to walk, with a twist. You’ll “buy and bail.”
Since you still have perfect credit, you figure that you can buy one of the homes on your block that’s in foreclosure for $210,000, move in, and let your present house go. You get rid of $430,000 in debt, halve your mortgage payment, and start over. Your credit may be ruined, but so what? You’re not going to be buying a new house anytime soon and as long as you’re current on your credit cards, they’ll leave you alone. Besides, you need to save for your retirement.
It’s against the law. But as unemployment persists and the economy stubbornly refuses to recover, it’s likely that such economically motivated walk-aways will increase.
According to Zillow.com, more than 20 percent of homeowners are underwater on their mortgages. Many more will walk away, but most will find their credit to be so impaired that they’ll be shut out of home ownership for many years.
A year or two ago, many economist saw the subprime shakeout as the inevitable weeding-out of no-doc “ninja” borrowers, so called because they had no income, job, or assets.
That was true initially, but now the foreclosure epidemic has created a new economic subclass of people caught in a relentless debt trap through no fault of their own. They’re out of the game, reducing demand for housing and postponing recovery. As more people opt out of underwater mortgages, home values could destabilize even further, prompting yet more defaults.
And there’s another twist.
Few of us stay in one job or one community for most of our professional life. We move from company to company, from city to city. At a guess, tens of thousands of professionals are mortgage victims, forced to take a job in another city but saddled with an unsalable house a thousand miles away.
It goes without saying that a national market for professional jobs is essential to the economy. That market in has been driven by real estate liquidity, which once enabled relocating employees to sell their homes and buy another in their new city without difficulty.
Not since the Great Depression have we seen such artificial demand restraints. Precisely how many otherwise qualified people are barred from home ownership by their credit scores is unknown, but the number is large and getting larger.
The situation presents an interesting dilemma for policymakers and lenders alike.
Any legislative remedy, such as requiring lending institutions to reduce the principal on underwater mortgages, would be unfair to those who have complied with law and difficult to fairly administer. It would also force lenders to recognize enormous loan losses, and dry up private mortgage funding indefinitely, thus worsening the problem it was meant to rectify.
There is, however, a simple and elegant solution.
Flood the economy with liquidity. Reduce interest rates to zero. Let the government borrow trillions, ostensibly to aid economic recovery. Within a couple of years, foreign lenders will grow uneasy, and start getting rid of dollar-denominated assets. Speculators will attack the dollar. Its role as the premier reserve currency will suddenly end. Stagnation will be replaced by frenzied deal-making, as soaring inflation will spark a flight to hard assets. Buy gold! Buy silver! Buy diamonds! Buy real estate in Arizona, or Nevada, or California!
Problem solved. Suddenly, our debts, both public and private, are eminently manageable. Our national credit score may be in the 200s, but all those underwater mortgages are irrelevant pieces of paper.
Hazlehurst can be reached at email@example.com or 719-227-5861. Watch him at 7:20 a.m. every Tuesday and Friday on Channel 3, Fox Morning News.