I would be bold enough to suggest rewriting your comment to read:This could be happening now in Canada if someone gets a variable mortgage and stretches to get the most expensive house they can afford. If interest rates go up then they might need a bailout.
I don't know the popularity of various mortgage products in the US but from what I've read "most" home owners take out either a 15 or 30 year fixed mortgage which means they don't have the same kind of refinancing risks that Canadians have since we generally only lock in for 5 years or less.The biggest issue facing borrowers in the US is not their mortgage payments but rather the issue that their house value has gone down so much they will never be able to refinance with any mortgage company.
For example even if you have a conventional mortgage on a house you paid $100,000 for and you put down 25%. You will still owe $75,000. So you pay your mortgage for 5 years and you have to refinance. Well you still owe say 65-70,0000 on that mortgage. But if property values went down 50% which is possible in some areas your house is only worth $50,000
So to refinance you need to come up with cold hard cash. How many people have $30,000 extra to put down on their mortgage.
SO this idea that only deadbeats are involved in this problem is absolutely wrong
This actually happened to one of my teachers here in Toronto during the last RE crash we had. She had to come up with $80,000 she did not have or walk away from her house. She did still owe the $80,000 though.
This article was very interesting.....
How dare you rewrite my perfectly crafted comment!I would be bold enough to suggest rewriting your comment to read:
This WILL happen in Canada for all the people getting a variable mortgage and stretching it to get the most expensive house they can 'afford'; where afford == the advise the bank gave them on what was OK for them to take on. WHEN interest rates go up then they WILL need a bailout.
Berubeland gave a good example and I know neighbors of mine that this WILL happen too; they even admit to it over a beer, but just drink another beer to make the problem go away. Oh boy.
It is a double wammy if house prices drop significantly again, because these people will not even be able to sell there house and pay the bank back what they owe them. Then what happens....... We get to have AZ right here at home!
How dare you rewrite my perfectly crafted comment!
The problem is that I don't know how many people are in this situation and I also don't know what will happen with interest rates in the future. Yes, the newspaper has many interviews with people in this potential situation but the media specializes in finding out the worst case scenarios.
As for turning into AZ - very unlikely. Certain areas in the US had huge percentages of speculator purchases which meant the values went up quickly and then went down just as quickly.
Again, I don't know the numbers but the fact that some people might/will lose their house due to inability to refinance doesn't mean they are a significant percentage. If they do represent a large percentage (ie >5%) then yes, real estate values will be affected. If it's a small percentage then I don't think real estate values will be affected very much.