I have talked to several people around town and hear a common scenario.  Buyers are under water.  Not because they bought a $300,000 home when they could only afford $240,000, but because they bought a $300,000 home they could afford that is now simply worth $180,000.  The $60,000 they put down as good borrowers (20%) is completely lost.  On top of that they are in the hole an additional $60,000 of equity.  They can make the monthly payment no problem as they had always intended to.

So what is the problem?  The problem is that their current house payment is $1600/mo, but they can rent the identical house in their same neighborhood for $800/mo.  That is a difference of $800/mo or $9600/year in cash flow.  The chances that in the next 7 years the equity of the house will rise by $60,000 to get them above water is virtually none.  So why on earth is the borrower staying in this home?  To save their credit score is a likely answer.  You have to ask if someone said they would pay you $67,200 in cash and relieve $120,000 in unsurmountable debt to ruin your credit score for 7 years would you take it?

The above person might qualify for the Obama 125% refinance plan, but at best that might only make their payment $1300/mo.  Not to mention that the banks are not just making the refinances happen.  They refuse to live up to their side of the bailout.  If instead a plan was in place to force lenders to readjust principle balances (not interest rates) to a point where the home owner was not completely underwater then perhaps the home owner might full well consider staying in their home.  At this point, I think someone in the above situation has NO SENSIBLE reason to stay in the home.  They have far more to gain crushing their credit and walking away.  Taking the positive cash flow and investing in their future.  If the bank were in the home owners situation they would certainly walk away.  It’s a business decision.  Sounds cold, but the current bailout isn’t helping much of anyone.  If we are going to throw money at the problem at least lets be pragmatic about it.

What are your thoughts?