I also hear people saying we're taking on debt on TV every day. I
think that many people outside of the world of banking don't deal
with negative equity (if they're lucky). Here's the difference.
Negative equity is the difference between the value of an asset and
the outstanding portion of the loan taken out to pay for the asset,
when the latter exceeds the former. Negative equity can result from a
decline in the value of an asset after it is purchased. So if you
bought a house in Florida at the height of the market taking out a
mortgage for $450,000 and that house is now worth only $200,000 then
you have negative equity. You cannot refinance the house for what
you owe, you can't sell it for what you owe, but you still have a
house (and a debt). If you can afford to keep making the payments
then you do and hope that the property value will increase again. If
you can't afford it and go into foreclosure then the lender gets the
devalued property. You will probably also get a deficiency
judgment.
Negative equity is not debt. It is a secured item which is no longer
worth the value of the debt it secures. It could increase in value
again and even exceed the value of your debt. The borrower has the
debt, the lender has secured equity and the entire country will have
a lot of loans securitized by negative equity. If that equity goes up
will the country benefit? That's the biggest question. I personally
am tired of seeing executives get millions when they're fired.
The way I personally see it is that we're already going to do this
buyout so let's do it smart. Let's build in a clause so that the
country can receive the benefit of increased equity (if and when that
does happen). Most of these loans are for 30 years and many are
being paid on time. Lenders just don't wait or can't wait 30 years
to get their cash back. WAMU was taken over by the FDIC yesterday.
Don't rush to the bank yet. JP Morgan Chase bought the banking
division.
Jennifer
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