No Bailouts If You Overpaid For a House

February 19, 2007

"After being in my house for a year, I learned that the market value is considerably less than the appraised value. I was obviously deceived by the builder and the appraiser. Who do I talk to about that?

My mortgage was for the full appraised value. I want to stay in my house, but I don’t want to pay for a mortgage than is for more than the house is worth. Is there any way I can get the lender to reduce my note to the real value of the house?

I thought I might sell but the new appraisal is for considerably less than the mortgage balance."

You may have paid more than the house was worth at the time, builders typically charge what the traffic will bear. There is no law against charging more than something is worth if a buyer is willing to pay it. Being unduly influenced by an appraiser working for a builder is a terrible mistake, but an understandable one for a home buyer to make. It is less excusable when made by a lender, who is supposed to know better.

An alternative and perhaps more plausible explanation is that you bought when prices in your area were at their peak, you paid the market price at the time, but prices have since tumbled. Nobody is to blame for that, house prices usually rise but occasionally they drop, and you were unlucky enough to be caught by one.

One of the reasons I advise people to avoid 100% loans if they possibly can is that a price drop is always possible. If it happens, you owe more than the house is worth, making the mortgage payment a torment, and a sale impossible without finding another source of cash.

The lender is not voluntarily going to share your torment by writing down the size of the mortgage. If your house had appreciated, you wouldn’t have shared the capital gain with the lender, and now that it has depreciated, the lender is not going to share the capital loss with you.

Of course, if you default the lender will indeed share your capital loss, but it will be involuntary. For your sake, I hope that doesn’t happen.

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