Earn What You Spend

From the AP today:

Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier.

So, we’re up 71% in foreclosure filings, which certainly isn’t good news, no matter how you spin it.  But let’s spin it regardless: notice this number is compared to last year.  With the market gyrations we’re seeing - and with the introduction of large-scale bailouts on what seems to be a weekly basis - Q3 of 2007 is a lifetime ago.  At that time we were just beginning to realize the mess we are in. 

If you compare September with the month before, it turns out foreclosure filings are actually down 12 percent.  Why?  The AP surmises that

much of that decline was the result of new state laws that delay the foreclosure process. In California, for example, lenders are now required to contact borrowers at least 30 days before filing a default notice. A similar law in North Carolina gives borrowers an extra 45 days.

The next paragraph, though, left me a bit confused.  The writer contends that the delays in the foreclosure process will not

 likely be enough to save homeowners who owe more on their mortgages than their homes are worth. Nearly 12 million of the 52 million Americans with a mortgage _ that’s 23 percent of them _ are in that position, according to Moody’s Economy.com.

Being underwater on your mortgage certainly isn’t a pleasant situation to be in.  It means, at it’s simplest owing more on your house than it is worth: if you took out a $250K mortgage on a $300K house, but now that house is only worth $200K.  You still owe the $250K to the bank, but you could only sell it for $200K, leaving you fifty thousand underwater. 

But if you don’t have an adjustable rate mortgage that will reset, but rather the plain-vanilla year mortgage, why should this matter?  Houses are like stocks in this case - any profit and loss is only on paper until you sell them.  (Again, with the caveat that you don’t have an ARM).  Sure, you may now owe more on that house than it is technically worth at this moment, but unless you’re forced to sell, it shouldn’t matter.  It’s a long-term investment. You should have time to ride out the fluctuations in valuation. 

Are all 12 million mortgage holders who are currently underwater being forced to sell in this down market, or are they all facing having their rates readjusted?  That seems implausible. Just because you are underwater on your mortgage doesn’t mean you are destined for foreclosure.  Buy-and-hold is still a powerful strategy.