Underwater Loan

Underwater Loan

A loan in which one owes more than the value of the asset the loan was intended to buy. For example, if one borrows $15,000 to buy a car, but the car depreciates rapidly to a value of only $12,000, the borrower has an underwater loan. See also: Underwater.
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Hence, borrowers need not be irrational or excessively optimistic when they continue to make payments on an underwater loan.
The best way to modify an underwater loan is to reduce the principal balance, lowering the monthly payment and restoring equity.
These losses were caused by an underwater loan portfolio, not credit losses.
Needless to say, not many borrowers will be willing to make put this amount of additional equity into an underwater loan."
The concentration of underwater loan problems in five states was clearly evident in the third-quarter data.
To what extent the outstanding principal on an underwater loan should be written down is another topic of discussion, although the consensus seems to be to no more than 115 percent CLTV.
Interestingly, while the fraction of loans with CLTV above 80 percent was higher than in the sand states over much of the sample period, the share of underwater loans (and especially severely underwater loans with CLTV of greater than 120 percent) peaked at much lower levels.
The additional requirements, which apply to this Fannie Mae non-performing loan sale, encourage sustainable modifications that have the potential to give more borrowers the opportunity for home retention by requiring evaluation of borrowers with underwater loans for modifications that may include principal and/or arrearage forgiveness; forbidding walking away from vacant homes; and establishing more specific proprietary loan modification standards.
The goal of the Community Restoration Program is to preserve affordable homeownership and rental opportunities in neighborhoods that continue to have high rates of foreclosure and underwater loans.
But Stevens thinks there's been "too much agitation over that subject." He sees Watt as being open to providing relief in certain targeted housing markets where there are still a lot of underwater loans. He mentioned Nevada and possibly Detroit as two possible candidates.
A number of localities have publicly considered adopting this plan to condemn underwater loans ("the Plan"), or some variation of it, since the firm first pitched it to counties and municipalities in California's Inland Empire.
Finally, government should confront the real-estate debt crisis head on and take steps to resolve the underwater loans that are burdening the balance sheets of small banks and businesses alike.
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