Old Wine in New Bottles
Thanks to a rising housing market, there are now far fewer underwater homeowners.
However, they’ve hardly disappeared.
In fact, something like 20% of all homeowners with a mortgage — about 5 million people nationally — still owe more on their homes than their home is worth (that’s down from closer to 30% at the market bottom a few years ago).
Three Options
Some of those people are simply continuing to make payments on their less valuable homes, assuming they have the means (you need equity to refinance, and by definition underwater homeowners . . . don’t).
Other underwater homeowners have elected to do a short sale — or tried to: the bank(s) holding the mortgages don’t always agree to take the necessary write-off.
Leaving the Bank(s) Holding the Bag House
Which leaves a third path (and one of this year’s biggest trends): so-called “flopping,” in which the owner of an underwater home who’s current on their payments (and otherwise has unblemished credit) gets another mortgage to buy a new home.
Step #2: after closing on their new, market-priced home, they abandon their underwater home to the bank(s), and default on their old mortgage(s).
That practice — or at least the second part of it — used to be called “strategic default.”
Now it’s called “flopping.”
By contrast, “flipping” refers to someone who buys a (typically) distressed property, then quickly re-sells it at a markup (sometimes after doing improvements, sometimes not).
See also: “Strategic Default Like Pre-’70’s Divorce?“; and “Strategic Default Double Standard.”
