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Upside-Down Mortgages Drive Foreclosures

Written By Brian Hicks

Posted October 31, 2008


With all of the talk in the news lately about the government modifying loans to make them more affordable, the 800 lb gorilla in the room goes largely ignored.

But huge, hairy and mean, there he sits. And he’s getting hungrier by the minute.

That’s because the much bigger problem here—for borrowers of all stripes—is actually the continuing decline in values that could reach as high as 30% from peak to trough. By comparison, higher payments are smaller problem.

So sure, while the government may save some homeowners from becoming renters, it will also chain a fair share of them to that big gorilla—an asset whose value is dropping like a rock.

And for those willing to take on those heavy chains, the price of “ownership” is that they will find themselves hopelessly upside down as prices continue to slide.

That, of course, is a no win situation and it’s the big reason why falling prices drive far more foreclosures than higher payments ever will.

After all who wants to be chained to a gorilla?

That’s the ultimate dilemma facing the millions of homeowners who have suddenly found themselves underwater and upside-down on their mortgages.

Unfortunately, it is a number that continues to grow.

From Bloomberg by Dan Levy entitled: More U.S. Homeowners Have Mortgage Higher Than House Is Worth

“Almost 20 percent of U.S. mortgage borrowers owed more on their loans in the third quarter than their house was worth as foreclosures depressed prices and the economy weakened, according to First American CoreLogic.

More than 7.5 million properties already have negative equity and another 2.1 million will follow should home prices decline another 5 percent, Santa Ana, California-based First American, a seller of economic and real estate data, said in a report today. Six states account for almost 60 percent of homes with negative equity, led by Nevada and Michigan.

“As long as job losses continue and people face resets on their mortgages, the housing market will be under severe distress,” Sam Khater, a senior economist at First American in Tysons Corner, Virginia, said in an interview. “We’ve created an entire class of homeowner that is very sensitive to price changes.”

The states with the highest shares of homes with negative equity either had rapid appreciation in prices, manufacturing declines or a higher proportions of subprime loans, according to First American.

Nevada had the highest share at 48 percent, followed by Michigan at 39 percent, Florida and Arizona each at 29 percent, California at 27 percent, Georgia at 23 percent and Ohio at 22 percent, First American said.

New York had the lowest share of homes with negative equity at 7 percent, followed by Hawaii at 8 percent, Pennsylvania at 9 percent and Montana at 10 percent, according to the report.

The negative equity report was compiled from 41.7 million first and second mortgages and covers single-family homes, cooperatives, condominiums, town homes and multiunit attached properties up to four units, Khater said

Home prices fell in August in all 20 metropolitan areas measured by the S&P/Case-Shiller home-price index, which dropped 16.6 percent from a year earlier and has fallen every month since January 2007. U.S. foreclosure filings rose to a record in the third quarter, and will probably increase as the economy worsens and the availability of financing shrinks, RealtyTrac Inc., a seller of default data, reported on Oct. 22.

The number of houses with loans higher than the property’s value may increase to almost 25 percent should prices keep falling, First American said.”

The bottom in housing is nowhere in sight.

Happy Halloween.