Thursday, May 7, 2009

1 in 5 Mortgages Underwater = Impossible to ReFi, Difficult to Sell, Potential Foreclosure

More mortgageholders sank underwater in their debt during the First Quarter of 2009.

The folks at Zillow say 21% of mortgageholders, or 1 in 5, are "underwater" nationwide. Other economists/research firms have different numbers than Zillow. Stan Humphries, Zillow's VP of Data and Analytics, explains:

The analysis is based on the mortgage balance at the time of purchase and the price changes that have occurred since. It does not take into account that some homeowners may have paid down principal along the way.

Humphries also believes that this is a "conservative approach" to coming up with the figures, as many homeowners took out HELOCs or cash-out refi's, rather than paying down mortgages. If anything, he says, the number may be too low.

The negative equity problem is growing so acute that the Obama Administration is rethinking the "Making Home Affordable" program, which refi's mortgages or cuts principal, but has a cap of 105%.

And for mortgageholders who are not underwater, there's limited amounts of equity in American households.
"Building equity" has always been a reason to "invest" in a house. During the Bubble many buyers believed "housing prices always go up." The housing crash has wiped out this idea.

So how much equity do homeowners actually have? Some analysts are challenging the Fed's numbers. Barron's Alan Abelson
gives analyst Stephanie Pomboy's interpretation of the data:

"...an overwhelming portion of some $8 trillion in mortgage debt (or 80% of the total) is teetering on the edge of, or in some state of, negative equity."

Abelson goes on, As to the Fed's claim that the equity of homeowners as a group stands at 43%, [Pomboy] points out that what the Fed neglects to tell you is that roughly a third of them have their houses free and clear. Lo and behold, some basic arithmetic reveals that 67% of homeowners with mortgages have equity of less than 15%.

The WSJ sums up the issue for the broader RE market:

The increase in the number of such "underwater" borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

Nowadays, as was true for all but the recent past, the best reason to buy a house is because you need a place to live. The trick for the buyer is to combine the need with available knowledge (pricing, economic forecasts, local data, employment prospects, etc.) so the new owner can avoid a similar situation as that faced by 1 in 5 American mortgageholders.

As a final thought, can somebody whose mortgage is underwater really be called a "homeowner?"

To read Zillow's press release, go here. To see a map of MSAs, plus info in Excel and graph formats (including Richmond, but not Charlottesville) go here.

Related Reading
Shotgun Wedding - Alan Abelson, Barron's (pg. 2)
House Price Drops Leave More Underwater - WSJ
Jumbo Loans Defaulting - Bloomberg
Back to Issuing Warnings - Dave Johnson
The Wealth of the Baby Boom Cohorts After Collapse of the Housing Bubble - Rosnick & Baker

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