The number of homeowners underwater on their mortgages has decreased slightly. According to the most recent report produced by CoreLogic (real estate analytic firm) ownership of homes in negative equity situations had decreased to 11.2 million from 11.3 million at the end of 2009. The trend seems to be picking up speed as modest gains in home values were posted in some of the nation's hardest hit areas and because more of the underwater homes are being lost to foreclosure.
The 11.2 million underwater loans are roughly equivalent 24% of all U.S. mortgages. Industry experts are closely monitoring the underwater housing statistics as it is considered to be one of the prime indicators of foreclosure. Only loss of income is a more predominant statistical barometer of the trend.
About the Underwater Mortgage Crisis
Underwater properties are homes with mortgages larger then the current appraised value. The most common scenario that would cause a home to slip into negative is a spike in the home loan interest rate. Adjustable rate mortgages (ARMs) are loans with interest rates that will fluctuate over time based on market conditions. Generally, ARM holders get a lower than average interest rate as a promotional incentive. After a period of time, the mortgage rate will reset and be adjusted based on current industry rates. The mortgage payment can balloons even has home prices retract and that can flip the monetary balance of the transaction and cause a mortgage to end up underwater.
This trend is especially prevalent courtesy of the the real estate boom and bust cycles. As home values started to grow at an exponential rate around the country, millions of consumers ended up buying homes at peak prices. As ARM mortgages started to adjust to higher interest rates more subprime mortgage holders started to default on their loans.
As this activity increased, Wall Street started to crumble as they had billions of dollars of investments in subprime mortgage bundle products. As a result of a decline in profitability, Wall Street started laying off hordes of people and private investors lost tons of money. That retraction trickled through the rest of the country and negatively impacted employment rates. As more people lost their jobs, the real estate market softened further as foreclosure rates started to increase. This movement resulted in further declines in home values and more homes evolved into negative equity thus continuing the cycle.
Relationship between Underwater Mortgages and Foreclosure
Statistical data has proven the correlation between underwater mortgages and foreclosure. According to DailyFinance.com "As the number of homeowners who are underwater rises, so do foreclosures." Current the country is flush with homes worth less than half of their existing mortgages. DailyFianance.com reports "There are 4.1 million homeowners with more than 50% negative equity and another 5 million homeowners with 20% to 50% negative equity."
The data from CoreLogic has shown that the areas considered to be the epicenters of the real estate crisis have the largest percent of underwater mortgages. Those states are Nevada, Arizona, Florida and California. However, it is important to note that the underwater mortgage crisis is not limited to those regions; it is a full-fledged national epidemic.
Assistance for Underwater
Despite the encouragement of the U.S. Government, private lenders have been hesitant in assisting underwater mortgage holders refinance their mortgages. When it comes to securing a mortgage of any type (including refinancing) an appraisal of the property is required for a bank to determine the risk associated with the loan. Courtesy of the market trend, homes are not appraising at satisfactory levels for lenders, leaving homeowners of underwater properties in a quandary and with very little choice in the matter.
However, there is hope for those currently in the situation. Rumor has it that the Obama Administration is going to order government-controlled lenders Fannie Mae and Freddie Mac to participate in a principal forgiveness program. Reuters recently published a piece by James Pethokoukis that states that the lenders may be required to "forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth." This move would fall under the guise of the Treasury Department pledge to provide unlimited financial assistance to the mortgage giants. The fate of this move is T/B/D and more details may be revealed after the Treasury Department's conference regarding the lenders scheduled for August 17, 2010.
That help may be too little and too late for those already struggling with their underwater mortgage debt. For those who are poised to partake in a short sale or a deed-in-lieu of foreclosure, the government will provide you with $3,000 to help make securing a rental easier. The allocation is part of the Home Affordable Foreclosure Alternatives (HAFA) Program. Qualifying former homeowners can tap into the resource that was constructed to help struggling Americans find more affordable housing options.
