About 1 In 4 Borrowers Is Underwater

The Wall Street Journal says the number of borrowers currently underwater on their mortgage (meaning they owe more than the property is worth) has swelled to 23%. Ouch.

On the bright side, there are still more homeowners who don’t even have a mortgage then there are ones who are seriously underwater. Still, areas with many underwater mortgages will face a long, hard road to recovery — as those properties are much more likely to fall into foreclosure, further diluting a market already saturated with bank owned real estate.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage, according to the Census Bureau.

One in Four Borrowers Is Underwater [WSJ]

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  1. Miraluka says:

    Buyers market indeed. It’s hard to even get the bank to allow you to sell your house when market value is below what you owe on your mortgage, and you can’t bring enough cash to the table to cover the difference.

    Who else sees a continued future of foreclosures and short-sales? Sellers could only hope their bank approves a short-sale, so they could at least re-coup some of their losses.

    • Cant_stop_the_rock says:

      If you sell your house for less than you owe you’re not going to recoup some of your losses. The bank gets that money, and prior to a change to the tax code (I believe a temporary change) you’d have been paying income tax on the shortfall.

      If you sell it for less than you paid but more than you owe, you’ll get some money (maybe, because you also have to pay the realtor)

    • GearheadGeek says:

      Seconding Cant_stop_the_rock: it’s only a short sale if the price is less than the mortgage, so the mortgagor is always going to get screwed to a certain extent. They’ll get no proceeds from the sale, and it seems to me they might have to kick in a bit to pay realtors’ commissions but that’s pure supposition on my part. It does cut FUTURE losses of throwing cash at the mortgage payment on the albatross…er… distressed property.

      • Miraluka says:

        I was speaking about in comparison to letting your house get foreclosed upon. Better to get a short-sale than get foreclosed upon.

  2. diasdiem says:

    Seems like a golden opportunity for people with the capital (or at least the credit) to get into the rental real estate business.

  3. apd09 says:

    This is why banks need to renegotiate the mortgages they have on their books. The Government has finally told the banks that unless they start curbing the amount of foreclosures and homes in default that they will no longer supply TARP funds to them.

    We will see though…

    • Skankingmike says:

      Same logic.

      Buyer takes a 6 year loan on a car worth 65,000 at the time of purchase. It is now 3 years later and the cars value is less than half of what he bought it for but the payments do not reflect what the value is. There for the buyer owes more than the car is worth.

      Should the banks renegotiate those contracts?

      The banks did not sell these houses, they provided mortgages to people. These same people would be up in arms if they didn’t get the mortgages to begin with now they’re up in arms because they want them reduced.

      If we just let these banks fail it would costs a lot less money. Because the debt owed on the homes would have been privately renegotiated by new banks that bought up loans that they felt were still good, and the bad ones? well open season on their loans i suppose.

      • GearheadGeek says:

        Your point would be a good one if the auto loan market was a perfect analog to the mortgage market. To make it so, you’d have to have millions of similar loan transactions and owners nearing default on those transactions such that the threat of all those car loans defaulting in a short period of time would both significantly damage the market for used cars AND threaten the stability of the financial institutions holding that paper.

        I think the banks should renegotiate more mortgages for the BANKS’ sake as much as for the mortgagors. The libertarian part of me wants to see the banks and borrowers suffer the full consequences of their actions, but the pragmatic part of me thinks that would be a very ugly fiscal bloodbath that would also harm millions of fiscally conservative folk who didn’t over-extend themselves.

        • Daemon Xar says:

          It would also only be a good point if there were auto dealers out there offering $65,000 cars on credit to people making minimum wage.

          While there is a real disconnect between people making mortgage loans and the ultimate owners of the loans, and consumers ought to have figured out that they couldn’t afford their payments after a reset, the loan owners are not exactly free of culpability either.

        • Skankingmike says:

          http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/TheRepoManIsGettingBusy.aspx

          Houses are much more money than cars, and to remove somebodies car is much easier and less costly than a house. Thus you will hear less about it. However, it is not any less of an issue currently.

          If the car industry doesn’t collate well with the housing markets I don’t’ know what will.

  4. NydiaGeben says:

    What? Did you think home prices would just go up forever and never look back? You buy during the bubble run up and at some point when the market crashes you are underwater. If you can afford to make your mortgage payments there is really little reason to care about the value of your home until you want to sell. … For those that bought more house than they could afford using adjustable rate loans, well, you play with fire and sometimes you get burned. Lesson learned. Deal with it.

    • cash_da_pibble says:

      That’s pretty callous.
      But unfortunately, it’s the truth.
      We’re underwater on our home- but hell, we’re making our payments and aren’t planning on going anywhere.

    • rpm773 says:

      There may be, or may have been some truth to this. But as the crisis deepens, it becomes a smaller part of the issue.

      You bought in, put 20% down on a 30-year fixed mortgage a couple years ago. You bought in a good area. In other words, you played by all the rules.

      Now housing values in your area have dropped 25%, and you have to move to go chase employment in an economy where 10 – 20% are out of work. Guess what – you can’t get out of your house because you can’t cover the difference of what you owe versus what your house is worth.

      My point is this: The ones who put themselves in a bad position have already been bucked off the horse. As this problem continues, it’s the good investors who will be dragged down. And that’s not a good sign.

      • Skankingmike says:

        in what world is this the banks fault?

        So what now we need fortune tellers in banks to see into the future?

        And most people did not put 20% down especially in my area where most houses were going for 400-600 thousand. that’s 80-120 thousand dollars which most normal people do not have.

        The problem came from people over extending themselves and both banks and people ignoring the bubble which so few people saw.

        Honestly I thought the housing bubble was going to burst in 2007 or 2006, when my parents sold their 3 bedroom house (by themselves no Realtor) for 560,000 dollars! They bought it in 1996 for 210 sold it for 560 in 2006. That was the bubble and if you bought then you were gambling pure and simple.

        • rpm773 says:

          I’m not sure I follow what you’re saying, but it doesn’t really matter if more, or a lot, or most people put less than 20% down with respect to my comment. Those people have an even better chance of being under water at this point.

          But if prices continue to drop, those that did put the 20 or 25% down will eventually be under water, too, depending on how recently the property was purchased. Our house was a shade over 400K 2 years ago, we put 20% down, and prices have dropped 10-15%. The only comfort I take is that we bought a good house in a good neighborhood in a good town. If I’m screwed, so is everyone else.

          The grease that keeps the housing market churning is necessity – the fact that people need a place to live. If that set is mired with toxic assets of their own, they’ll be unable to act on necessity as easily, which means demand will stay soft, which means the prices drop lower still.

          • Skankingmike says:

            Point is there is no “rules” it’s a narrow minded view point. Just because your neighborhood is nice now doesn’t mean in 1 year it will continue to be. People should buy a house because

            A. they like it
            B. it provides them a home.

            any other reason and you run into problems.

            A home as an investment makes sense but it’s no more safe than buying stock in a “safe” company and then watching them go under during a recession.

      • Tetrine says:

        Underwater issues aside, a lot of people did NOT put 20% down. They got 0% down mortgages on houses that were unaffordable for their incomes.

    • floraposte says:

      I agree that it doesn’t actually matter, as long as you can afford your payments and aren’t trying to sell or borrow against your house. But I don’t agree that it’s just people’s chickens coming home to roost–some houses lost well over 20% of their value, for instance, so you could have a pretty old-fashioned mortgage and still find yourself upside down. And it’s not like people who needed a house had much choice between bubble-riding properties and non-bubble-riding. So I’d definitely encourage people to wait it out if they can, but I don’t think being underwater is necessarily a result of their misjudgment and thus something that would never happen to the likes of you and me.

    • Coelacanth says:

      I’m hoping this same logic also applies to healthcare costs. At some point, the price gets so astronomical that the market must correct itself!

      (Hopefully not by foreclosing on hospitals and doctors offices, leaving lots of sick patients.)

      Ditto higher education.

    • Geekybiker says:

      Well real estate doesn’t always go up, but it rarely crashes. What really sucks is the people who are upside down now are mostly those to were responsible with their loan, only to be screwed by everyone else defaulting. Even if you can still afford your mortgage you are looking at paying tens of thousands of dollars just to get back to even let alone any equity. I figure the stupid and irresponsible failed long ago.

    • u1itn0w2day says:

      I don’t think it was just the buyers with ARMs it was simply over paying . I think it was niave of many to assume the value of their house would continue to rise . That’s infinate inflation .

      The housing bubble herded in alot of sheeple just like the retailers did Black Friday morning . Instead waiting in line for hours prior to opening just for the deal many sheeple during the bubble wanted that house just as bad as many wanted that ‘ deal ‘ Black Friday morning .

      Kudos to those who bought with-in their means for a place to live and not something to invest in .

  5. BenChatt says:

    Copyedit concern: “than” rather than “then” in sentence beginning “On the bright side…”.

  6. BenChatt says:

    I really see this as a situation in which there are two parties that are both at fault, trying to place all of the blame on the other. Owners, of course, often buying homes they knew they couldn’t afford, ’cause, hey, the bank will let me. Banks giving out home loans to everyone who wears pants, ’cause, hey, if they screw up, we still have a pretty awesome property. Now we have banks that won’t adjust mortgages and people who are willing to walk away. Both still wrong.

    • ElizabethD says:

      My concern is for those like us who can afford our monthly payments (now that we have two incomes again) but, if we need/want to move, or to downsize with our kids out of the nest, won’t be able to get our money back out of the house and thus may never be able to buy another house in our lifetimes. I’m not even sure how we could pay off the mortgage in full if we decided to rent a place forever. As we approach retirement ages (I’m 58, husband is older), this is a worrisome possibility. Our local market (Rhode Island, which experienced a ridiculous bubble) is one of the worst hit by the downturn in home values.

  7. Hi says:

    Bubble pops and then all the banks take their stimulus money and buy up all the properties for cheap. Happens every time. Not a surprise unless you watch the news on tv. Apparently they are completely in the dark and had no idea.

    • Cant_stop_the_rock says:

      Yeah, the banks are making so much money off selling those foreclosed houses for less than they were owed, they’ve had to build enormous vaults to hold all of the money and they swim in it in their free time.

      Banks aren’t in the business of owning houses. If you think the banks are better off as a result of everything that has happened, you need to quit reading the crazy tinfoil hat media.

  8. savvy9999 says:

    Being underwater doesn’t really matter unless you’re selling right now, does it?

    Owning a house, coupled with the real closing and moving costs, generally only makes financial sense if you’re not going to sell it for a couple of years; otherwise one rents.

    I have plenty of investments that at some point have lost value, and then gained it back. No different than houses or real estate or any other investment; total loss is a possibility, but that’s not what we’re discussing here. It’s temporary loss, requiring mostly only patience to resolve. Stay in the house, keep making payments, if you can renog your loan great, but otherwise you’ll be fine.

    To me this entire meme is akin to the “OMFG, HALF OF CHILDREN ARE BELOW AVERAGE!!!!!” yelp of the uninformed.

    • deadandy says:

      I think there is some degree of invisible morale effect of being underwater.

      I bought at a low point, about seven years ago, before the market started going crazy. I bought a 2700 sq ft house for 144. The market went nuts, and it some point the comps for my model in my ‘hood were 275+. Then it crashed, crashed far below the level I bought at. One of my models is for sale for 105, with a pool, and no one has even looked at it.

      So I played by the rules and I still got burnt. I have no intention of selling, but I still feel rotten knowing I still owe 130 on a house that’s maybe worth 100. I should have sold at the top of the bubble, pocketed the cash, and rented, but hindsight is always 20/20 and all that.

      • Quake 'n' Shake says:

        I feel your pain. My wife and I bought during the crash, but before things hit bottom. Prices had seemingly leveled off, but this was before the foreclosures began. We’re underwater after putting 20% down when we bought. Now, we’re not underwater by a lot, but if we need to sell the house we’ll owe a significant, albeit manageable amount.

        That being said, we love our home. We understood the risk we were taking, and we accept that it didn’t turn out well for us. We’ll keep paying off that mortgage knowing that, for us, in a few years, we’ll achieve some level of equity. The way we see it, there’s no point beating ourselves up over it.

    • spinfire says:

      Negative equity can offset other assets like retirement funds and savings and investments. This leaves the household “balance sheet poor” with a low net worth. This means that you need to increase your savings to make up for the lost value of the home, limiting cash flow for other expenditures. Remember that you’ll have to cough up money to move if the loan balance is higher than the selling price, so you’re tied up as long as you don’t have enough to cover the remaining principal owed.

      • Cant_stop_the_rock says:

        savvy9999 is right that the value of your house only really matters if you’re selling it. And even then it only really matters if you’re not buying another house, or if you’re buying a house in an area that was impacted differently from your area. If I paid $500k for my house and it dropped to $400k, I haven’t really lost anything yet. If I then sell my house and buy a house that’s just as nice down the street and I pay $400k for it, I still haven’t lost anything. If my house is still only worth $400k when I want to retire and sell the house and buy a condo, then I’ve lost something.

        My house has lost some value, but that doesn’t force me to alter how I allocate my money to savings, discretionary spending, etc. The value of my house right now doesn’t impact me at all.

    • kilpatds says:

      Except that it puts pressure on completely rational people (aka Beancounters) to consciously default, even if they can easily afford to continue making payments. If you are willing to increase your cost of credit for ~7 years, you could make (for example) 30k by defaulting. Is a good credit rating worth 30k?

      • TuxthePenguin says:

        I am a bean counter… but lets let that pass.

        While the idea of walking away from a house because of the cost-benefit doesn’t seem in line, lets step back and just compare the cost of renting and cost of owning, assuming the loan is 30k over the value of the house.

        You get the bank to accept a short sale. Congradulation! You now have 30k of extra income to report on your taxes… so lets just estimate that it comes to a ~25% rate, so you get to pay 7,000 in income tax. Heck, lets say you get some wiggling going on and get it down to 5,000.

        Now you have to move into an apartment. You’ll need to put down a substantial deposit (you have a hit on your credit score) – say $500 – and deposits on your utilities (again, bad credit score) – as well as moving expenses, first month expenses for cable, phone, internet, etc. So lets say all of that comes out to $2,000. Maybe more, you are moving from a house to an apartment, so you might also have need for a rental unit…

        Now you get to rent for 7 years. And then start again on the top of the amortization table. “Walking away” is not always the best option. Before you do something drastic like that, you better do the math and go with worst-case scenarios. What if interest rates rise dramatically? You’re “bad” 6-7% mortgage might be great if it gets back to 12-14%. What if tax rates rise? Suddenly that mortgage interest deduction gets better.

        On the other side, there are things that can make walking away better as well – if you go bankrupt, you might be able to ignore the extra income from the short sale. Perhaps you can get an apartment closer to work for cheap…

        If you do walk away, you’d better save as much as possible and go into your next home with a HUGE downpayment.

        • nbs2 says:

          That presents an interesting question that i haven’t been able to answer. If I rent a house, for say $2k/month, in three years I’m out $72k. If a escrow payment on a similar house is $1600/month (1200 mortgage, 400 property tax) and I tack on $400/month in maintenance, I’ve spent $72, but I’ve gotten to knock off 14.4k from my income, saving me 3600 (assuming 25% income tax). When I sell my house three years later, as long as I lose no more than 75.6k (total expenditures plus the amount I save on my taxes) off my original purchase price (not accounting for the costs of selling), I come out ahead of renting a place for three years. Is that right?

          I know that this does not account for differences between neighborhoods/communities/commutes/etc, but it is a good chunk of change that you can absorb and come out ok.

          • TuxthePenguin says:

            You’ve simplified it, but you’re for the most part right. You’d want to factor time value of money, actually calculate how much interest you’re paying, equity you’ve created, etc. And, seriously, you might start at $2k a month for that house rent, but do you really think it won’t go up over 7 YEARS?

            But you also need to calculate the tax-savings of taking a capital loss on the sale of your house. Granted, you’re limited to an amount equal to your capital gains + 3k. Every year. Until you’ve taken that entire loss into your taxes. At 25% rate, that’s $750 in lower taxes a year.

          • Cant_stop_the_rock says:

            $14,400 in interest and property taxes won’t save you $3600 on your income tax UNLESS you have sufficient other deductions to offset the standard deduction (which you lose when you itemize).

            If you’re married filing jointly and your interest and property taxes are your ONLY deductions, then you’ve saived 25% * ($14,400 – $11,400) == $750. BUT once you start itemizing you usually find more things to itemize, so it’s not that bad. It’s just not as simple as you made it.

        • treimel says:

          It’s fair to point out that many people are underwater more to the tune of six digits, though, changing the equation completely.

        • kilpatds says:

          Actually, if you can afford the house, you won’t get a short sale. You’ll have to default (part of getting a bank to agree on a short sale is showing an inability to make the payments). But thanks for making my point… you can run the numbers in an emotion free context and decide that walking away is the right thing to do.

          Many will attach a negative moral context on that decision (skirting your responsibilities). But by the cold numbers, depending on your negative equity, it may be a rational decision.

  9. nbs2 says:

    Of the 23% who are underwater, how many know (or care)? As savvy9999999 points out, investments fluctuate. I bought a foreclosure in May, and I am pretty sure that I have gained some equity as the house has increased in value (we paid 40k less than the folks that are two doors down, and the only difference I know of was they have a brick facade instead of siding). But, we may be underwater. I don’t know.

  10. steveliv says:

    my issue is with the loan modification programs. if you couldn’t afford your house payments to start out with, even with a generous interest and time to payoff modification, chances are you still can’t afford the house. i know people want to stay in their houses, but if you can’t afford it you need to sell the house. i am totally against principal reduction, i think that goes too far, especially the majority of people seem to be able to find a house they can afford

    • Daemon Xar says:

      Principle reduction actually makes sense for a lot of loan owners even if it means that the loan owner takes a loss, particularly in areas where the real estate market is severely distressed. Either way, the L.O. is going to end up losing some money, and by making a principle reduction they not only are able to avoid paying closing costs/real estate agent fees, they get to continue to make money off of the interest on the loan.

      Now, if only there were ANY community of interest at all between the loan owners (rarely banks, these days) and the company servicing the loan . . .

  11. the Persistent Sound of Sensationalism says:

    Does it really matter when you pay up to twice as much for the house over the duration of the mortgage anyway?

    Really, I want to know. Is this any different?

    • Cant_stop_the_rock says:

      It’s different in that the money you use to pay your mortgage is worth less than the money the bank loaned you, because of inflation. When you consider the time value of money, the interest you pay isn’t nearly that bad.

  12. ElizabethD says:

    [raises hand]
    Yep, that’s us. Sigh.

  13. RandomHookup says:

    No photo of a flooded home? That would have been more appropriate.

  14. BleedBlueinFla says:

    I am so tired of hearing “Houses are underwater” followed by “Too bad, shouldn’t have bought more house than you could afford, ARMs…” We bought our house near the top of the bubble and apparently were stupid enough to stay within our means on a fixed loan. Our reward? Watching our neighbors suck off of the government “milk.”

  15. pot_roast says:

    We’re doing fine with our mortgage, but getting a refinance done has proven to be fruitless. Even an FHA Streamline refi now has a whole bunch of strings and fees attached to it, making it a huge pain in the neck. We’re getting hosed on the LTV ratio and the appraisal, because the other builder in the subdivision has been doing a fire sale on homes.

    Ugh. I really wanted to take advantage of those nice low interest rates too. :|