One in Six Home Owners Are Under Water

From a recent Wall Street Journal report comes this story. According to an analysis by Moody’s Economy.com, about 16 percent of U.S. home owners, or one in six, owe more on their mortgage than their home is worth. About 4 percent were under water in 2006 and 6 percent last year, Economy.com says.

An analysis by Zillow.com estimates that for people who bought their homes in the last five years, the situation is worse: 29 percent owe more than their homes are worth.

The majority of home owners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse," says Celia Chen, director of housing economics at Economy.com.

Still, she expects mortgage money to remain tight and home prices to decline in much of the country for another year.

Locally I can attest to this trend. Of the last five houses that I’ve sold, four of the sales resulted in the seller having to bring money to the closing table and three of them had to be re-negotiated on price, because the appraisal came in for less than the agreed upon sale price. Prices have dropped so far, so fast that even real estate professionals are having a hard time advising their sellers on how quickly and low far to reduce prices.

Basically in our area the “values” of homes have plunged between 20-30% in the last five years. So if you bought a home for $200,000 in 2004, it is likely worth only $150,000 now. Even it you put 15-20% down on the home, you are likely underwater right now.

The foreclosure problems are many times caused by the ARM second mortgages that many buyers took out back then to get to the 20% level and avoid PMI. Those ARMs are resetting (or have already) and the homeowner who though that he would just refinance it when that happened now finds that he can get that refinance loan, because the house is now worth less than even his first mortgage alone. That leaves the homeowner trapped in a “toxic loan” that he now can’t afford.

What can you do? For now tread water and hope that government programs like Hope for Homeowners or some of the other bail-out programs provide an avenue for relief. Even the Hope for Homeowners program only provides for forgiving 10% of the principle amount of the primary loan and doesn’t deal with secondary loans at all.

Eventually some program is going to have to be invented that allows the homeowner off the hook for the original inflated value of the home and refinances the house at the current deflated values. Those will probably have to be 100% loans, since most distressed homeowners don’t have any money to put into the process. Stay afloat and stay tuned.