Underwater mortgages will bring another wave of foreclosures
For those who haven't heard this term, an underwater mortgage is a colorful description of today's commonplace problem - the market value of a house is way below of what homeowner owes to the bank. Basically your Loan to Value ratio (LTV) is over 100% if you have only one loan, or it is called CLTV or combined LTV if you have more than one mortgage on your house. Underwater mortgage situation is quite dire and has been growing fast enough for some economists to state that it may just kill off any potential home market recovery as well as $700 bailout package hopes. What a joke, no recovery is or will be coming, as I predicted in housing bubble written in January 2007, and reiterated in numerous more recent posts that can be found under Economy category. Of course, one should only look at professor Robert Shiller chart to understand the real trouble we are in. Dr. Shiller latest book, The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It should be a fascinating read.
Back to the underwater mortgages. According to Mark Zandi, chief economist at Moody's Economy.com, about 12 million U.S. homeowners or nearly one in six, owe more than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006, threatening the U.S. economy with a fresh wave of foreclosures and bankruptcies, as many who bought their homes with a small or no down payment, will simply hand the keys and walk away. My friend just paid $1,075,000 USD for a house that was built and sold for a cool $1,825,000 in 2005. Washington Mutual financed that purchase with 20% down, of which it immediately gave half back to the buyer in a form of home equity line of credit. Facing almost $30,000 yearly tax bill and dwindling home values, buyers just packed and left. They decided that $182,500 was an expensive mistake, but the cheapest way out. With house being so much underwater, my friend asked if this was a good investment? Surely in 3 to 4 years she said, home values would recover and less than $1.1 million price she paid would seem like a bargain. I didn't want her to feel bad, so I said you may be just right, but should enjoy this lavish 6 bedroom, 5 bathroom mansion on a nicely manicured acre regardless. I didn't want to tell her, that it may just sink deeper under and likely be worth $850,000 or so, and I hope I am wrong.
Anyway, as the homeowners with underwater mortgages go into foreclosure, it would add to the oversupply of homes, delaying a recovery in the housing market, and adding to pressure on banks. Throw into this slowing economy with growing unemployment, still quite high energy prices and even the most optimistic fella gets the picture,... hopefully. Mr. Zandi also said, that with current home prices likely to decline on average by another 10 percent, there will be 14.6 million homeowners under water by September 2009.
Here are few more numbers and facts on underwater mortgage situation that will likely send shivers down your spine, courtesy of Zillow.com.
In Stockton, California, a town that has become a poster child of the U.S. housing crisis, nearly every homeowner who bought in 2006 is now under water, and there are countless other trouble spots across the country.
Nationwide, for those who purchased U.S. homes since the beginning of 2003, nearly one in three now have negative equity. Nearly half of buyers who purchased in 2006 are under water.
Foreclosed homes already account for 50 percent of all home sales in some markets, according to Zillow.com, an online real estate research service.
Also according to LPS Applied Analytics, despite tighter credit and underwriting for home loans this year, mortgages originated in 2008 were on par or trending worse than those originated last year or in 2006.
Thinking of underwater mortgages, I can help but recall all the negative amortization loan programs which happily allowed homeowners defer their principal payments as well as nice chunk of interest, or borrow against equity and exceed their homes appraised values by 10% to 25%.
Wed Oct 22, 2008 02:10PM | Copyright: www.bad-credit-advisor.com | More in Mortgage | Comments (0)
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