Negative Equity Rising and Still Understated

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Negative Equity Rising and Still Understated

Editor’s Comment: 

In our pretend world which is being narrated by the Banks, the housing crisis is easing, people are starting to buy foreclosed homes for investment and domicile, and the defects in documentation were just paperwork problems that will get fixed. The foreclosures are real, we are told, the banks hold the assets on their balance sheets, the auctions were valid, the credit bids were properly accepted by the auctioneer as a no-cash offer from a bona fide creditor. Planted articles and stories across the media spectrum would have us believe that the worst is behind us.

In the real world, even those who wish to portray the housing market to be in some stage of recovery admit that the number of homes with negative equity is increasing as prices continue to fall far below the alleged balances due on those dubious loans and mortgages. And they admit that the amount of negative equity in each house is deepening to the point where, as in the movie Larry Crowne, the owner simply turns in the keys or waits out the foreclosure.  Strategic defaults are increasing rapidly as people realise that they can recover some of their losses simply by not making a rent or mortgage payment for as long as they can hold off the bank. 

The amount of negative equity is computed without regard for selling expenses and other factors usually totalling around 10%. So the “average” $175,000 house is actually at around $157,000. If the principal demanded on the loan is, on average, $325,000, it is easy to see why even the spinners must admit that the owner of such a home is likely to walk away from a bad investment. In order for there to exist a valid reason to stay, the homeowner must hold out for a price increase of more than twice the current value of the house — something that everyone concedes is not going to happen, even with inflation, for a minimum of 20-30 years. The stigma once attached to such a move is largely dissipating and even those who extend credit are beginning to soften up on using a foreclosure to deny credit — opting instead to charge more from a customer who otherwise had a stellar credit history. 

So in the real world, the housing market is still going down and it must — because the inventory of empty, abandoned homes is increasing. The re-sales, short-sales and even modifications are barely making a dent in the growing number of defaults and foreclosures on the horizon. And then on top of all that, despite the bank narrative, a new narrative is coming from the courts and law enforcement. The real world has millions of foreclosures that never should have happened. The real world has millions of homeowners who have every right to reclaim the title and possession of their homes. And that is the other reason why housing prices continue to fall below 2001 levels — even the buyers are aware that there is considerable risk associated with “buying” a home from a company whose claim to ownership is at best unproven and at worst an outright lie.

Negative Equity Increasing

by THE KCM CREW on MARCH 6, 2012

Last Week, CoreLogic released their Negative Equity Report for the fourth quarter of 2011. The report delivered some important news. Let’s go over the key findings in the report.

What Is Negative Equity?

When a home’s current value is less than the existing mortgage on that home, the house is said to be in a ‘negative equity’ situation (other terms used to describe this situation are ‘underwater’ and ‘upside down’).

How Many Homes Are in a Negative Equity Situation?

The CoreLogic report stated:

“11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011.”

This is important because studies show that people in a negative equity situation are more likely to default on their mortgage payments than people who have equity in their homes.

How Many Homes Are Approaching Negative Equity?

According to the report:

“An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter.”

Many experts believe that housing prices will soften in the first half of 2012. That will cause a percentage of these homes to fall ‘underwater’.

Bottom Line

History has shown that a percentage of those 2 million+ homes will enter the distressed property category as some families decide it no longer makes sense to pay their mortgage. Any increase in short sales or foreclosures will impact prices in an area.

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