Negative Equity Crisis: Harbinger of Foreclosures to Come?

MortgagesThe alarm has been sounded for several months by mortgage industry insiders, real estate professionals, consumer groups and others testifying before Congress or conducting studies:
Negative equity, or homeowners “underwater” in their mortgages, will deepen the foreclosure crisis if not addressed by lenders and U.S. officials.
The most recent red flag was sent up by, the real estate researcher and marketplace. It reported this week that mortgages in negative equity were essentially flat from the third to the fourth quarter, moving from 21 percent to 21.4 percent.
But the stark reality remains that one in five homeowners across the country owe more on their homes than their value.
Moreover, the number of homeowners losing their homes to foreclosure reached a peak in December, with more than one in every thousand homes being foreclosed – “a number not reached since Zillow began recording national foreclosure data in 2000,” Zillow said.
“While we have seen strong stabilization in home values during 2009, there are clear signs that they will turn more negative in the near-term,” said Zillow Chief Economist Stan Humphries.
Moody’s projects that short sales and transactions in which borrowers surrender their deed in lieu of foreclosure will jump more than 50 percent, to nearly half a million this year.
Another study reported this month by the New York Times found that when a home’s value falls below 75 percent of the amount owed on the mortgage, a homeowner starts to think seriously about walking away — even if the homeowner can afford to pay the mortgage.
“Walking away” has become such a problem that CitiMortgage, the unit of Citigroup, today launched a pilot program that serves as an option. It allows distressed borrowers to stay in their homes up to six months without making payments if they agree to keep the home in good condition and turn over the property’s deed at the end of the period.
Recent research indicates a strong correlation between negative equity and mortgage delinquency, said Julia Gordon, senior policy counsel at the Center for Responsible Lending, in testimony recently before the U.S. House Committee on Financial Services.
“For these homeowners, even the reduction of monthly payments to an affordable level does not fully solve the problem. As a result, homeowner equity position has emerged as a key predictor of loan modification re-default, more so than unemployment or other factors,” Gordon said.
Gordon and other mortgage industry experts have told Congress for months that the government’s primary foreclosure rescue program is doomed to fail unless lenders are persuaded to increase principal forbearance programs.
The Home Affordable Modification Program, HAMP, has been plagued by a low ratio of borrowers converting to permanent reductions in mortgage payments. Moreover, less than a quarter of those who would qualify for a trial have been assisted, according to the latest HAMP report for December.

3 thoughts on “Negative Equity Crisis: Harbinger of Foreclosures to Come?

  • February 13, 2010 at 2:32 am

    In August of 2009 I responded to a letter I received in the mail. It got my attention because it was an offer of help for people having trouble making their home mortgage payments or facing foreclosure. I called the phone number in the letter and talked at length with a man (name withheld) who outlined what his company, RESN8 Financial Services of Hayward, CA, could provide for people like me.
    Being somewhat skeptical I asked a lot of questions about the business which the person on the other end responded to in a tranquil tone of voice. I especially remember how he punctuated many of his sentences with: “Does that make sense to you?” After requesting substantiation of the company’s prior successes, I agreed in principal to the proposal and was told that the requested proof along with a contract would be mailed to me.
    A few days later the paperwork arrived and I read it over. It reiterated what I had been told on the phone, that payment for the company’s efforts on my behalf would be required in advance—in three installments payable by one current and two post-dated checks. This should have been a red flag! But I was desperate and was unaware at the time that this very same service was available for free by a number of non-profits. After reading and re-reading the contract, I decided I’d better take advantage of their proposal to avoid problems down the road. At this time, I wasn’t behind on my mortgage payments, mainly because I had already received a modification from my lender, Washington Mutual, which went into effect at the beginning of 2009. This granted only temporary relief in the form of an adjustable rate and in January 2010 the payment would increase to nearly the same monthly amount I had been struggling to pay previously. Not a satisfactory solution!
    As soon as I was able, I mailed back the three checks along with a signed contract and waited to hear back from the man with the soothing voice. I did hear, via email, that the paperwork and checks had been received and that the business of getting me a permanent modification was underway. I felt a sense of relief although the cost–$4000—had been difficult to raise and was troubling.
    Much time passed without any word, either by phone or email. This too was troubling as I was being kept in the dark about the company’s progress (or lack of progress). I finally heard from a woman with an exotic name who asked for additional information to assist her in the work. I complied by filling out a detailed accounting of my financial situation and why I was struggling (hardship letter.) I stated that I was self-employed as an artist and was supplementing my modest income from art sales by selling collectibles on eBay and at flea markets in the Los Angeles area. More time elapsed and I wondered what was being done to help me get out of the mess I was in. Eventually, I got a call from someone else in the company who said he was working on my case and needed to know if I was current on my mortgage. I said yes and he countered that banks are more inclined to take seriously a loan modification request if the property owner is behind in their payments. I found this odd since the contract I’d signed clearly stated that I must stay current on mortgage payments.
    Washington Mutual had become Chase, so I was now making payments to them. Before starting this process I had called Chase’s Glendale office (the one purportedly dedicated to helping homeowners in distress keep their homes) and asked for an extension of the affordable introductory rate that Washington Mutual had granted. They refused and offered nothing to help me avoid the substantial payment increase I would soon be facing.
    Nearly four months into the RESN8 modification attempt and well into the New Year, I again heard from the man who had essentially advised me to stop meeting my obligation (which I did) that Chase had refused to work with them. No reason was specified for their refusal. Instead, I was given the option of hiring their in-house attorney to prepare a legal case against the bank based on indiscretions found during an audit of the bank’s loan documents. Of course, this would require an additional $3500 payment upfront. I declined.
    All efforts to ascertain why the bank refused to work with RESN8 on my behalf have been disregarded. Obviously I’m disappointed and upset at this outcome. I feel like I’ve been mislead and ripped off…and NO, that doesn’t make sense to me!

  • February 13, 2010 at 9:18 am

    I haven’t seen any news that lenders will return to sound lending practices, i.e. minimum 10% down, making sure people actually have a job that pays enough to service the debt AND their monthly bills, etc. This will be another huge wealth transfer – from responsible borrowers to irresponsible borrowers. People who are underwater will have their loans rewritten, principle reduced, interest rate lowered, while the rest of us see our equity erased by lower values. Home ownership is not a right.

  • February 13, 2010 at 12:13 pm

    The UN’s Agenda 21 charter signed on by 192 countries including the USA in 1992 advocates the plan of getting rid of private property rights, worldwide. Look it up if you don’t believe it, because I already know you do not because you did not see it on TV. Private property is harmful to the environment, don’t you know? Manufatcured housing bubbles are a great way to get people out of their property. The revolution will not be televised.

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