The Wall Street Journal reports that 1 out of 6 American homeowners — about 12 million households — owe more on their mortgages than their homes are worth.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says Moody’s Economy’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.”
Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The story notes that this statistic makes foreclosures more likely, because underwater homeowners needing money will have few ways to obtain it.
Which brings up another topic: the national Countrywide loan-modification program agreed to this week by Bank of America. The program is designed to modify mortgages so people can stay in their homes, but how many people will it help?
According to this Contra Costa Times story, the program may only postpone the inevitable:
The new efforts could create a fresh round of problem loans and foreclosures a few years from now, warned Sean O’Toole, founder and chief executive with Discovery Bay-based ForeclosureRadar.com. Many of the restructured loans could produce more woes later.
“Maybe the loan won’t blow up now, but it will blow up in five years,” O’Toole said.
That ominous assessment is based on Countrywide’s approach in the voluntary program. In more than a few instances, O’Toole said, Countrywide’s restructured loans featured payments based on super-low interest rates of 2 percent, with payments rising over time. Put another way, the loans bear similarities to the ones at the heart of the current problems.
In other words, these restructured loans only buy homeowners some time to figure out how to make those larger payments.
Bank of America should restructure the loans so that the payments are high enough to pay down the principal on the mortgages, O’Toole said.
If the housing market doesn’t rebound strong, mortgage balances could still burden houses with more debt than the residences are worth, O’Toole said. He cited the restructuring of a mortgage with a $930,000 balance for a house valued at $500,000. Bank of America rewrote the loan with a fixed interest rate of 2 percent that would last five years.
“Bank of America and Countrywide are kidding themselves if they think that house will be back to $930,000 in five years,” O’Toole said.
Are there really homeowners out there who would stick with a mortgage that’s twice the value of their homes? And with a 2% mortgage, no principal is being paid down, so they’re merely treading water instead of improving their financial situation. At some point, wouldn’t most people in that situation just walk away?
Furthermore, the story notes, only people whose debt payments are below 34% of their gross monthly income will be eligible for the B of A program. That’s going to disqualify a ton of people right there.
Chart credit: The Wall Street Journal