More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth. That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period. All this is likely to keep consumers on the sidelines.
“I think this financial panic and Great Recession is an inflection point for the financial system and the economy,” said Mark Zandi, the chief economist for forecaster Moody’s Economy.com. “It means much less risk-taking, at least for a number of years to come — a decade or two. That will be evident in less credit and more costly credit.”
The longer buyers wait the cheaper prices have become. There is no end in sight as the huge shadow inventory of bank owned real estate has yet to reach market. For example, a single bank, the 2009 failed Colonial BancGroup, held tens of millions of non-performing loans in the River Region area.
Additionally, “almost half of the shadow inventory is not yet in the foreclosure process,” said Mark Fleming, chief economist for CoreLogic. Unfortunately, for River Region and many formerly fast growing areas, the worst is yet to come. It is a sobering indication the housing market remains deeply troubled, with home values still falling.
Reviewing the latest figures available, 31 percent of River Region home loans that were in negative equity – in which the outstanding loan balance exceeds the value of the home – were FHA-insured mortgages, according to CoreLogic.
Many borrowers thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices.
Even for loans taken out less than four months ago, borrowers, now find themselves under water. “The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”
Since October average home prices have fallen 7.4 percent. Overall, CoreLogic data shows that 11.1 million, or 22.8 percent, of U.S. residential properties with a mortgage are in negative equity.
“This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.”
The U.S. Federal Reserve, in a report delivered to Congress in January, estimated that 12 million American homeowners had negative equity. Of those, the Federal Reserve said, 3 million were borrowers with FHA-insured loans.
Jason Opalka took out an FHA-backed loan on his two-bedroom property in the suburbs of Orlando, Florida, in August 2010. He was helped by Certified Mortgage Planners of Orlando, who negotiated the FHA-backed loan with the lender, Freedom Mortgage, based in New Jersey.
Opalka was refinancing another FHA-backed loan he had obtained in 2008, for $196,000, then at an interest rate of over 6 percent.
Under the refinancing, he borrowed $192,278 at an interest rate of 4.5 percent. Opalka, looking at the paperwork, is still surprised at the down payment he had to make in 2010, for a property valued at the time for little more than the loan was worth and in which he had almost no equity.
His down payment was just $3,000 – or about 1.5 percent of the total loan.
Less than two years later, local real estate estimates now value Opalka’s home at no more than $110,000.
“I’m at least $80,000 under water,” Opalka told Reuters. “We never expected to go under water. We never expected prices to fall like they have. We definitely didn’t see this coming. If I’d known this, we probably would have rented.”