U.S. Markets open in 8 hrs 53 mins

Underwater mortgages are a bigger problem than the national average suggests


If you follow real estate prices or sales trends or the number of homes going into foreclosure, you’re apt to have a pretty positive feeling that things are improving. If you dig a little deeper, however, and look only at the 15 hardest hit states, you’ll find a totally different story.

While these outlier markets and metropolitan areas are also seeing improvement, they are still years away from breaking even and being whole again.

“In these pockets, we’re still looking at thirty, sometimes as much as forty percent of homes with mortgages that are underwater, which is significant,” says noted real estate attorney and author Shari Olefson in the attached video.

For example, December’s headline data from RealtyTrac showed the national rate slipping to 18% of homes being underwater or having negative equity (which simply means a homeowner owes more than the property is believed to be worth), but at the bottom of the scale, there are still 9.3 million “deeply underwater” homes that are in the hole by twenty five percent or more. In fact, six states that are at least ten points above the national average of 18%, including Nevada (38%), Florida (34%), Illinois (32%), Michigan (31%), Missouri (28%), and Ohio (28%).

[Click here to check home loan rates in your area.]

The case in certain cities is even worse, as the latest data shows towns such as Las Vegas, Orlando, Tampa and Chicago still have negative equity ranging from 33 to 41 percent.

“It’s especially relevant now because interest rates are going up,” Olefson says, pointing out that these owners who have been unable to refinance out of a variable rate mortgages, as well as tax law changes that took effect January 1st, “will be even more tempted to walk away” from their homes.

“If you do a short sale now, you’re going to have to pay income tax on the amount that the bank forgives,” she says, in describing the expiration of the Mortgage Debt Forgiveness Relief Act.

To run the numbers, say you owe $250,000 on your home in Chicago, but it’s currently only worth $167,500, and you get your bank to agree to waive the difference in a “short sale,” you now have to pay income tax on the $82,500. Whereas if you just walk away, give the keys to the bank and foreclose, you’d owe nothing.

“So that five percent of homes nationwide that were being short sold, is just going to go away,” she says.

It’s hard to say what the full impact of that will be on a national basis, but at the very least it would suggest we are going to be going through a new period of adjustment. A phase that will require watching distressed sales and pricing data more closely as well as the burden and cost holding these properties will have on the banks and institutional landlords that now own them.