Negative equity stats staggering
An oxymoron is a figure of speech that combines contradictory terms. As contradictory terms go, negative equity is at the top of a long list of others swirling around our real estate downturn.
Negative equity is when the value of an asset, a piece of real estate, is less than the outstanding loan on that asset. The more common term for negative equity and one that we mostly hear is underwater. No matter which term is used, the statistics for properties with a negative equity are staggering.
At the end of the first quarter of 2011 22.7 percent of all residential properties with a mortgage were in negative equity territory. Nevada had the highest with 63 percent of all mortgaged properties underwater, followed by Arizona at 50 percent and Florida at 46 percent. Michigan at 36 percent and California at 31 percent were the other two states in the country comprising the top five with the highest negative equity. Excluding these top five states, the balance of the states averaged 16 percent negative equity. As bad as these sounds, it is actually an improvement from the fourth quarter of 2010, with Nevada declining 2.7 percent and Arizona and Florida both declining 1.3 percent.
Not all homeowners who are in a negative equity situation stop paying their mortgage payments. Many are willing and able to maintain these payments because they don't want to disrupt their families, jeopardize their credit score or feel they have a moral obligation not to default. Also these homeowners are hoping that the market will reward them with appreciation down the road, and in fact, some are being rewarded even if they aren't asking for it.
In a recent report in the New York Times, some banks specifically JP Morgan Chase and Bank of America are proactively overhauling loans without being requested to do so. Part of this overhaul involves reducing the principal amount of the mortgage on the property substantially, and sometimes raising the interest rate, leaving the homeowner with a similar monthly payment. The types of loans the banks are looking at are the ones that are most at risk usually option adjustable rate mortgages (ARM) on properties that are severely underwater.
When Chase Bank took over Washington Mutual and Bank of America took over Countrywide Financial, they also inherited all of their toxic loans, most of them ARM's with teaser interest rates and low down payments. Their reason for offering mortgage modifications and reduced principal to homeowners who are not yet in pre foreclosure is hopefully to prevent them from reaching a point where they struggle to make their payments and ultimately find themselves in foreclosure resulting in a more serious problem for lenders.
Although the Federal Reserve economists could find no evidence that lenders are reducing outstanding debt, it appears the banks are quietly proceeding with this method. The banks are, however, working on an ongoing basis with the government in an effort to find a way out of the negative equity dilemma.
So, do we have a moral hazard issue by reducing the amount of outstanding debt on some loans and not others? Who deserves to be helped and who doesn't certainly presents an ethical issue never before faced on such a large scale. Negative equity, a unique oxymoron for our time in history, may it never repeat itself.