One Fifth Homeowners Have Mortgage Problem
MADELEINE BRAND, host:
From NPR News, this is Day to Day. Drive down a residential street these days, and you'll see quite a few for-sale signs, and chances are, a fair number of those sign say foreclosure. One big reason is that the people who use to own them ended up owing more to the bank than their houses were worth. And the problem of being upside down on mortgages, that problem is growing. Marketplace's Mitchell Hartman is here now, and how big is this problem, Mitchell?
MITCHELL HARTMAN: Well, there's a new report out today from First American CoreLogic saying that one in five homeowners around the country is in this situation. It's a situation called negative equity. There are some other colorful terms. You can be in an upside-down or an underwater mortgage. Not surprisingly, the situation is worst in states where home prices have really tanked.
So, in Nevada, where home prices are down a third from last year, every other homeowner is in a house that's worth less than they now owe the bank. California, Arizona and Florida all have about one in three homeowners living under water. Things are also bad in Ohio and Michigan, not so much because home prices went boom and bust, it's actually because jobs are disappearing in the Rust Belt and the economy kind of stinks. And the home prices are depressed because no one can afford to buy.
BRAND: Well, maybe not in those areas, but in the West, couldn't homeowners just wait until the prices come back?
HARTMAN: Well, the issue isn't necessarily that these people can't afford to pay their mortgages, although it's true they may be strapped for cash, especially if they both with, say, no money down. The question is, why even bother? Desmond Lachman, an analyst at the American Enterprise Institute, explains.
Dr. DESMOND LACHMAN (Resident Fellow, American Enterprise Institute for Public Policy Research): The problem is that there's an incentive for people to walk away from their mortgages. If the value of the house is only $300,000 and the value of the mortgages is $500,000, what are they doing servicing that mortgage?
HARTMAN: Now, Lachman points out that if you get foreclosed - so you just walk away from the mortgage - then the bank just gets the house back. In most states, the bank can't try to milk you for what you still owe. Then the bank puts the house back on the market on the cheap, along with all these other foreclosed properties.
Dr. LACHMAN: As foreclosures rise, house prices go down further, means more people have got negative equity, which means that foreclosures rise. So, we're in that vicious cycle.
BRAND: And so, Mitchell, how do you get out of that vicious cycle?
HARTMAN: Well, the only real way out of this mess is simply for foreclosures to slow way down and then home prices to turn around again. Lachman and a lot of other economists say there's really no way to stabilize this market in the long run without government intervention probably on a pretty massive scale. There are reports today that the Bush administration is looking at maybe a $50 billion rescue package for as many as three million struggling homeowners. Ultimately, the solution is just fewer for-sale signs and that may take awhile to happen. And by the time it does, they're likely to be a lot of very cheap houses for sale out there.
BRAND: Thanks, Mitchell. That's Mitchell Hartman of public radio's daily business show, Marketplace.
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BRAND: And there's more ahead on NPR's Day to Day.