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Deutsche Bank: Half of All Mortgages To Be Underwater By 2011

According to a new report put out by Deutsche Bank, half, or approximately 25 million homeowners will be underwater with their mortgage by 2011, the year in which Deutsche Bank expects home prices to finally stabilize.

Les Christie and CNNMoney.com are reporting that the Deutsche Bank forecast goes further than any other estimates that have been calculated to date, "First American CoreLogic estimated 11 million homeowners -- and rising -- were underwater by the end of 2008. Moody's Economy.com estimated 15 million at the end of March and projected 17.5 million by early 2010. Zillow.com reported that 20 million were already underwater at the end of the first quarter 2009".

There are two reasons this phenomenon of being underwater with a mortgage, also known as zombie homeowners, is significant. First, owing more than the house is worth will negatively impact consumer behavior and spending. We are seeing this already.

And second, home value declines lead to more foreclosures, and more foreclosures lead to more losses for the banks. According to Christie's article, "Currently, 26%, of defaults are classified as strategic, according to a recently published paper by Paola Sapienza, a finance professor with Northwestern University, and Luigi Zingales, a finance professor at the University of Chicago." In other words, the homeowner voluntarily walks away from the property rather than continuing to pay interest on a loan that far exceeds the value of the property.

So while Wall St. and Jim Cramer celebrate the fact that home sales may have bottomed, the much bigger problem is that the strained relationship between the demand and supply for real estate means that home values are still falling. There is insufficient demand for real estate to stop home values from deteriorating further.

Posted by Mark MacKenzie on 08/07/2009 04:19 AM

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61 Comments on Deutsche Bank: Half of All Mortgages To Be Underwater By 2011

AUG

If the report is accurate, we are going to see further declines in the market. I honestly couldn't imagine being so upside down on my mortgage that I would walk away from it. However, I never bought more than I could afford and never put personal expenses on my home equity line.

Mark,

Alarmist post. But do some homework on this; that's speculation on one side.

If this is true it is really scary news! Hope it's not true!!

Jim Cramer is one of the most in accurate crystal ball readers I have ever seen. I once met an investor who made a substantially good living by short selling every stock 2 days after Cramer touted it on his craptastic tv show. He may be working as a morning dj on WKRP in Cincinatti soon enough.

Which, of course, takes about 25,000,000 home owners out of the economy. It's going to be hard for the economy to grow at the projected 4% on which all of the economic forcasts, including the budget, are founded.

Those predicting a bottoming are dreaming. Those predicting a recovery in a year or two are smoking something.

These 25,000,000 American home owners with negative equity will not be in the consumer market for much of anything. Their budget will be devoted to keeping a roof over their heads.

Eerie Forecast! I'm sure that the present federal government will churn out some more money though to get 50,000,000 (who probably shouldn't be buying) into houses as well with their STIMULUS Recovery Package.

I think it is already starting to turn as I have seen a lot less BPO's lately, a good sign for the market as less people are late on payments, and I work for Wells Fargo. Keep the faith and don't let the negatives weigh you down!

Suddenly the American dream became a nightmare and the culprits that initiated the avalanche where given more money by the kingdom to continue on their rampage

No one has a crystal ball. I hope world wide economy will improve by 2011.

I think we are bouncing along the bottom but I think another decline is in the wings as another wave of Foreclosures will hit later this year and into early next year from what I am hearing from local Mortgage Brokers. Now some of the Sub-Prime Mortgage Bond holders are selling properties cheaper than banks are willing to and this is driving the market down too.

It's interesting to note that one day the economists say the economy is recovering and the next day they say it will take longer. The truth is that even in our complicated economic system no one knows what tomorrow will bring.

Ryan: I think strategic mortgages are contingent upon when and where you bought. Somebody buying a house in CA in 2006 is in a going to be in a different position than most Americans.

Terry: It is not just my post, it is a report put out by Deutsche Bank. I have done a lot of research on this. My estimate is that home value declines still have another 2-3 years to go based on foreclosures that are caused by job losses and mortgage resets.

Crystal: I don't see how it is not true when you peel back the curtain and look at the number of properties that are already at risk of foreclosure.

Robert: That is hilarious, WKRP! Great show!

Lenn: Agreed. The only reason we have an economy right now is because the government has thrown $20 trillion at it. That type of "spending" is unsustainable.

Mark - There is insufficient demand for real estate to stop home values from deteriorating further. That statement says it all. And it really doesn't make much difference whether we see 50% or 35%, the effect of either is disastrous.

Not surprising as they were a major purchaser of subprime loans. Interesting point here is that they only purchased their loans from Mortgage Bankers.

Pocono: Unfortunately I think the Federal Government has done all that they are going to do to stimulate demand for real estate. The next move is for mortgage rates to move higher to pay for all of our debt, further complicating a housing recovery.

Dennis: RealtyTrac is reporting that foreclosure filings are up 33% year over year in June. I am not going to ignore this problem.

Fernando: Well said. The banks are back in business. The consumer is going out of business,

Gita: I agree that no one has crystal ball, but there is an awful lot of evidence that points to the fact that this housing depression is far from over.

April: Agreed.

Integrity Mortgage: The economy has been pulled off a cliff by $20 trillion of government spending and loan guarantees to banks. This is unsustainable. There is little evidence that the consumers can drive the economy without government intervention.

I think prices are at least close enough to the bottom to not worry so much.

Do you have a link to that report? If so, perhaps you should post it. Thanks

Chuck: I think that statement is true for a very small number of markets.

Melissa: Here is a link to the article.

Even though Oklahoma has not had the downturn other areas have had we are still seeing a rise in foreclosures. I don't see this ending soon. I am also worried that the government which has been propping up the housing market will lose the will. We live in interesting times.

Daily more homeowners are swimming underwater. There are not enough buyers diving into the market. Who knows when this market will bottom out.

Linda Metallo, Re/max Impact, Lockport, IL.

Mark I think it's a 'local' market - not a national market. We've bottomed and prices are slightly going up - not is all areas - but the under 200 mark for sure. Multiple bids on just about every home in good condition ( and not so good as well at times).

Believing is Seeing. I'm not buying into all the negativity. I am going to continue to grow my company and be successful - shift and change - is fine by me.

Hi Mark- The last blog of yours I left a comment on, I was very honest, and tried to ask a question. The response I got from you was very condescending, and I took it quite personally. That said, I wasnt going to comment on your blogs anymore. I hope I mistook it, as I consider myself a very professional & nice person.

However, today when your blog hit, I had to comment, and this is why. I dont understand what you personally stand to gain from publishing blogs of this nature.

I agreee, that informing the public to FACT is paramount, and I am not questioning that. not in any way. What I am questioning however, is the purpose behind the blog. Are you republishing data that comes out for people who dont follow the market? Are you doing it to sell your book?? are you doing it to show people how smart you are? because I am a 20 year veteran and you made me feel like I was in 3rd grade. Are you doing it to truly help people understand? What qualifications do you have to paint yourself into an expert in this category? I AM NOT BEING SARCASTIC or rude...I WANT your opinion...I want to know, because I ASK questions BEFORE i formulate an opinion. EVERY SINGLE TIME! People in general take things WAY to personally and get defensive for no reason! SOMETIMES on a person's blog, I even ask a question I already know the answer too because the author didnt do a good job of explaining it, and it is my way of getting the question answered without making the AUTHOR look dumb. Plus, it spurns conversation on a postivie note, rather than looking at it negatively all the time. I dont mind looking a little nieve or stupid if that is what it takes!

I just dont believe in Negativity in any form. The liberal news media is just like this blog...stumping...Whether it is a valid issue or not, I think CHOOSING to move forward in a positive direction is a choice we all have to make. Yes, we ALL KNOW BY NOW that property values are declining..get over it all ready...but consider for a moment, how difficult it is for a REALTOR or LENDER to come in EVERY DAY...gettting BLASTED by negativity, and be positive in the face of a customer?? I personally believe a blog of this nature is only perpetuating negativity even more, and really serves no purpose. We have a job to do folks, and I want to feel that there is SUPPORT out there..not people shouting fire & brimstone and earth's destruction all the time.

AR is not just a portal for conversation...but in my book , it is also a portal for therapy, information, FACT, program and guideline updates, changes in the idustry...suggestions, as well as industry changes..and this blog DOES FALL into almost ALL of those categories! I think you are a very good writer, and would NOT have subscribed to you if I didnt think so! I appreciated the information you gave me privately too about writing a book! thank you.

I am truly sorry if you feel I have personally attacked you..because I really havnt. I am just as opinionated as the next person, and quite frankly generally keep my opinions to myself, or temper them a bit. It is actually blogs of this nature, and the status of situations like the one you described that make me feel every day that I should get out now. That is discouraging, not encouraging! I would like a few days of sunshine amidst this THUNDERSTORM of a business we are in.

I know my hubby who is in the manufacturing sector said about 5 years ago he didn't like what he saw. (Manufacturing has a long lead cycle for those not familiar with it). His company's business has ticked up very nicely here lately so that is a good thing for our economy...1-2 years from now.

It's going be tough going for a while longer.

Now ask me if I am surprised at this? Great post.

My only question would be: Hmmm . . . who was doing the 'forecasting' when all this paper was being traded?

They couldn't WAIT to loan money (and by 'they" I mean the lending institutions). The 'bubble' was all over the news in 2007 (beginning in some areas in '06). Nobody wanted to listen?

Now, in hindsight, they (and by 'they' I mean the lending institutions) are moaning and wrangling their hands . . . "Oh my, oh my"

Either they are IDIOTS for not being able to PREDICT/FORECAST this economic situation -- OR -- they are IDIOTS for watching it unfold.

Just say "NO" works on a lot of levels.

The fact that people are underwater does mean they're all going to default. We've been underwater on one of our rental properties for 4 years, and now we are about even-stevens, because prices have risen just a tad. I think an more interesting statistic would be how many homeowners are behind in their payments - that would be indicative of expected foreclosures.

I think we are definitely in uncharted waters and it will be hard to forecast how this sector is going to play out. In short, it doesn't appear promising over the short-term.

I read through all of these comments - and all I am going to say is I focus on now with alittle bit of prep for the future. I don't put all my eggs in any one basket. Interesting post, and from being in lending for 8 years, this doesn't surprise me.

"I just dont believe in Negativity in any form. The liberal news media is just like this blog...stumping...Whether it is a valid issue or not, I think CHOOSING to move forward in a positive direction is a choice we all have to make. Yes, we ALL KNOW BY NOW that property values are declining..get over it all ready...but consider for a moment, how difficult it is for a REALTOR or LENDER to come in EVERY DAY...gettting BLASTED by negativity, and be positive in the face of a customer?? I personally believe a blog of this nature is only perpetuating negativity even more, and really serves no purpose. We have a job to do folks, and I want to feel that there is SUPPORT out there..not people shouting fire & brimstone and earth's destruction all the time."

@One Source -

You are kidding, right? There are many aspects of life that are negative. Not "believing in negativity" doesnt change reality. W The facts are that we are in a financial crisis that hasnt existed since the Great Depression - 350 bank failures in 3 years. That is one every 3 days.

Your job is to broker loans or real estate transactions, not set the mood, or try and frame public perception.

You don't want to be blasted by negativity? How about those who make up the 9.4% unemployement rate, or the millions of families that have lost their homes?

The news is what it is. What you do with it is up to you, but sticking your fingers in your ears saying, "I'm not going to listen to this" isn't a proactive way to approach what ARE real world problems.

Mark:

As more borrowers move from the depressed categories of Alt-A, Subprime, and Option ARM loans these numbers should level off or decline. No lenders are writing Option ARM loans, and Subprime and Alt-A lending has been reduced, so these figures strike me as somewhat alarmist. As these underwater loans are foreclosed on, new, conforming loans should be taking their place and many of these problem loans should be worked out.

Great, another reason for people to not buy houses. I'm so sick of the doom and gloom. Why doesn't anyone post all the good things that are happening in the housing market?

I appreciate that CNN and Deutsche Bank's position.....I am waiting to see the first positive news program coming from CNN other than Obama walking on water every other day. I am sorry that Phoenix AZ has decided to participate in this "recession" but Roanoke VA has denied it. Have a nice day.

If that's true then I suppose I will be very busy...my neighborhood will suffer and it won't be so great for my children growing up...but new families will move in...Life always changes...

Mark,

Whether we use Deutsche Bank's or Moody's Economy.com's numbers, they are going to be somewhere around 15 to 25 million homeowners underwater. That is high. Puts lots of pressure on the economy.

I can feel a real sick physiological feeling when I read this. It is a tough road between a potential harsh reality or a negative mob mentality. But with recent governmental decisions, it remains more and more challenging to feel optimistic. I am new to the real estate profession and sometimes I question my sanity about my choice.

That is amazing. I too feel we may not have bottomed out, even if we have seen 2-3 months of housing numbers rising.

I actually find this heartening. When the media is going nuts over something, it is generally over...

Joe: I agree. The Fed will have to start raising rates soon, this will further complicate a housing recover.

Linda: Agreed. Demand, while stabilziing, is insufficient in back-stopping home values.

Anna: I am seeing this same thing too. Unfortunately home values needed to fall by 50% for it to happen.

Darin: I am sorry you took my comment that way. That was not my intent. I tried to communicate the relationship between mortgage purchase applications, pending contracts, and property sales. That was it. I was trying to be factual. There was no sarcasm.

Based on a lot of evidence it appears very clear that home values are going to continue to fall for the next two to three years. This will negatively impact millions of Americans, the banking system, and our broader economy.

The government can do something to stop this by reforming or repealing the Tax Reform Act of 1986. They are not doing it. Instead they are throwing trillions of dollars at the banks, none of which is actually helping Americans. This is why I wrote the book and why I blog, to illustrate not only a solution to this crisis, but also the hypocrisy of it all.

Melina: I think you may be right. But I also think that the economy has not felt a lot of the pain yet because of the amount of money the Fed and government has thrown at it. At some point, we need to start paying for this and that means higher taxes, higher rates, and more pain.

Jim: I'm going with, "no". :)

Carla: GREAT points. You are absolutely correct.

Joetta: Good points. According to the MBA, a record 12.07% of all mortgages are at least 30 days late. Being underwater is what I would call a systemic risk to the housing market and banking system. It is a pre-condition for default.

Chris: I agree. I also think, and I could be wrong, but things could be very complicated when the Fed starts raising rates to pay for all of this.

Steve: I agree. This doesn't change the fact that we still go to work tomorrow.

San Diego Homes: Thanks. I know that everything that is said has a context and I am going to respect that.

Jesse: That tipping point will take place beginning in 2012...assuming that unemployment has improved.

Carol: Acccording to CNBC's Jim Cramer, the housing market has already bottomed. ;)

Damon: Are there not people in Roanoke whose home values have declined?

Christianne: Life does go on.

Esko: That is the point. This is not a good forecast for the economy or the banking system. I don't think the government has planned on this..if it does happen.

An: For every crisis there is always an opportunity. Stick with your decision. :)

Erica: Agreed. While home existing home sales have finally returned to 2008 levels, foreclosure filings according to RealtyTrac are up 33% from last year.

Lane: There is still a lot of significant headwinds facing the housing market. The last of which will be when mortgage rates spike as the Fed raises rates to pay for all of this "stimulus".

This is a strong statement by the Deutsche Bank. Let hope these numbers are incorrect.

I hope that your predictions are not true. I believe that we will go through inflation within the next couple of years and those of us who remember the eighties with inflation and elevated mortgage interest rates know that a period of inflation will make things more difficult for most people, and it will definitely affect the real estate market.

Mark- Thank you for your thoughtful and professional retort & comment. I appreciate it. thanks!

Also Mark,

Regarding the person from San Diego Real Estate,

Im sorry if I seemingly diverted the message of your blog. That was not my intention. My apologies.

However my apology is to the blog author, not the commentor.

thanks..Darin

As to #29-

You dont think I care? You have no idea who I am or what I am about. I do not use this platform for spouting my political or religous beliefs! The honest truth is that I DO care. I care about alot of things. It just doesnt make sense that we continue to look back & blame , rather than see what we can do and move forward.

I dont hide behind anything. I also dont cry about things with no solution at hand. It is very easy to bitch & moan about ANYTHING without a viable solution! Im sure you blame everyone for everything and have no feeling of responsibility on your own.

I do not put my fingers in my ears...etc.. I came to AR to get away from all the bullshit negativity, not get it here too. I merely stated, and you clearly didnt understand, that I am sick of hearing it. It is EASY to soapbox negativity, let me see YOU try the opposite! Try soapboxing POSITIVITY!

I loved SAN DIEGO until today! If that city is filled with morons like you, I never want to visit again! Congrats!

Oh and thank you for telling me what my job is! I appreciate it! After 21 years, I had no idea!

"Your job is to broker loans or real estate transactions, not set the mood, or try and frame public perception."

What did you just attempt to do??

AUG

this would not surprise me one bit. hopefully people buying homes right now all understand they are making a long term investment. I make it a point to make sure my clients realize that.

it only makes sense that it's going to take a while to hit the bottom. just look how long it took us to get where we were.

Great insight and discussion here. I do think that many of the economists have been incorrect regarding the length of time of the recession and those that were predicting a depression. So I know a great deal of research has been done on the report, but it may be too stretched on one side. Many areas of the country are already starting to rebound and it may not be as bad as what is stated in that report. Time will tell !

I can certainly see this happening based on the decrease in property value based on the influx of distressed properties and the economic decline as buyers are seeking bargin basement prices. We can only hope the lenders see the the light early and make loan modifications to stop the bleeding.

I have challenged myself to not watch the news for 30. I am now on day 11 and I feel great! My intentions are to continue working as if it is a "up" market. Negativity only weighs you down.

I completely agree with "One source" in that it is easy to spell out what is wrong, but please bring solutions along with the criticism.

Mark,

Banking (pun) on analysis by Deutsche Bank's view of mortgage markets would not be the smartest move. They are one of the primary banks that led the charge into the mortgage Derivatives based on positive projections by their analysts.

Their report at best shows one possible outcome of many possible outcomes.

Mark,

When the Deutsche Bank report came out a few days ago on MSNBC, it was summarily pooh-poohed by the experts on air. (Sorry, was in my car so I can't tell you who the "experts" were)

The price in the San Francisco Bay Area has definitely bottomed. I've personally seen 15+ offers bidding on a not so great 3bed 2 bath in an okay neighborhood. As a matter of fact, go check out San Ramon area, $600K to $700K houses are disappearing in a matter of days, just like the pre-crash. So get you act in, price is going back up.

Why should owing more on your home than it is worth give people the mindset that they should walk away from their obligation. Everyday someone buys a new car and as soon as they sign on the line and drive off the lot, they now owe more on the car than it is worth. When someone buys an item at a department store and charges it to their credit card, they will never be able to resell that item for what they owe on it. The American mentality has drastically changed over the years and you can see that in our current congress. Lets keep spending even though we know there is no way we can pay for it. Someone else will be responsible for that, not me. The bottom line is these people did not have to buy that house for that amount of money. Yes, some might argue that it was the market rate for the house at the time, but was someone holding a gun to that homebuyers head that said if you don't buy this house for this amount you will be sorry? No, it was pure and simple greed on all parties involved: the buyers part, the sellers part, and the mortgage broker's part. The buyers greed was they wanted to live in this particular area because ____________ and I will pay this amount of money because I want the presitige of living here. The Sellers greed was that they were asking as much as they could because so many people were buying and willing to pay that amount of money. The Lender's greed was junk fees and fraud with the ARM loans to buyers who never should have quailified for these mortgages. I know this is supply and demand and that is why Real Estate works the way it does, but get real. Why should 2 identical houses located in 2 different areas of the country be more than 500%+ different in price?

Bottom line is if you owe more on your house than it is worth, suck it up and hold to your obligations!!!!!! If you were greedy and signed a mortgage for a ARM speculating that you would eventually be able to afford the rates as they adjusted higher, you took a gamble and lost. It is your responsibility. If you loose your job and can't afford the mortgage anymore, that happens and that is what foreclosure and bankruptcy is all about. The last resort for homeowners in trouble, not the easy way out.

Yes, this greatly affects our industry and now we have to deal with fixing what greed, corruption, and selfishness got us into, lets just hope people learn this time. But expect this again in another 21 or so years, when everyone's memory becomes selective again.

Take hope. The experts never get it right in the long run. I think inflation will kick in. I also think people buying with FHA loans now will see value in their homes as the loans are assumable at the low rates they are getting now.

Roland: I think these numbers are fairly moderate when you consider the unemployment rate, and the number of alt-a and option arms that still have yet to reset.

Sybil: I don;t see how we can't have massive inflation. The only question is when will that storm make land-fall.

John: You said it perfectly. This is not about scaring people, this is about educating them.

Christopher & Stephanie: Just as with the broader economy, due to government intervention, as bad as it is, I don't think we are seeing the "real" housing market right now.

Linda: I think loan modifications are only a temporary stop-gap measure. I don't think you can overlook the importance of actual property values in this equation.

Kim: I have written a book about my solution to this crisis. I have dedicated my blog to it. I am all about solutions.

Full Service: Credit Suisse is right behind them in terms of foreclosure predictions. There are not many different outcomes when you have millions of option arm and alt-a resets outstanding, rising unemployment, the potential for higher rates, and a home ownership bubble.

Janet: Chances are good these are the same "experts" that never was this crash coming in the first place.

Ed: I have been seeing this too. However, there is still a lot of uncertainty over the next couple of years though. Unemployment, rising rates, and loan resets just to name a few.

Stephen: I agree with you. But as I wrote, being underwater is not only a pre-condition for default (especially during a rising tide of unemployment), but it also negatively impacts the consumer moving forward.

Gene: I agree that the experts rarely get it right. Most "experts" are calling a bottom to the market today.

That's a huge percentage of the homes in this country. We're looking at 40% decline in median value here over the last 2 years. If you figure people move every 5-7 years and throw in the financing that was done in the past few years, it's amazing the number of people who are upside down.

AUG

Christine: You bring up a REALLY good point. I am not certain that being underwater accounts for the actual costs of sale. So even if you may owe what the home is worth, you still may not be able to sell because of commissions and closing costs.

Considering the home values in my State are creeping up already, and in neighboring States, I think this is mere speculation. We just need take care of our own business and leave the prognosticators to theirs.

AUG

Great post Mark, thanks for the info.

AUG

Hhhhmmm...... I think I put this in the same catagory as the Weatherman..... it's a GUESS!!! Sometimes it correct ,but more often than not..... it's wrong! Just get back to BASICS and work!

Kathy Opatka

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