It’s no secret that the U.S. housing market has taken a beating over the last few years and still remains flat-lined when it comes to recovery, but new figures indicate the number of home owners submerged under a sea of debt is still increasing with the total number of foreclosures expected to increase over the next few years.
The continuing crisis is a result of so many homeowners having an underwater mortgage.
An underwater mortgage is when a homeowner owes more money on their mortgage than the property is worth on the open market.
While many financially prudent people see this phenomenon as poor money management – and in many cases it is – there are three main reasons the people wind up in an underwater mortgage situation.
Borrowing more than you can afford: Homeowners who have taken out second or third mortgages have found themselves in a tough situation when it comes to monthly payments.
Refinancing: Beware the lure of borrowing more money if you decide to refinance your mortgage. Lenders may offer the opportunity to borrow against the existing equity of your property. This may be financially sound if there is substantial equity involved, but can, and has, spelled disaster for many who found the property value has not increased.
Speculating: Many owners found themselves in an underwater mortgage situation after buying an expensive house assuming the property will increase in value. The sudden collapse of the housing market had the opposite effect and many expensive homes were suddenly worth a lot less than the purchase price.
So how big is this crisis?
By the end of 2011 around 22.8 percent of all residential properties had negative equity – meaning the homeowners owed more money than when they originally bought the property. This represents an increase of over six percent from the third quarter in 2011.
On top of these figures, there are another 2.5 million homeowners who have less than five percent equity in their home. These mortgage holders are considered ‘at risk’ considering they still owe at least 95 percent of their home’s value to the bank, not including of course the interest that must be paid on the loan.
Nevada tops the charts when it comes to negative equity loans with 61 percent of all mortgaged properties being underwater. This is followed by Arizona at 48 percent, Florida at 44 percent, and Michigan, with 35 percent of all mortgages owing more than the market value of a home.
These figures indicate more trouble in the future for the housing market. While some home owners will keep making monthly payments – if they can afford it – and hope for a upswing in the housing market, others will crunch some numbers and decide it is more affordable to simply walk away from the property and let the bank take it.
The result of those taking the second route will mean another round of foreclosures expected over the next couple of years.
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