Historically low interest rates are prompting many homeowners to take a serious look at ‘tapping’ into the nearly free money available from mortgage lenders these days. They’ve heard enough knocking at their door by banks and mortgage lenders to take a shot at refinancing their residence.
Unfortunately, many owners are finding that they are greeted by Negative Equity, a cold and unpleasant guest. Negative Equity is a relative of that holiday Grinch, Christmas Past. A recent report by Lender Processing Services (LPS) indicated that 18% of homeowners are underwater on their mortgages. The report suggested a high correlation exists between negative equity and new problem loans. Another source, reported by CNBC on non-current mortgages, indicated that 57.6 percent are underwater, and those in foreclosure are experiencing 68.3 percent negative equity.
In Nevada and Florida are two of the states with the highest percentage of underwater borrowers. Illinois is one of the states with the highest number of homes with negative equity. In Chicago, the total negative debt was $56.8 billion and the delinquency rate was 12%. Of thehomes with negative equity, 15.3% of homeowners owed more than double what their home is worth.
Meanwhile, many high-interest borrowers in negative equity are attempting to refinance. The good news is that those taking a look at refinancing are doing so at a rate four times higher than a year prior, according to Lender Processing Services. This could be due to a government initiative,The Home Affordable Refinance Program, also known as HARP, set up March 2009 to help underwater and near-underwater homeowners refinance their mortgages. Unlike the Home Affordable Modification Program (HAMP), that aimed to assist homeowners who are in danger of foreclosure, the program targets homeowners who are current on their monthly mortgage payments but are unable to refinance due to dropping home prices in the wake of the U.S. housing market correction.
More than 519,000 loans have been refinanced under HARP since the beginning of this year, more than all of the HARP refinances done in 2011. The key was a change this year that took away any limits as to how far underwater the borrower could be. Of course, 519,000 is not going to stop all of the bleeding, but for those 519,000 homeowners it surely has begun the healing process.
There is fear that if homes continue to fall in value, the recent improvements in the housing market would be in jeopardy. As noted by Herb Blecher of LPS Applied analytics, the number of problem loans increased as negative equity increased. And we all agree that unwanted house guests are not only unpleasant but sour our experience on inviting any future guests in.
Michael Hobbs, SRA, LEED GA, PahRoo Appraisal & Consultancy
Twitter @Pahroo
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