About 12 million U.S. homeowners owe more on their mortgage than their homes are worth, compared with 6.6 million at the end of last year and slightly more than 3 million at the close of 2006. That's the bad news from Mark Zandi, chief economist at Moody's Economy.com, quoted in a Reuters news report on Tuesday.
As the financial crisis hits Main Street America, nearly one in six U.S. homeowners are finding themselves in the same position, threatening the economy with a new wave of foreclosures and bankruptcies, Reuters reported.
Sinking mortgages
Zandi argues that "underwater mortgages" - when homeowners owe more on their mortgages than their homes are worth - is what's suffocating the housing market and will continue to fuel the problem. Today, more and more homeowners are finding themselves in this situation and are either being forced into foreclosure or they're walking away from their properties altogether. With the country's financial health so vulnerable, economists are worried it won't take much to put an underwater mortgage into default, thus leading to another hefty wave of foreclosures to hit the already-fragile housing market.
With current home prices likely to decline on average by another 10 percent, Zandi said there will be 14.6 million homeowners under water by September 2009. He and other economists worry that the underlying housing crisis could eventually prove much more costly to the U.S. taxpayer than the $700 billion the government has pledged to recapitalize banks and buy up distressed debt from financial institutions.
The $700 billion bailout plan has been focused on rescuing banks, and it has done little to help individuals who are struggling to pay their mortgages, apart from the HOPE NOW program, which has been under large scrutiny for not doing enough to temper the problem.
The government may have no option but to step in, especially if escalating foreclosures and a falloff in property and other tax revenues endanger municipalities and local governments and force some into bankruptcy.
Finding a solution
Both presidential candidates, Barack Obama and John McCain, have outlined plans to relieve distressed homeowners. But critics say they have been short on details, and there appears to be little consensus about how best to help homeowners who are under water. Foreclosed homes already account for 50 percent of all home sales in some markets, and the problem doesn't appear to be going away anytime soon. I think Active Rain blogger Bo Hussung said it best in a comment in one of my posts last week:
"If the lenders do not jump on the wagon, all the money in the world is not going to fix the underlying problem, and right now, [the Hope Now] program is all voluntary."
Maybe it's time for some of these mortgage lenders to play a bigger role and take some initiative, especially by rewriting bad loans. We can't expect the government to hold everyone's hand.
Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.
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