By Gerri Elder
A look at the number of underwater mortgages indicate that the real estate market may be pulling out of its nosedive. But, experts warn, foreclosure could continue for stressed borrowers.
A mortgage is considered “underwater” when the homeowners owe more money on their home than it is actually worth.
CNN is reporting that a third quarter residential real estate report from Zillow.com shows that just 21 percent of all single-family homeowners are underwater. That figure is down from 23 percent, as reported at the conclusion of the second quarter.
When homeowners go underwater on their mortgages, it can increase the chance that they will lose their home to foreclosure. With a drop in underwater mortgages, the hope is that there will be a corresponding drop in foreclosures. Underwater mortgages are the leading cause of foreclosures, just behind a lack of income needed to keep up with payments, according to CNN.
Zillow chief economist Stan Humphries spoke with CNN, telling them that “the decline in the percentage of homeowners with negative equity is a positive sign and is directly attributable to the stabilization of home values from the second quarter to the third.”
There may be a downside to the drop in underwater mortgages, however. Upon foreclosure, a mortgage is taken on the record as an underwater mortgage. It's possible that so many people have already had their homes foreclosed upon that the number of underwater mortgages has decreased.
A look at the number of mortgages estimated to be "seriously delinquent" reveals many more foreclosures could be waiting in the wings with little foreclosure help on the way. CNN reports that there are 1.2 to 1.5 million mortgages that are seriously delinquent, which means that they are at least 90 days late for payment. Homeowners who are seriously delinquent rarely catch up on these payments.
The continuing foreclosure problem may worsen as a result of adjustable rate mortgages that will reset in the next few months. Borrowers in these cases were for a time allowed to make minimal payments on their mortgages. In the meantime, however, these payments did not even cover the interest of the loan, and when the mortgages reset borrowers will be required to start paying down the principal. Many people will not be able to afford these payments, and more foreclosures are likely to follow.
These ARM mortgages were the cause of a great number of foreclosures earlier this year and in 2008. In the time since the housing bubble they have become less popular, but many are still on the books. According to Humphries, “foreclosure rates are ramping up again.”
Good news of late has been tempered by more troublesome news. According to CNN, the gross domestic product rose at an annualized rate of 3.5 percent during the third quarter. Mere days after that report, however, came news that the unemployment rate had risen to 10.2 percent in October of 2009. People also continue to file bankruptcy at record rates.
There are 3.63 million homes on the real estate market, which is an oversupply based on current real estate demands. These numbers might even fall short of the true numbers, which can be skewed by repossessions and such that haven’t yet been reported. The housing market may depend on these homes reentering the marketplace.
In today’s economy, good news—a drop in underwater mortgages, for example—is often tempered with less optimistic news, like the foreclosure rates that are here now and that may be around the corner.