Black and Buono Blog

With encouraging news about home prices finally rising and sales picking up, it's easy to think that the housing market is finally coming out of the dark ages.

But there's at least one trillion-dollar problem that lingers on: negative equity.

Though rising home values have shaved $42 billion off the nationwide total millions of Americans still owe more on their mortgages than their homes are worth, also known as being "underwater."

Just shy of 31% of American homeowners with mortgages are underwater, and nearly half of them are under 40 years old. But although a good chunk of that age group has underwater mortgages, they are some of the least likely borrowers to skip payments.

A lot has to do with how much homeowners are underwater. Though more borrowers under 40 are underwater, their loan-to-value ratios are smaller than those over 40.

The more a borrower is underwater, the more likely they are to feel that trying to pay back the loan is futile, even if they can afford the payment. That tends to result in more strategic defaults, where a borrower walks away from a property allowing it to be foreclosed on instead of paying on a mortgage larger than the home's value.

Another reason simply has to with a borrower's stage in life. Those under 40 are more likely to have children still living at home, and many are hesitant to disrupt family life despite having an underwater mortgage. Also, younger folks may be less likely to have more expensive or multiple houses, making them less precariously stretched when it comes to finances.

But economists point out that high levels of negative equity continue to stunt a deeper recovery in the housing market. Would-be sellers are trapped in properties because they can't break even on their mortgages. That in turn has tightened the supply of homes for sale and kept pent-up demand for housing at bay.

If you are underwater in your home and need assistance, contact Black and Buono.

US News

...by Anthony Buono

A strategic default in terms of home ownership is the decision by a homeowner to stop making mortgage payments (to default) on their debt despite having the financial ability to make the payments.

This is particularly associated with residential mortgages.  It usually occurs after a substantial drop in the house's price when the debt owed is much greater than the value of the property, meaning negative equity or underwater, and is expected to remain so for the foreseeable future.

Homeowners who walk away in strategic defaults are not necessarily the ones most 'underwater.'

Credit scores are designed to predict the risk of default. But when it comes to strategic default -- which is when people who can afford to pay their mortgages don't, usually because their homes are worth less than their loans -- analysts have noticed a reverse phenomenon: Good credit scores can indicate a higher likelihood that a homeowner will voluntarily bail on a home loan.

Today, somewhere around one in three mortgage defaults is strategic.

"People who make the decision to strategically default tend to be more savvy," said Andrew Jennings, the chief analytics officer for Fair Isaac, the company that created the leading FICO credit score. "Most of the people who walk away from a mortgage are saying, 'This is not a contract that makes sense anymore.'"

FICO analysts looked at a population of borrowers who started out current on all their bills but wound up 90 days or more behind on their mortgages.

The people who stayed current on their other bills but stopped paying their mortgages had better initial credit scores and lower credit balances, and were less likely to have gone over their limits -- all signs of responsible money management.

Intriguingly, one factor that wasn't a strong predictor of strategic default was how far "underwater" these homeowners were. What mattered far more was the future trajectory of home prices.

Another point: research indicated that 40% of strategic defaulters lived in "recourse" states, where they could face lawsuits over debts that remained after foreclosure. It's not clear whether defaulters didn't understand the risks or whether they had bet that their lenders wouldn't come after them.

“We feel that people take this action without fully understanding the consequences," Jennings said. The message coming from them is that if enough people take this action, there is no way the banks are going to come after us, and even if they do, we can declare bankruptcy."

Strategic default dumps the traditional "payment hierarchy" on its head. In the past, lenders could count on people skipping other payments first before they reneged on their mortgages. And, the trend seems to be growing. A study at the University of Chicago found that 35% of mortgage defaults in the U.S. were strategic in September 2010, compared with 26% in March 2009.

If you're thinking about skipping out on your mortgage, here's what you need to keep in mind:

• The foreclosure process varies by state and by lender. Don't count on other people's experiences to predict your own.
• Your risk varies. Some states prohibit lenders from suing you for mortgage balances you owe on a primary residence. Massachusetts is NOT one of those states.  Massachusetts allows the lawsuits. Before you stop paying, talk to a bankruptcy attorney who is familiar with the credit and real-estate laws in your state as well as industry practices.
• Understand what a foreclosure does to your credit. The higher your credit scores, the longer they will take to heal.

By Anthony Buono

If you are in a position where you are underwater on your home, you are not alone in Massachusetts. Unfortunately, 17% of homeowners are underwater in Massachusetts. If you think you need to sell your home, and you believe you will have to sell at a loss, it is important to solicit the help of a real estate attorney. There may be ways to keep you in your home. But, if you think you are in financial trouble, the time to act is now.

Losses Rise as the Boston Housing Market Tumbles

Greater Boston’s housing market has tumbled back to 2002’s pricing levels, and one out of every three homes being sold is resulting in a loss.

The price declines have left approximately 17 percent of the Massachusetts homeowners underwater, that is, holding a mortgage balance that exceeds a home’s value. Greater Boston’s “underwater” rate — essentially one in six homeowners — is up from the 14 percent of Massachusetts homeowners who were underwater at the end of 2010 and is far ahead of the 11.7 percent mark set a year earlier. The national negative-equity rate is 28.4 percent.

The local housing data was included in a national report published Monday by Zillow.com.

According to the Zillow analysis, Boston-area home values were down 5.3 percent on a year-over-year basis as of March 31 and had tumbled 2.6 percent from the end of 2010. The region’s average single-family home value was $305,800 at the end of the quarter, versus the national average of $169,600. Pricing averages are derived from Zillow’s Home Value Index and include all homes, and “not just those that sold in a particular period.”

Boston-area prices have slipped 23.2 percent since their peak in July 2005 and are back to where they were nearly a decade ago in June 2002.

The trends appear to be forcing more homeowners to sell at a loss. According to Zillow, 33.9 percent of all first-quarter sales went for less than their prior purchase prices. That was up roughly 3 percent on both a year-over-year basis as well as a quarter-to-quarter basis. Nationally, 37.7 percent of all home sales were at a loss in the first quarter — a new record.

Original article-Boston Business Journal by Craig M. Douglas

...By Kiley Black

Negative equity is the term that describes the situation of having a home that is worth less than your mortgage. In layman terms, you are upside down on your home. Negative Equity is the result of the boom and bust cycle of the housing market. If you find yourself in this situation, you have a few options which consist of a short sale, foreclosure, loan modification or a deed in lieu of foreclosure. If you do not have the resources to sell your property, meaning you do not have enough money in the bank to make up the difference between what is owed and what you can sell the home for, your options are more limited. However, if you have the resources, if you have money in the bank, you can go the closing as a seller with money. In this way your credit can remain unaffected.

A loan modification is when, as the homeowner, you find yourself unable to make your monthly loan payment. You can work with your lender to get the loan modified, or lessened. This does affect your credit rating. Loan modifications show up as late payments, but you will be able to stay in your home.

A short sale is when your lender agrees to accept less than they are owed for an outstanding mortgage loan. A bank would much rather agree to a Short Sale than foreclose on a home.
No matter your situation when you have an upside down mortgage, you need a real estate attorney who is well versed in these procedures. Contact Black and Buono today.