If you owe more on your mortgage than your home is worth, you have negative home equity. That often leads to foreclosure and bankruptcy. The value of home equity is shriveling, leaving growing numbers of homeowners upside down in their mortgages.
Generally speaking, negative home equity is defined by the mortgage industry as equity that adds up to less than 5 percent. That means that the homeowner still owes more than 95 percent of his mortgage balance. If you sell a home while you're that deep underwater on your loan, the closing costs and real estate brokerage fees will eat up more money that you'll make on the deal, and leave you with too little cash to pay back the mortgage.
Negative home equity woes
That's why growing numbers of Americans, fed up with owning homes that represent money-losing headaches, are just walking away from mortgage debt obligations. They're mailing the house keys to their lenders, and refusing to make any more mortgage payments. They see no point in continuing to pay for houses that carry huge amounts of negative home equity, and feel that they're better off saving their money or spending it on more rewarding purchases.
These people may have damaged their credit due to foreclosure but, with millions of homeowners suffering the same fate, a poor credit score may not be as damaging as it used to be. Mortgage lenders will eventually have to start lending again when the economy and the credit markets recover. Since many of their customers will, by then, have bad credit due to the economic collapse, banks will probably have to loosen up and agree to lend to people with flawed credit. Otherwise, they may have very few customers left to do business with in the aftermath of this foreclosure crisis.
Underwater mortgages growing
At the end of 2008, 20 percent of American homeowners were upside down on their mortgages with negative equity. But since then, millions of people have lost their jobs, and home prices have fallen even further. Now, the number of underwater homeowners is accelerating. An additional two million borrowers are headed toward that critical negative equity level, and each time home prices fall, more borrowers go underwater. In the state of Nevada, for example, the majority of people who own a home are upside down. Other foreclosure-prone states, like California and Florida, have exceptionally high numbers of negative equity, but the trend is rapidly spreading to regions that have been insulated from the problem-at least until now. Adverse factors in the general economy-not just the housing market-are pushing people over the edge. No part of the U.S. is immune to the epidemic of negative equity.
Mortgage lenders have only themselves to blame. After all, it was their no-money-down loans and exotic mortgage products that encouraged negative home equity. When this was coupled with a reckless lack of underwriting standards, the crisis of negative equity and underwater borrowers only deepened.
