Will news of more upside-down borrowers = cramdowns?
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A Deutsche Bank report this week estimates that 26% of U.S. homeowners with mortgages are underwater (owe more than their homes are worth) and predicts that plummeting house prices will push the figure to 48% by 2011.
The causes of this phenomenon are not news to many of us in Southern California: Falling home prices quickly brought values below mortgage amounts, especially for homes purchased in recent years with little money down. Deutsche Bank’s researchers point out: ‘A loan made in California in 2003 enjoyed three years of home price appreciation before prices began to fall, cushioning the impact. A loan made in September 2006 in Los Angeles has experienced nothing but depreciation.’
As negative equity rises, more foreclosures inevitably follow. When negative equity levels for individual households become extreme, however, economists and policy makers worry that more people will walk away from their houses rather than keep making payments on a home that, it appears, won’t return anything on the investment any time soon.
The latest negative equity news, combined with a federal ‘report card’ this week showing only 9% of loans eligible to be modified under the latest federal aid plan had actually been changed.
Lawmakers are likely to push for more initiatives to head off the 48% national negative equity level Deutsche Bank says is coming. House Financial Services Committee chairman Barney Frank (D-Mass.) has already warned that if more loans aren’t worked out, he’ll renew the push to allow bankruptcy judges to order reductions in mortgage amounts. Slicing a chunk of principal off mortgages would be one way to make homes ‘right-side up.’
So-called cramdowns were advocated by former Treasuy Secretary Lawrence Summers, now a top White House economic official, and are backed by a majority of Congressional Democrats.
Deutsche Bank says the Los Angeles metro area ranks 33rd in the percentage of upside-down mortgage holders, with 51% of borrowers currently underwater. Merced is in first place, with 81% of borrowers upside down.
Because Southern California home prices began falling earlier than those in other parts of the country, Deutsche Bank thinks we may be closer to the bottom. L.A. doesn’t make the list of the 33 regions predicted to have the worst negative equity in 2010.
A bunch of Florida metro areas replace California cities on the 2010 list. Fort Lauderdale tops that list, with 92% of mortgages there projected to be upside down in 2010. At the bottom of the 2010 list is Naples, Fla., with 65% of homes with mortgages projected to have negative equity -- far higher than the current Los Angeles level.
-- Peter Y. Hong