One in Four Homeowners Are Underwater

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Underwater HouseThis week home mortgage borrowers got the latest word on how much they owe compared to the actual value of their real estate – and the numbers are only getting uglier.

First American CoreLogic, a company that gathers data on millions of mortgages that have been packaged into securities for investors, reports that nearly one in four home loans nationally is now larger than the actual value of the home that backs it. In other words, one-quarter of all home loans are underwater!

In just the last three months of 2009, plummeting home prices and accumulating debts pushed 620,000 more homeowners into negative territory.By far the worst off are borrowers in Nevada, 70 percent of whom now owe more than their homes are worth. Not far behind is Arizona, where more than half of borrowers are underwater, and Florida, where 48 percent are in for more than their homes' value. New York is weathering the storm the best, with just 6.3 percent of borrowers owing more than their homes are worth. (New Yorkers who own should be thankful for their perpetual housing shortage, since it helps keep prices strong.)

For most homeowners, negative equity is just a temporary setback – like watching your stock portfolio dip below where it was when you bought it. Eventually, odds are the values will recover.

But the new numbers show that for an increasing number of homeowners, negative equity is becoming a way of life – and that means living on the edge of foreclosure. Negative equity sharply increases the odds that a homeowner will decide to "walk away" and stop making mortgage payments. And even if a homeowner is eager to avoid foreclosure, owing significantly more than a home is worth usually makes it impossible to refinance or sell the home. If that owner loses his or her job and can't find another, or needs to get out of an adjustable rate mortgage, a future foreclosure is likely.

Plummeting home values aren't the only reason homeowners are sinking more deeply into the hole. Borrowers hold hundreds of billions of dollars' worth of Option ARMs, which allow borrowers to pay less each month than it would actually cost to pay off what they owe on the mortgage so what they owe actually grows. Most borrowers with Option ARM mortgages have only been making those minimum payments. Interest rates are low right now, so some are managing to make a dent in their loan balances anyway. But as rates rise, which they inevitably will, these borrowers are poised to fall farther and farther behind – and when they fall too far below the total amount of principal they owe, their monthly payments are programmed to jump sharply.

In the coming two years, according to Amherst Securities Group, borrowers will see these payment spikes on more than $150 billion worth of Option ARM mortgages. That means that they'll be forced to start spending more each month, and start catching up with what they actually owe on the house. And if they can't? That's when the sheriff comes calling.

The good news: nearly half of all homeowners with a mortgage still have equity in their home. Which side of the picket fence are you on?
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