Mortgage Bubble Haunts Housing Recovery
When the housing bubble burst, it left many with underwater mortgages. Yet nothing was done to deal with the debt levels on these homes. The mortgage values shown on the banks' books are still elevated beyond their true worth.
Right now we're seeing more and more people walk away from this debt. While property values fell from $20 trillion to $13 trillion when the housing bubble burst. Mortgages fell from $11.95 trillion to $11.68 trillion.
John Lounsbury, a financial and investment adviser, says home equity is now over 90 percent mortgaged. Historically our mortgage levels were 50 to 60 percent. He agrees with White that we're in a mortgage bubble that is ready to burst. In order to get back to the normal historic relationship, Lounsbury says "outstanding mortgage values would need to be about $7 trillion, which is $5 trillion below the latest level."
He says, "Banks are looking to resolve this bubble by waiting for mortgage repayment and for house prices to rise." He calls this the "extend and pretend" mode. The big question is: Will people continue to pay these mortgages as they wait for homes to rise enough in price to get back above water. In some of the hardest-hit areas that could take 10 to 20 years or longer.
The Business Insider focused on the 15 hardest hit areas, with Nevada leading the pack. In Nevada, 69.9 percent of mortgages are underwater. Arizona comes in second with 51.3 percent of mortgages underwater, and Florida is third with 47.8 percent.
Based on mortgage debt, we're becoming a country of haves and have-nots. Those stuck in homes underwater cannot move to find work in another location, even if there's no work where their home is located. Without jobs, they may have no choice but to walk away or work with their bank for a deed-in-lieu of foreclosure. In many cases, these homes are so far underwater that banks won't agree to short sales.
As more and more people realize that they have no choice but to give up their homes, the mortgage bubble will deflate. The only question left is whether the bubble will burst rapidly or continue to deflate slowly as foreclosures are resolved.
But Lounsbury thinks that some areas of the country that have not yet been hard hit by the housing meltdown are ripe for problems. For example, he thinks the New York area is a bubble waiting to happen. In fact, Keith Jurow of the Real Estate Channel thinks a housing collapse in Queens is almost certain.
As the housing bubble continues to deflate in areas that right now are not among the hardest hit, will that finally cause the mortgage bubble to burst? Will the banks be able to withstand these shocks or are we looking at another bank bailout?
Based on some reports, the banks may have pushed the worst of these mortgages onto Fannie Mae and Freddie Mac, leaving the taxpayers holding the bag for this next bubble burst. So the big question is not whether there's a mortgage bubble, but who will be left holding the bag when it bursts.
Lita Epstein has written more than 25 books, including "The 250 Questions Everyone Should Ask About Buying Foreclosures" and "The Complete Idiot's Guide to Personal Bankruptcy."
More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.
Want to learn more about home buying and home finance? If so, you won't want to miss
our online discussion with industry experts,
"What Works Now: Smart Moves When Buying a Home,"
created by AOL Real Estate in participation with Bank of America Home Loans.
Watch it now on AOL Real Estate.