For almost two years, home foreclosures have swept the nation. But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It’s not that these homeowners will stop making their payments. It’s just the opposite – that they will keep doing it.
How could that be a source of future trouble? Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending – a drag on family finances, the housing market and the overall economy.
And the drag could persist for years.
Of the estimated 15 million homeowners underwater, about 7.8 million owed at least 25 percent more than their properties were worth in the first quarter of this year, according to Moody’s Analytics’ calculations of Equifax credit records and government data.
Many of these homeowners are paying much higher interest rates than the latest national average of 4.17 percent. They still have jobs and can afford to make the payments.
But they can’t refinance because they owe too much. That home equity line of credit isn’t going to happen. Even ordinary loans may be impossible to get. And selling the home at a huge loss is out of the question.
Nor can most underwater borrowers take advantage of the Treasury Department’s loan modification program, which generally requires a job loss or another kind of hardship.
In other words, they’re stuck.
Heather Hines and her husband reflect this new reality. They owe $415,000 on a Santa Rosa, Calif., town house they bought in 2004 for $430,000. When the county appraised the three-bedroom home recently, it was worth $246,000 – even less than a year earlier.
The couple had planned to move to a larger home after their two grade-school children became teenagers, but now that looks impossible. Their house needs a new roof, but they’ve put off replacing it for more than a year.
“It’s hard to think of making that investment when you’re hundreds of thousands underwater,” said Hines.
Theoretically, the Hines family could walk away – stop making the mortgage payments that consume a big part of their income. But defaulting would ruin their credit and have other negative consequences. So, she said, they’ll keep paying and hoping for the best.
Unhappily for the rest of the country, that’s not the end of the problem: The Hineses’ financial bind will ripple throughout their community and the larger economy.
The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can’t grow.
Meantime, the Hineses will keep delaying that new roof, depriving a local roofer of business. They’re unlikely to redecorate or upgrade the kitchen either, as millions of families were doing before the recession – more potential losses for local businesses, not to mention the car dealers and retailers. (article taken from The Ledger)