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Underwater mortgages continue to drop

June 12, 2018

When millions of homes across the country shed huge chunks of their value before, during and even after the recession, many homeowners ended up underwater on their mortgages, owing more on their balance than their properties were worth. Since then, however, that problem has been eliminated thanks to owners continuing to pay down their balances and, more often, homes regaining most if not all of the value lost in the downturn.

"5.2 million homes are severely underwater."

There are still more than 5.2 million homes considered severely underwater at the end of the first quarter - with owners still owing at least 25 percent more than the value of their properties - but that number was down about 291,000 from the same period a year ago, according to the latest U.S. Home Equity & Underwater Report from ATTOM Data Solutions. That decline, however, was the smallest seen in any single quarter seen since the Home Equity & Underwater Report began at the start of 2013.

A closer look
While the 5.2 million severely underwater properties represent about 9.5 percent of all homes with outstanding mortgage balances, that number was down on an annual basis as well, from 9.7 percent, the report said. However, there may be some underlying reasons for the slowdown in declines, not the least of which is that many homeowners now feel better about their position and are taking out more home equity loans or simply selling their homes.

"This tapping of equity could take the form of a cash-out refinance, home equity loan or simply a home sale," said Daren Blomquist, senior vice president at ATTOM Data Solutions. "We saw the biggest quarterly drop in average homeownership tenure for homeowners who sold in the first quarter since Q4 2008, evidence that more homeowners are reaching that equity-tapping tipping point more quickly and deciding to sell."

How much equity is out there?
Right now, government data suggests there is about $14.4 trillion in home equity in the U.S. housing market, up from about $13.4 trillion at the same point in 2017, according to housing expert Kenneth Harney, writing for the Washington Post. However, less than 40 percent of that equity - some $5.4 trillion - is actually able to be tapped. This can be done with home equity loans or home equity lines of credit, but also with cash-out refinances (which may have been particularly attractive options when rates were incredibly low, but less so now).

The fact is that many owners now have plenty of options to consider that would allow them to tap the equity on their homes, which can be valuable in certain situations such as if that money is being invested into home improvement, the report said. However, some owners might be content to simply stick with their current situations and wait to accumulate even more equity at a time when home prices are, by and large, improving at well above historical rates.

"Nearly 9 in 10 never considered stopping their mortgage payments."

What about underwater owners?
Meanwhile, there are still millions of Americans dealing with either marginal or strongly negative equity, and a large portion of them continue to pay down their outstanding mortgage balances despite their properties still being at least partially underwater, according to the latest Survey of Consumer Expectations from the Federal Reserve Bank of New York. Nearly 9 in 10 people dealing with negative home equity said they have never considered stopping their mortgage payments, and another 6 percent said they considered it but never stopped.

The vast majority of those underwater owners said they kept up their payments for a fairly simple reason: They don't want to lose their homes because they like them, regardless of their equity situations, the survey found. About a quarter also said the cost of moving would be too significant for them to truly consider it and almost one-fifth said they didn't want to suffer the credit score consequences that would come with suspending their mortgage payments.

Help on the way?
Another issue for many underwater homeowners is that if they got some financial assistance to deal with that issue - such as a principal reduction - that would have traditionally been considered taxable income, meaning owners could have seen their "pay" increase by tens of thousands of dollars, according to the Cleveland Plain Dealer. However, lawmakers changed that standard with an exemption passed in 2007, when the housing market meltdown was truly heating up, but that was set to expire at the end of 2016. As part of the new federal budget, though, that exemption was extended to the 2017 tax year, and could therefore be expected to continue as a likely benefit for underwater owners for some time to come.

When homeowners are dealing with underwater homeownership, they may have more options to deal with the issue than they might otherwise expect. Consequently, it may be wise to do a bit of research and find potential avenues that can mitigate at least some of the challenges they face. That, in turn, could help them take a big step forward financially and get them back closer to positive equity once again.




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