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20 Million Underwater Mortgages by 2012?

August 5th, 2010 by Marco Santarelli

More than 14 million borrowers were underwater as of Q1 2010, and with a further 10.8% decline in house prices expected relative to Q4 2009 levels, another 6 million borrowers are likely fall into negative equity by the end of 2011, according to commentary today by Deutsche Bank.

The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers may sometimes not be willing to pay the mortgage when the house has lost substantial amounts of value.  The firm noted that, even when strategic default makes economic sense, many borrowers resist on moral and social grounds, as well as from fear of legal consequences. The existence of recourse — when a lender is able to pursue a borrower’s other assets — also acts as a disincentive against strategic default.

Deutsche Bank noted 11 states are considered non-recourse — though not all explicitly forbid deficiency judgments on homes or on purchase loans.

Underwater borrowers are more likely to default in non-recourse states. The greater the negative equity, the higher the cumulative default rate. “Walk away or strategic default from a house with negative equity makes economic sense, especially in locations that have less expensive rentals,” Deutsche Bank researchers said. “Many existing academic studies model homeowners’ default decision based on the theoretical hypothesis that a borrower would exercise a default when it is in-the-money, i.e., when the borrower’s house has negative equity. Therefore, a homeowner with negative equity would default even though they can still afford to make their mortgage payments.

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  1. Comment by peter robison
    August 7th, 2010 at 9:44 am

    I think the only solution that makes sense, is for the lenders and the government to agree to recognize a reduction in values equal to the percentage drop in prices for each part of the country.This along with a corresponding reduction in the morgtage balance, will encourage homeowners to make their payments, and be in the same reltaive position with their equity. Any other solution will result in the current situation dragging on for years, and millions more Americans losing their homes.

  2. Comment by Kevin at NOPsites.com
    August 8th, 2010 at 1:22 pm

    Yes. What do you think they will do when the homeowner has a 6 figure negative equity situation and the likelihood of a larger gap 2 years from now?

    Right now the choice for many is continue to struggle paying for a losing investment or short sale/foreclosure?

    I don’t see the govt just wiping out the negative equity. Maybe a program to allow faster financial recovery for homeowners who sold through a short sale. Something to put the homeowners back in a home at a a price they can afford.

  3. Comment by Randy at usenotes.com
    August 13th, 2010 at 9:03 am

    I have an extreme objection to the concept of a “strategic default”! I fail to understand how any homeowner, real estate investor or speculator who purchased real estate during the time when real estate was appreciating, they mortgaged the property to the hilt or refinanced taking out all of their equity and now they expect a lender to take the loss…

    How would these borrowers have reacted if the lender declined to make a loan? They would have been outraged and insulted claiming the lender did something wrong by not financing them.

    NOW that the property value has declined they want the lender to take the loss despite the fact they have the financial capability to honor their commitment to repay the money they borrowed. I’m not a big fan of institutional mortgage lenders however we must consider the lender did not keep that loan. They’re not making any profit on the loan; those loans were bundled and sold on Wall Street as bond investments. Guess who those bond investors are? If you have a 401(k) or any type of retirement program or you invest in Wall Street look in the mirror… YOU are the lender! Here in lies the problem, a real estate speculator has a mortgage with Wells Fargo, Wells Fargo sold that loan that was bundled with millions of others and sold to Fidelity who manages your 401(k) now your retirement account has lost 50% of its value. You are struggling and try to sell your home however your home is not worth what you owe on it and the cycle continues.

    In my personal opinion anyone who “strategically defaults” on a mortgage they have the financial capability to continue should be sued with a deficiency judgment and have their credit file flagged as a deficiency debtor and severely constrained from obtaining mortgage financing for 10 years similar to filing bankruptcy. It is not the government’s fault, it is not the lender’s fault in fact it’s not the borrows fault but we cannot expect the borrower to walk away debt-free while the lender, Wall Street and the rest of us lose billions of dollars.

  4. Comment by Land Estate Reviews
    August 15th, 2010 at 4:38 pm

    In Australia the penalties are much harsher and it is not strategical at all

  5. Comment by Louise May
    November 25th, 2010 at 9:54 am

    I dont think that alot of people would default on purpose. Surely they will end up bankrupt? I have a property in London which I purchased just before the credit crunch. I am making the mortgage payments OK but that is not to say that when the government raise the interest rate I wont have no option but to default if I really cant find the money.

  6. Comment by wmeallian
    February 21st, 2011 at 6:12 pm

    as we have seen in the past the results of Q1 2010 and Q4 2009 . There has been a sudden decrease in the mortgages. so i expect that it would not happen the same in 2012. Looking at the current market the property investments are going to touch a new high


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