"Underwater" Mortgages To Hit 48%!

[Parsad]

A couple of Deutsche Bank analysts are predicting that nearly half of U.S. homeowners with mortgages will owe more than their home's value by the end of this housing recession.  I think the number will go significantly higher from where it is today (close to 30%), but I think these two are probably way on the high end.  Cheers!

 

http://www.bloomberg.com/apps/news?pid=20603037&sid=ac9y1xr7yNhQ

[Guest Broxburnboy]

Let me see if we can spin this into a "green shoot"

 

"the rate at which homeowners are going underwater on their mortgages has slowed dramatically indicating the end of the housing recession is in sight".

 

Cheers

[Parsad]

Another article by CNNMoney covering the same report.  They have details from other analysts and their estimates.  The Deutsche Bank analysis is the most dire, but the others aren't that far off either. 

 

http://money.cnn.com/2009/08/06/real_estate/underwaterworld/index.htm

 

Behaviors have changed somewhat and I believe we will continue to see greater psychological effects on consumers from this era.  One of our partners in our U.S. fund was telling me how things are so bad in California, that when it came time for lease renewals on his commercial and residential properties, he had to throw out 20% across the board rent decreases to keep his tenants.  I asked him if his other friends with properties were doing the same.  He said "Hell yeah!  They've got no choice!"  Cheers!   

[Junto]

The key telling is how many people intend to go delinquent. This is a garbage stat and to me doesn't say anything. A vast/super majority of people will continue to pay their mortgages because prices will rebound and most people don't buy houses for the next year but for the next ten years.

 

 

[Parsad]

Most people will continue to pay their mortgage, but obviously like anything, there is a moving line where some owners will feel that it simply isn't worth it to continue paying interest on an asset that has depreciated significantly from when they bought it. 

 

If the statistic was 25%, you could probably assume that 1-2% may default.  If the statistic jumps to 50%, then reasonably you could assume that default rate jumps to 2-4%.  Most bank loan loss portfolios for mortgages are around 1-1.25%.  In these times, they've increased that to 1.5-2%.  So what happens if the loan losses climb above 3%.  Then you also have institutions that wrote more Alt-A and Option-A mortgages...the delinquincy and default rates on those will be far higher.  The statistic has meaning...the question is how high or low are the analysts from where we eventually end up.  Cheers! 

[bargainman]

I'm not sure if this is true everywhere, but for people who are underwater in a state where the mortgages are non-recourse, even if they walk away from the mortgage, in the end the bank will end up putting the difference in the loan value vs the house value on the person's 1099 at the end of the year.  So if there is a significant incentive to not walk away.  It's something that's not often talked about, but from what i've heard it is the case.  So say a mortgage is underwater by 100K and the payer walks away.  At the end of the year they'll end up with an extra 100K as reported income and owe the IRS taxes on it.  From what I've heard..

[kiwing100]

Unemployment is also a key variable - if a household loses their key source of income and do not have sufficient savings or other form of income (e.g dividends from portfolio) to help cover costs in the interim period, default on a mortgage is an increasing possibility.

[ERICOPOLY]

I'm not sure if this is true everywhere, but for people who are underwater in a state where the mortgages are non-recourse, even if they walk away from the mortgage, in the end the bank will end up putting the difference in the loan value vs the house value on the person's 1099 at the end of the year. 

 

 

No that isn't the case.  No tax is due.  That's only for recourse loans. 

 

However, you might be thinking of loan modifications -- if debt is reduced/cancelled but the owner stays in the home, then it's taxable.  So they let the person turn in the keys and walk away without tax penalty, but the person who stays in the home with forgiven debt is hit with a bill.

 

See page 11.

 

http://www.irs.gov/pub/irs-pdf/p4681.pdf

 

"If you are not personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer."