For underwater homeowners, waiting to inhale
If you're among the 17 percent of Baltimore-area borrowers underwater on a mortgage, you want to know when your home will be worth more than the debt on it.
First American CoreLogic suggests you settle in for a while:
For the typical underwater borrower in the U.S. it will take until late 2015 or early 2016 for negative equity to disappear. In certain markets, it will take another five to 10 years or even longer to return to positive equity. For example, Detroit is not projected to recover even by 2020, because of its depressed economy.
First American has forecasts for several metro areas. Baltimore isn't among them, but Washington is. The firm expects the D.C. area will emerge on the earlier side -- 2015.
Pittsburgh and Lancaster, Pa., on the other hand, are both on the 2020 end.
First American expects that the average loan balance will fall by an annual rate of 3.3 percent over the next 10 years as borrowers pay down principal, while it forecasts that prices will rise by 3 percent annually over that period. That suggests that getting your head above water is a bit more about monthly payments than about appreciation.
When I asked you all about your mortgage situation, 30 percent said your home value is a lot higher than what you owe and an additional 5 percent owned outright with no mortgage. (Always a good feeling.)
But more than half were either close to being underwater or all wet. Twenty percent of you say your home's value is a lot lower than your mortgage balance.
Economists say homeowners are more likely to walk when they get far underwater, so you'll see that I'm not changing the subject when I mention that Bank of America has agreed to lower principal amounts for Countrywide Financial borrowers. (Countrywide was acquired by Bank of America.)
It's part of an agreement with the Massachusetts attorney general, but it affects borrowers nationwide. The Boston Globe reports that the principal-reduction agreement is worth about $3 billion to roughly 45,000 struggling homeowners:
Bank of America officials said the new plan requires the lender to offer qualified borrowers reductions in their mortgages — before offering to reduce their interest rates — in an effort to help them afford their monthly payments. ...Qualified borrowers whose mortgage debt is 20 percent or more above the value of their homes are eligible for a mortgage reduction over a five-year period. Bank of America spokesman Dan Frahm said that helping these homeowners benefits the lender as well because nearly half of such distressed loans end up going into delinquency.
Banks have resisted the idea of principal reductions. Do you think this is a one-off, or will more follow Bank of America?
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Comments
Principal reductions will be the only way to curtail the strategic defaults. I just don't think the banks will do it unless forced to. As far as BofA, I think they are being forced to do this by the state. I do not believe it is voluntary. Also, the loans that will receive the principal reductions are toxic mortgages, specifically the interest only and pay option ARM. It is possible other lenders will suit only if the state sues them and they reach a settlement.
Posted by: Frank Rizzo | March 26, 2010 9:22 AM
Frank, yes, the Massachusetts attorney general pushed for this.
Posted by: Jamie Smith Hopkins | March 26, 2010 9:33 AM
Southern CA late 1980's through late 1990's peak to trough back to peak again took over 10 years. Comparing to that puts break even at 2016-2017. Adjust from there depending on whether you think this time is more severe or less severe.
Posted by: Josh Dowlut | March 26, 2010 11:45 AM
I think it is a great time for buyers to trade up for a new house. First time buyer credits and many other credits, principle writedowns, forebearance, short sales, etc may make this your last chance! Get as much loan as you can from whoever you can and buy the most expensive house out there possible for you. If you can't pay for it - no biggie. Just make sure you don't make too much money....30% of 45,000 is much less than 30% of $450,000. I say 30% b/c if you cannot pay your mortage in the future that is all you will have to pay ever!!
Posted by: Bobby Realterr | March 26, 2010 12:27 PM
The reduction in principal will only serve to keep house prices at levels higher than they should be and beyond the reach of the average wage earner.
Posted by: ted | March 26, 2010 3:53 PM
Although it keeps it at higher levels, there still may be some chance it could help the real estate market.
Posted by: Abbotsford Real estate | March 26, 2010 9:22 PM
Relief ought to be far off for two reasons:
1) These people made a commitment; and perhaps more importantly,
2) Writing down principle, tax credits, and all the rest only forestall the inevitable. Too many people paid too much money for their houses, yes, perhaps aided and abetted by sleazy underwriters or greedy banks, but also perhaps encouraged by horrendously misguided government policies. Regardless, an awful lot of wealth has evaporated and will be taken from someone's pockets. The longer the day of reckoning is put off, the longer before the economy will truly recover.
Posted by: jjjackson | March 26, 2010 10:39 PM
JJ-
Can't say I agree with you. Home ownership (or renting from a bank) is a wonderful thing. It is the American Dream (I mean Banker's Dream). Most of my friends are looking to "trade up" to larger homes so they can "own" and pay more for their abodes. Of course - they need to make a profit on their current home first to do so.....why should they have to wait 10-15 years down the road? I think the policies in place now - are hoping to help not make them have to wait. It is all monopoly money out their at this point anyway...
Posted by: Bobby Realterr | March 27, 2010 9:17 AM
Seriously, just don't break character. Stay 100% delusionally sarcastic for the full effect.
Posted by: This Bobby guy is great | March 27, 2010 12:39 PM