Another Milepost On The Road To Oblivion

One in five mortgages are now underwater.

One in five U.S. homeowners with mortgages owe more to their lenders than their homes are worth, and the rate will increase as housing prices drop in states that have so far avoided the worst of the crisis, a new study shows.

About 8.31 million properties had negative equity at the end of the year, up 9 percent from 7.63 million at the end of September, according to the study released Wednesday by First American CoreLogic. The percentage of "underwater" borrowers rose to 20 percent from 18 percent over that time.

The study covered 43 U.S. states and Washington, D.C.

While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.

"The economic slowdown is broadening," said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. "As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country."

I fully expect this number to top 25% (one in four), if not 33% (one in three) of all mortgages. Home prices will fall another 15-20%, folks. As it does, more and more Americans will end up owing more money on their homes than the home is worth.

The problem on this is the penalty rate of the mortgage, typically this kicks in when you get far enough underwater that you owe 110% to 115% of the home value on the mortgage, such as a situation where you took out a $300,000 mortgage on a home five years ago that's now worth, say, $200,000. You still owe $250,000. If the house is worth $300,000 then you're fine, you'd actually have $50k in equity. But if it's worth $200,000 then you owe 125% of the value of the home to the bank, deep into the penalty rate of the mortgage.

It's at this point where the mortgage holder (bank or mortgage company) jacks up your mortgage payment every month until you get under that penalty rate. So, you go from a situation where you were paying your mortgage on time to the point where suddenly your mortgage is a good $1,000 or more expensive every month...in an economy that's hemorrhaging jobs, and that negative equity means you're a massive, massive credit risk.

Everything else in your life suddenly gets a lot worse through no fault of your own. These are the people Obama is trying to help refinance with his plan, the 9 million he's talking about.

It may be a lot more than 9 million who need help by the end of the year.