Underwater Between a Rock and a Hard Place

Owning a home with negative equity and a higher mortgage payment than is affordable is like living between the proverbial rock and a hard place. Yet for hundreds of thousands of homeowners that’s the way things are these days.

Home Underwater

Staggering job losses, growing under employment and record bankruptcies throwing many business owners out of work contribute to the growing foreclosure crisis. Tens of thousands of former business owners and self-employed people aren’t counted in the unemployment figures.

Underwater mortgages give consumers little to be confident about when it comes to the housing market. That saving for a “rainy day” fund many homeowners were doing by owning a home has been wiped out thanks to negative equity.

The struggle endures for mortgage holders that want to escape defaulting as many choose to walk away from their mortgages by strategically defaulting. In some cases banks are even telling homeowners to “throw away the keys.”

Treasury Department Secretary Tim Geithner says the Obama administration is working on a plan to bring “fundamental reform” to the housing market. The administration’s broad strategy will be offered to Congress within several weeks.

Not since the Great Depression have housing markets been in such a grave mess. Mortgages go “upside down” fundamentally because of two reasons, a bubble that bursts or lack of demand. In the current crisis both deflation with a housing bubble that burst and lack of strong demand developed to nearly halt activity in housing sales. Too many consumers bought more than they can afford and are over-leveraged.

When a home’s value declines the amount owed on a mortgage no longer reflects the property’s real market value. Rising mortgage rates can also trigger additional problems as more mortgage holders lose confidence in the lending system and walk away from their debts.

Fundamental changes in the way people view the banking system and Congress inability to rein in excesses on Wall Street contribute to the problem. The slow legislative process to produce meaningful financial reform also contributes to a growing lack of consumer confidence.

Detroit, Michigan is by far the hardest hit housing market in the nation with 47.4% of mortgages underwater. Detroit has had a long-running history of losing population and growing joblessness, over three decades.

Rows of vacant homes left to rot in Detroit are evidence that a multitude of problems plague the community and the lending system. Unless financial reform is legislated to regulate consumer lending with controls on mortgage lending they’ll be a lot more cities like Detroit, where people are between a rock and a hard place and some homes sell for $1,000 each.

Leave a comment

Your email address will not be published. Required fields are marked *