The Problem of Negative Equity in California Homes

August 29, 2012

While recent news of increased home sales is an encouraging sign for the housing market, the scars from the 2008 housing crisis are still evident. The increase in foreclosure activity in 2012 suggests that a number of troubled home loans are still in the market, and the wave of underwater mortgages (i.e. properties with negative equity) that have not been included in the foreclosure process threatens the market's stability.

According to a recent report by USNews.com, home loans currently subject to foreclosure carry nearly $45 billion in negative equity. However, that figure increases to $1.2 trillion when more than 12 million underwater mortgages are considered. Analysts believe that this amount is equal to 26 times the negative equity currently associated with troubled loans. Across the nation, 28 percent of all single family homes were underwater.

The trouble with negative equity is that homeowners are less likely to continue paying on an asset that continues to lose value. A home is not like a car, where people expect it to depreciate over time. As their most valuable asset, homeowners expect their home to appreciate as they pay down their mortgage. When this does not happen, homeowners are more inclined to walk away than to throw money into a wasted investment. RealtyTrac CEO Brandon Moore, explained to USNews.com that if a fraction of the 40 million Americans with mortgages decided not to pay them each month, the housing market could see additional problems, including another decline in property values.

Besides the erosion of property values, negative equity prevents buyers and sellers from moving between properties, thus slowing down the market. A house must have all active liens paid off before it may be sold or transferred. Homes with negative equity may have a number of outstanding liens that exceed the value of the property. Buyers are unwilling to purchase homes with additional liens that they are not responsible for. As such, the home doesn't sell. With thousands of properties in this predicament, the housing market is in a precarious position.

There are a number ways homeowners can move away from negative equity. Homeowners can ask lenders to adjust their mortgages to reflect the true (or current) value of the home. They may also refinance high interest second mortgages. In situations where foreclosure is imminent, bankruptcy may be an option. Through Chapter 13 bankruptcies, second mortgages or home equity lines of credit can be stripped from the property, (hence the term "lien stripping") depending on the circumstances.

If you have questions about negative equity and whether it may threaten your property, an experienced bankruptcy attorney can advise you.

Article provided by The Law Offices of James C. Shields
Visit us at www.shieldslaw.net