Foreclosures And Equity Equations

Posted in Foreclosures, January 31st, 2008 |

The worst jam one can get into is when mortgage payments lag and the worth of the house lags behind the loan due. Few years ago the picture was rosy. House prices were appreciating and those buying a house with sub-prime mortgage funds were confident that equity of the house would enable them to pay off the dues even if nothing else did.
There were many others whose position was very risky right from the start. They took a second mortgage, known as a piggyback mortgage, covering the down payment. This made them start off with a negative equity. In 2007 more than 79% more of all the houses in the country entered foreclosures as compared to 2006. The Joint Economic Committee of Congress calculates that about 2 million will lose their houses in the forthcoming two years. Other data collecting agencies are more or less predicting on the same lines.

The worst impact is on Wayne County, Michigan with 10,622 houses having negative equity. Of these 176 have more than $100,000 negative equity. Clark County in Nevada (famed for its Las Vegas) has 4,278 houses in foreclosure with negative equity. It ranks second.
Maricopa County in Arizona followed by Riverside and Los Angeles of California are included among the top five offenders. But the colour of the foreclosure is not the same everywhere. In Wayne County 40% of all foreclosures are on units with negative equity. But those in Miami-Dade – another hard hit zone – have only 11.6% with negative equity.

There are two explanations for this. If foreclosures are high in an area with positive equity it shows that the owners are pushed into foreclosures because of high rising interests or that the valuation of the house is higher than the current market value. In Miami both arguments hold well – rising interests are pushing house owners into foreclosures and also appraised values are dropping to current market levels.
Detroit has been down for a longer period mainly because of the job market blues and Miami is just beginning to drop.

The positive equity is often an illusion when it does not take into account the costs included in selling a house like, broker’s fees, legal expenses and the like. It might well erase the positive equity figures to nil.

There are however many escape routes from the foreclosure trap – one being short selling. For this the best advice comes from bonafide housing counselors.