Negative equity, a term that means that the amount owed on all mortgages is more than the market value; also known as “underwater.” Home equity is the difference the current resale value of the home and the total mortgage debt owed. According to Zillow, 9.7 million Americans still have a problem with negative equity and are holding on to underwater homes. The Forbes article looked at the Zillow data and noted that the most troubled homes are valued at less than $100k, in the lower tier of values. This is despite the recent equity boom since the foreclosure crash of 2008.
Underwater homes where the debt owed exceeds the value cannot be sold on the regular market; cannot be refinanced to reduce interest rates; and have no cash value to the homeowners trying to wait and see when their equity may come back. Especially troubling are those whose negative equity exceeds 25% or more of the value. This begs the question: How long would you continue to pay on a home that may never fully recover from the negative equity?
12% of California homeowners still don’t have any equity in their homes. I believe that as some of those toxic mortgages begin to adjust from the teaser “interest only” terms to full repayment, we will see these owners forced into a short sale, or loan modification, if they qualify. However, with every dark cloud there is a silver lining. Bankruptcy may strip off a junior mortgage for negative equity homes. Bankruptcy may also eliminate potential income tax consequences of a short sale, if the Mortgage Debt Relief Act is not continued.