Of The 11 Million Mortgage Holders Underwater Backed By $2.9 Trillion In Mortgage Debt.

Tyler Durden's picture

Submitted by Dr. Housing Bubble

Owning with no equity is just renting with no mobility. 11 million mortgage holders underwater backed by $2.9 trillion in mortgage debt. In California, close to 20 percent of mortgage holders underwater by 25 percent or more.

I think the concept of owning a home is undergoing a radical paradigm
shift.  Owning conveys a sense that you actually have tangible equity
in a property.  This has always been the connotation of ownership in our
society.  In the past it did mean something because of decent down
payment requirements that built in an equity buffer when people bought. 
Even when I attend conferences and events when someone tells me that
they purchased a home in the last few years, most of the group
automatically assumes that the person somehow has an automatic buffer of
equity in the home.  Unless you live under a rock, we all know that
over the past decade most of the popular loans required very little to nothing down
This is a radical shift to the home buying structure.  Yet psychology
is a very powerful thing when it comes to home buying and the mythology
of the American Dream which is inextricably linked up to owning a home
(for better or worse).  Yet is it factual to call it ownership if you
have no equity?  What about millions that now face having a mortgage
that is underwater?  Today I’m going to examine new housing data
provided by the Census and look at the current status of underwater
mortgage holders.

Owning with no equity is renting with no mobility

First we should take a look at the entire housing situation in America:

us housing market data

Source:  Census, CoreLogic

number of mortgage holders in the U.S. fell on a year over year basis. 
This isn’t good news because we also see the number of those with no
mortgage and owning a home falling (this number fell by 195,000).  The
number of homes with a mortgage fell by 867,000.  What happened?  What
occurred is the massive number of foreclosures.  A large number of the questionable mortgages
are falling into distress and people are still losing their homes.  The
trend is still moving along like a bullet train.  It does take years
for the mentality of people to change their entrenched views on a
strongly held belief.  After all, how can you claim to be a homeowner
and actually have no equity in your property?  The recent numbers are
startling for many reasons.

If we combine underwater homeowners
with renters, we will find that in the U.S. we have virtually the same
number of homeowners with equity as we do with renters combined with
negative equity mortgage holders.  This is a giant shift in thinking
here since the generally accepted idea is that in the U.S. we are a
large home owning nation when in fact, we are largely a debt owning
nation.  If we look at the actual nominal value of mortgage debt, the
amount of mortgage debt underwater is $2.9 trillion:

percent of underwater mortgage debt vs total mortgage debt

Source:  Federal Reserve

percent of all mortgage debt ($2.9 trillion) is underwater.  This is
incredible given that the number of underwater mortgages amounts to 22
percent of all mortgages which tells us that there are some big loans
skewing the figure here.  In fact, we can see this when the numbers are
broken down further:

negative equity mortgages

Source:  CoreLogic

the 11 million mortgages underwater, 10 percent (1.1 million) are
underwater by 25 percent or more!  These loans are setup for
foreclosures.  No market is going to recover 25 percent in the near
future.  So what will happen to these 1.1 million active underwater
mortgages?  As you can see from the chart above, you also have many in
the -5, -10, and -20 percent equity ranges as well.  In other words,
these people basically rent their home with no mobility.  If they want
to move, they would actually have to bring money to the table.  And
given the massive number of toxic mortgages
in the market, the worst of the worst underwater mortgages are in
states that Wall Street lovingly dubs “sand states” or Nevada, Arizona,
California, and Florida:

negative equity amount in top states

above chart should give you a good understanding of why some states
will have much tougher housing markets moving forward.  It is incredible
that 50 percent of all underwater mortgages in Nevada are underwater by
at least 25 percent.  In California that number is closer to 25
percent.  But run the numbers:

California housing data

California underwater mortgages:                                                            1,724,774

California underwater mortgages -25% equity or more:                               344,954

can almost guarantee that those 344,000 mortgages will default in the
next year or two.  The 1.7 million mortgages are also in this risky
pool.  So in many respects this large group here has it worse off than a
renter.  What if a new job opportunity came up in a different
location?  Or out of state?  Their mobility is completely constrained. 
Being underwater by 25 percent or more in California will likely mean
they are underwater by tens of thousands (or even hundreds of thousands)
of dollars.  Since many bought with no or low money down mortgages, it is likely that they do not have the funds to make this deal happen even if they wanted to.

The sand states also have the biggest problems moving forward:

negative equity mobility

is so bad it is literally by itself far to the right.  But California
by sheer size has the largest nominal amount of these mortgages.  In
California just by statistics you can say that every one out of three
people that tell you they are a homeowner is likely underwater.  And
every one out of five of those people is underwater by at least 25
percent.  We look at certain examples even in more select cities and we realize that this is happening all over the place
And what if home prices fall as we expect in the next year?  Then more
people will find that they are now in the position of renting their home
from the bank and not having any equity.  Isn’t that renting in a
nutshell?  Plus, what metrics are they using to claim homes being
underwater?  They are being too generous in many areas that still are
largely in bubbles.

And keep in mind in many of these higher
priced areas renting is much cheaper than buying even with multi-decade
low interest rates.  You also have to ask why do we as a nation so
heavily subsidize home buying.  For many Americans, the tax breaks from
owning a home are minimal because of already built in standard
dedications (plus the fact that they live in more moderately priced
areas – the median home price in the U.S. is roughly $179,000).  Yet
someone in California who purchases gets an overwhelmingly high subsidy
to buy (forget about the extremely wealthy that have giant advantages in
terms writing off interest and other deductions).

I am happy to
say that many more people are becoming more comfortable with the notion
of renting and will only buy if it makes sense.  You will always have
people especially here in California that will view a broke homeowner in
a better status than a wealthy renter.  Just like I’m sure many of you
know folks who lease BMWs and live in tiny apartments.  That you can’t
change.  But you also can’t change the fact that owning with no equity
is basically renting with no freedom to move without forking money over
to the bank.  Hard to think of something more American than freedom.

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MarkTwainsMustache's picture

Just announced, PNC financial services delaying sales of foreclosed homes for 30 days

FunkyMonkeyBoy's picture

Breaking news:

They tried, but stimulus found not to be able to raise the dead.


ThisIsBob's picture

When you are throwing money out of a heilocopter, what do you care who spends it, long as it is spent?

outamyeffinway's picture

The don't want the money primarily spent; they want it multiplied, then spent!!

Miles Kendig's picture

More real home stories of genius from DrHB.  Especially the nod to the fact that underwater mortgage holders form a basis for what I would call a form of capital control as the free flow of human capital remains constrained.  It had been said previously in our history that it was this specific feature of our society, namely the free flow of human capital that was a key factor contributing to the dynamics of American society and creativity. 

Jasper M's picture

Plenty of good work in this article, But I must challenge the notion that

". . . these people basically rent their home with no mobility.  If they want to move, they would actually have to bring money to the table."

Really? California, for example, is a no recourse state – all those people need to do to get mobile is Default. And they will, in droves. 

And while I am on that topic, let me dispense with the notion that the GSE's can deter this with threats of "lockout" – in a very few years, pretty much No One will be getting credit for squat, except maybe from relatives, so the threat is to reduce strategic defaulters to the status of . . . ordinary citizens. Not to mention, the threatening entities in question will shortly be Dust .

    I suspect the belabored home 'owners' of this tale will not end up being the one that suffer the most. That place will be held by the equity holders int he institutions that made the loans. 

FEDbuster's picture

I think the author is considering those "chumps" who still believe in not stiffing the banksters.  You know, live up to their obligations, protect their credit, etc...  old fashioned ideas and moral codes.

Bearster's picture

Great article, but...

...someone needs to explain to everyone that *TAKING LESS* of your money is not the same thing as a *subsidy*!

Granted, it provides a non-market-based incentive in favor of one economic decision and against another.  So I think the author's point is basically valid.  But words have meanings...

Devore's picture

So it's a subsidy, glad we got that out of the way.

Home ownership is heavily tax favored and subsidized (just two faces of the same coin) in pretty much every country on the planet.

Zombies On Toast's picture

So tell me why someone who makes the choice to go into debt to buy a house should get a deduction on their taxes when someone who rents doesn't? Is that at all fair? I call that a subsidy for the debtor.

snowball777's picture

Ooh ooh I know I know!

So we can artificially inflate the value of the assets in question (as the real estate lobby has requested)?

Oh wait. I'm sorry. Big Brother has asked that I change that to, "make the American dream affordable".

SloSquez's picture

Killer -boots on the ground analysis- Miles slammed it.  IMHO

gwar5's picture

I heard that number today of people underwater and the numbers seriously about to default on their mortgages. Those are huge.

Mercury's picture

Create a system, clearinghouse, whatever whereby certain underwater or deadbeat mortgages get converted to equity.

Not so much a foreclosure but a restructuring. It's not a perfect solution but it's better than the government waving it's wand and essentially forgiving all bad mortgage debt on a technicality.  Maybe the bank (now majority owner) would be obligated to rent to the (now minority owner) for some period under some conditions etc.

It seems reasonably fair given the clusterfuck of a situation we have here, it's similar to what happens in other default-type situations, it's a bummer for both the original home purchaser and the bank which is nicely reflective of the likelihood that they both share guilt for this mess and...what the hell else are we going to do?

snowball777's picture

Blow em up, like China!

- Helps our construction industry.

- Teaches both parties a lesson.

- We get to blow shit up!

Spalding_Smailes's picture
Get that popcorn ready ...



‘Inside Job’ Makes Oliver Stone’s Movie Look Like A Comic Strip


Larry Summers. Tim Geithner, Bob Rubin, Hank Paulson, Alan Greenspan, Ben Bernanke refused to make  voluntary appearances  in the documentary film on Wall Street’s collapse, which gets my vote for  the Oscar documentary. Sadly, documentary film makers don’t have subpoena power.  These  Masters of the Universe  were skewered anyway by a film that is a gripping, must-see narrative of the financial meltdown. Good on Sony Classic for giving the filmmakers  total control over their product. The purity of the film’s narrative is impressive.

‘Inside Job’ is a comprehensive , exhausting  series of ethical and sometimes illegal actions that casts Wall Street in a very dim light.  It is the real thing– not a fictional concoction from Hollywood like   “Wall Street-Money Never Sleeps” –which is more Barnum & Bailey fantasy  than a non-fiction-though clearly biased — documentary.  I left Lincoln Center last night inspired  by the muckraking  and furious that no-one has gone to jail. The audience definitely wanted blood and gave the director Charles Ferguson a standing ovation– more than Oliver Stone will ever get for his cinematic mess.


swamp's picture

So far in this downslide, only 29% are complete fools and morons.

wisefool's picture

They are going to end up being "foolish" and "moronic" like foxes when they are going to keep all the memories, new car every two years, trips to the carribean, etc all bought on home equity.

And they are going to get their McMansion/Condo for free.

And there will be no personal shame or professional marks for anyone involved because everyone was doing it. 

Slim's picture

Honestly, all the interest deduction does is jack up the price of houses for the average demographic looking at them.  It is instantly built into the market.  This is what happens when you mess with a market, ecosystem or any kind of system.  Unintended consequences.  Similarly generous student loan terms set by the government did not so much help people get their education but facilitated a tuition bubble as everyone believes they need a college education no matter the cost.  So you end up with a generation of people with a massive, impossible to remove debt burden put on them right from the get go.


How about we start educating our kids in the realm of financial decision making while they are in high school.  Give them the tools to think about rent/buy, saving/investing, and best use of funds.  This will avail them no matter what field they go into as their work will accrue in the form of money which will be limited and should require thoughtful management.  End the idiot culture where we test all kinds of crap and impart little to no useful real world skills.  Of course we've removed the ability to default on student debt...way to screw the kids over politicians - make no mistake, you are accountable and you've failed.

Kali's picture

I remember in high school, one of the required classes one had to take was "Business".  You learned about basic banking, savings, checking.  Learned basic tort law. That was the class that required you to learn how to type too.   I credit that class for a lot of my success in life.  Two others, home economics and auto mechanics.   The old home ec classes didn't just teach cooking and sewing, but actual home economics.  How to shop, how to create a viable domestic budget, even how to save water when doing the dishes (by hand, most people didn't have dishwashers back then).  It also taught about renting/buying home, leasing/buying cars.  I can't tell you how much money I saved in auto repairs over the last 35yrs.  I was the first woman to ever take the auto mechanics class, was restricted to boys only, til I threatened to sue the school district if they didn't let me take it.

Would be great if the schools went "back to basics" on a lot of stuff. Parents, in general, don't seem to be taking up the slack.

traderjoe's picture

Now we teach to a test - so that kids can learn how to take the standardized statewide test. But, not basic living, budgeting, self-sufficiency, etc. All a part of the FIRE indoctrination?

snowball777's picture

Doesn't seem odd to have educators teaching your kids "basic living" and "self-sufficiency"?

Is there nothing on your plate, humble parents?


Hephasteus's picture

I remember taking typing class. All I got was why are you taking this class? I'd say computers.

williambanzai7's picture

If I wanted to launch a criminal prosecution of Wall Street, you would be on my team along with Elliot

Excellent presentation

buzzsaw99's picture

The difference between renting and being under water on a mortgage is that if you rip the appliances out of a rental you get prosecuted.

grunk's picture

Not being under water or being free and clear just makes you a taxation target.

I just got tagged for a $120,000,000 school referendum to educate the spawn of the leeches in my area. They'll come out of brand new schools to pursue careers in the landscaping or powerwash industries.

Meanwhile, the mayor's dissolute nephew, Cletus, drives around town all day in a town F-250 picking his nose. 

FEDbuster's picture

No shit!  Our school district issued bonds to put astroturf on the football field and are thinking about using some of the bond money to build an indoor swiming pool facility.  In the meantime, their enrollment is shrinking and they have had to close schools that are only a few years old.

chinaguy's picture

In California just by statistics you can say that every one out of three people that tell you they are a homeowner is likely underwater -

No, one out of every three Mortgage holders are under water - so about one out of six mortage holders . Off by about 100% - Fool


tom's picture

Of course there have long been big subsidies of the US homebuilding sector. We Americans like to think we drive back and forth everyday to and from the outer edges of suburbia because of our innate love of open spaces and freedom, but the fact is the government pays us subsidies to live this way.

Since the crash, the government has been increasing those subsidies, partly to keep some semblance of a homebuilding industry alive, but more as a roundabout way of bailing out banks. The government's top priority is to keep as many people as possible paying on these underwater mortgages.

DaveyJones's picture

How does that Chicago song go? "Only the beginning"

clagr's picture

Several thoughts:

In all of these problem cases there was a requirement for about 25% private mortgage insurance. These policies do not pay off until the property is delivered with clear title. They (the PMI companies) then have the right to pay off on the full value of their policy or take the property and pay off the mortgage in full. Obviously on the scale we are talking about the second option is no option. So, think how many of the marginally under water mortgage losses will be significantly mitigated by these private mortgage insurance payouts.

The problem of delays in the foreclosure processes is it forestalls getting at any of the PMI proceeds.

I have no simpathy for lenders holding these underwater loans, nor simpathy for those who falsified documents or got no-doc, little or no down payment loans.

The real tragedies are the people who put significant money down (i.e., >10%) or had lived in a home where equity built up and they borrowed some of that build up--and the market collapse has them upside down.

The villians are the rating companies who whored themselves out so often AND the clowns in Congress who pushed Fannie and Freddie to lower credit standards time and time again in the name of spreading home ownership to the masses (who could not afford it).

I know many of you are really up in arms against the Banksters, but really, if you have the government pushing the standards down into non viable levels, only those who play that game have any business. [Gresham's Law about 'bad' money driving out all the 'good' money applies well to the lending market and the reaction of all participants.]

A perfect encapsulation of the essence of the problem was when a Republican Senator put forth an ammendment in the Financial Reform bill discussion that would have required a minimum of 5% downpayment on any loan bought by Fannie or Freddie. Senator Dodd's spluttering response was "Why if you put that in only those that can afford houses will be able to get a loan."


fajensen's picture

" ... which tells us that there are some big loans skewing the figure here. "

It could also mean that there might be many more mortgages out there than there is houses they were originally taken out on!

The securitisation process seems (almost designed?) to lose the original deeds quite often - But, when there are no deeds and the paper-trail is broken, then, why not just "copy" the same mortgage and sell it into multiple tranches of SIV's for More Profit with Less Work? I know *I* would do it, no fail!!

The whole securitisation process is all OTC, who will ever know? Of course the "cloned" mortgages will not pay any revenue stream - but that is what CDS's are made for, besides, once the loans have been recast as 'AAA' bonds, sold to suckers, the sale generating huge fees, then it becomes someone elses problem. One could also set the whole thing up via a black-box Cayman trust fund which will pay the clones for a while before blowing up.

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