Housing is still Hurting even though Underwater Mortgages have Declined

By Sari R. Updated on 8/23/2012

In the second quarter, the amount of “underwater” homeowners decreased – but these mortgages are still holding back the housing market.

A study released by Zillow last week states that underwater mortgages dropped from 15.7 million in 1Q to 15.3 million in 2Q.  While this is an encouraging sign, the problem still remains that many homeowners are stuck without equity in their homes.  The negative equity situation is not good for borrowers under 40 as almost half of them are underwater on their mortgage payments. 

Despite the fact that the negative equity situation showed signs of improvement in 2Q, it’s seen the most in places hit the worst by the housing crash.  Miami and Phoenix showed the most improvement from 1Q to 2Q, but Phoenix still has over half of its borrowers experiencing negative equity.  Miami has 43% of its borrowers with negative equity.  In terms of the worst negative equity, the Las Vegas metro area has over 68% of its borrowers underwater.

The FHFA (Federal Housing Finance Agency) said no to principal reductions as a potential solution, but is now attempting to let more borrowers take the short sale route.  Starting November 1^st, Fannie and Freddie will simplify the process for mortgage servicers to allow more short sales.  These new guidelines will let borrowers qualify for a short sale even if they haven’t faced a financial hardship – the only qualification will be if the borrower is late on the mortgage payment by over ninety days.

Economists think that these new guidelines and parameters will speed up the process significantly.  Since short sales are an effective way for borrowers to forego their negative equity, housing will benefit from these new guidelines.  In addition, shadow inventory will most likely be cleared in a way that preserves neighborhoods by ensuring properties don’t fall into disrepair through abandonment, abuse and non-occupancy.  Analysts think that the short sale relief could be short, however.  As a result of the Mortgage Debt Relief Act, borrowers haven’t had to pay taxes on debt forgiven in a sale since 2007, but the tax break is supposed to expire at the end of the year.