Negative equity stats likely erroneous

negative equity
What is a short sale (infographic from lender411.com)

Before the Great Recession, there was the foreclosure crisis of 2007. That was the year that the housing bubble popped and home negative equity soared. Many home owners negotiated with their lenders to keep their homes, while others lost their homes to foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 was one of the first measures to assist distressed homeowners during the financial crisis. The Act initially was to end in 2009 but has been extended annually. The Act was recently retroactively extended for 2017.

The purpose of the Act was to address tax liabilities that distressed homeowners faced when they tried to save their homes. Because debt forgiveness is typically considered taxable income, a mortgage balance reduction via mortgage modification or short sale would have resulted in a tax bill to a homeowner who was already experiencing a financial hardship.

Recent home equity gains in the housing market should help many home sellers who would have otherwise needed a short sale. Highlights from CoreLogic’s Q4 2017 Home Equity Report (corelogic.com) indicated that about 4.9 percent of mortgaged homes have negative equity (which is a huge improvement from the almost 31 percent reported in 2012 by Zillow’s Negative Equity Report). Additionally, CoreLogic reported that the national average of home equity gained by homeowners over the past year was in excess of $15,000. However, there is disparity in home equity growth by region.

Dr. Frank Nothaft, chief economist for CoreLogic stated:

“Home-price growth has been the primary driver of home-equity wealth creation. The CoreLogic Home Price Index grew 6.2 percent during 2017, the largest calendar-year increase since 2013. Likewise, the average growth in home equity was more than $15,000 during 2017, the most in four years. Because wealth gains spur additional consumer purchases, the rise in home-equity wealth during 2017 should add more than $50 billion to U.S. consumption spending over the next two to three years.”

The National Association of Realtors testified on March 14th to the U.S. House Ways and Means Subcommittee hearing on “Post Tax Reform Evaluation of Recently Expired Tax Provisions” to make the Mortgage Forgiveness Debt Relief Act permanent. In his testimony, Realtor Barry Grooms discussed the plight of many homeowners who are surprised to find that they are upside-down on their mortgage despite national home price gains.

Grooms made an argument why the Mortgage Forgiveness Debt Relief Act should be permanent.  The Act has been retroactively extended each year in recent years leaving many short sellers “sweating it out” until the end of the year.  Part of the decision-making process for a short sale is a potential tax liability. Many home sellers take the chance that the Act will be renewed retroactively. But others do not want to take the chance of incurring a large tax liability.

Negative equity statistics are likely to be erroneous. The number of homes with negative equity is probably under-represented due to deferred maintenance.

Yes, home prices have significantly increased, which has grown home equity. But the statistics for home equity assume that all homes are worth “retail value.” The retail value of a home is the full price a home can sell. In today’s market the home must be in better-than-average to excellent condition to sell for retail value.  We don’t know the real value of any home until it’s sold.

In his testimony, Grooms touched upon a number of issues why homeowners are selling for less than they owe. However, not addressed by Groom is the number one reason why homeowners are under-water and why many home sellers need to sell via short sale. Property condition. The property condition crisis was highlighted in a February 2013 article by the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing.” The lack of updates and/or deferred maintenance in a home can significantly decrease its value.

Copyright© Dan Krell
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Home pricing strategies focal point of 2016 housing market

2016 housing market hinges on home prices.

A home selling season has not been anticipated so much by home sellers since 2013. It’s not that 2015 was a bad year for housing, because it wasn’t. It’s that many home owners who have been wanting to sell since 2010 (some because of being underwater) may be in position to make the long awaited move.

Home Prices
CoreLogic HPI (from corelogic.com)

A central reason for the reanimation of the housing market is, of course, home prices. Several major indices concur that home prices have made significant improvements through 2015. S&P/Case-Shiller U.S. National Home Price Index (spindices.com) reported a 5.2% annual increase in October, while the FHFA House Price Index (fhfa.gov) revealed a 6.1% year over year increase in October. November’s CoreLogic HPI (corelogic.com) indicated a 6.2% year over year increase and project a 5.4% year over year home price increase next November. And as much as home values had healthy gains nationwide, the local Washington DC metro region’s home annual price increases were more modest: 3.1% according to CoreLogic, and about 1.7% according to S&P/Case-Shiller.

home equity
US Home Equity Report (from corelogic.com)

Although negative equity continues to burden many home owners, the good news is that the number of underwater homes is decreasing. Although home prices continue to edge higher throughout the nation, there are many who are still underwater. According to CoreLogic’s Equity Report Q3 2015 (corelogic.com), 256,000 homes regained equity. And although 92% of mortgaged homes now have equity, about 4.1 million homes continue to be underwater. 17.6% of mortgaged homes are considered “under-equitied” (less than 20% equity), while 2.2% are “near negative equity” (less than 5% equity). 29.3% of underwater homes in the US are located in five states: Nevada, Florida, Arizona, Rhode Island, and Maryland. While 87.9% of Maryland mortgaged homes have equity, 95.5% of mortgage homes in Washington DC have equity. However, the local Washington DC metro region (DC – VA – MD) records 89.2% of mortgaged homes with equity – leaving about 10.8% of mortgaged homes underwater.

If you’re selling your home this spring, you want to capitalize the market. Although you want to benefit from the current low inventory; realize that by late spring, the housing market gets into full swing and inventory surges while your competition intensifies. Also consider the home buyer: many consider themselves savvy consumers who are money conscious and more fiscally responsible than their 2006 counterparts. Most home buyers want homes that have new or recent updates, including systems (such as HVAC and roof). There are few who are willing to make repairs or upgrade homes they are moving into; much less budget for a new roof or furnace in the first years of home ownership.

Real EstateThe sensible way to make the most of your sale is to have a plan, and pricing your home correctly should be the focal point. Don’t fall into the trap of pricing your home by comparing national price increases or worse yet – media reports of hot markets. Real estate is a local phenomenon and you should collect data within your neighborhood (the closer to your home the better). Your real estate agent should be able to produce a detailed market analysis and explain how the comps vary and correspond with each other and to your home. Consider your home’s condition and amenities. You may have to adjust your price if your home is in need “TLC.” However, updates to the kitchen, bathrooms, windows, roof, flooring, and HVAC not only add appeal but also add value.

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Growing interest in the use of eminent domain to assist underwater homeowners

UnderwaterAs interest increases to use eminent domain to assist underwater homeowners, there is opposition in Maryland.

Eminent domain has not received as much attention since the controversial decision in the 2005 case Kelo v. City of New London.  However, the issue could become a hotly debated topic in the current session of the Maryland General Assembly, since the introduction of HB1365/SB850 Real Property – Prohibition on Acquiring Mortgages or Deeds of Trust by Condemnation on February 7th; the bills propose the prohibition of acquiring mortgages through eminent domain, stating, “The use of eminent domain to acquire mortgages undermines the sanctity of the contractual relationship between a borrower and a creditor.”

The issue of using eminent domain as a vehicle to restructure underwater mortgages became a national conversation in 2012, when a few municipalities began the discussion as a means to assist underwater homeowners.  The plan caught the attention of Baltimore officials, who began a discussion last year of doing something similar.

As the housing market slowly recovers, many homeowners are emerging from a negative equity position on their homes.  According to the Zillow Negative Equity Report (zillow.com), the national negative equity rate for homeowners with a mortgage dropped to 21% during Q3 2013 (from a peak of 31.4% during Q1 2012); while 14.7% of homeowners who own their home free and clear are underwater.  Regional statistics vary depending on the strength of the local markets compared to peak home values.

The Baltimore Sun reports that about 13% of mortgages in the Baltimore- Towson area are underwater; neighborhood percentages vary, and there some with significantly more underwater homeowners (Some call on city to explore eminent domain to combat blight; Program targets underwater mortgages, By Natalie Sherman; The Baltimore Sun; November 25, 2013).

A recent industry article looks at the back story and status such plans, as well as discussing some practical considerations.  The article asserts that the concept is “far from dead,” stating that “…Local government and community leaders have legitimate concerns about their constituents, many of whom are struggling with mortgage payments on inflated loans that have made their homes unaffordable, and nearly impossible for them to sell without sufficient equity to pay off the loans…”  However, the conclusion states that such a plan at present “…appears wrought with complications and does not appear likely to lead to any significant chance of furthering its stated “public” purpose-economic development…”   The result may be “lengthy and expensive legal battles; and possible disruptions or changes to the credit industry, which decrease access to mortgages and/or increase interest rates (Dellapelle & Kestner (2013). Underwater mortgages: Can eminent domain bail them out? Real Estate Issues, 38(2), 42-47).

In response to the effort to implement eminent domain in such a way, the Federal Housing Finance Agency (FHFA.gov), the regulator and conservator of Fannie Mae and Freddie Mac as well as the regulator of the Federal Home Loan Banks asked for public input; and subsequently issued a General Counsel Memorandum on August 7th 2013:

The General Counsel Memorandum was a summary and analysis of the public comments and input regarding the use of eminent domain to restructure mortgages.  The memo discussed a number of legal issues as well as issues that relate to the FHFA.  The memo stated the pros and cons of such a plan too: Proponents claimed “…if securities have lost value, then the proper and fair valuation of mortgages backing the securities through eminent domain results in no loss to a securities investor, but permits a restructuring of a loan that would benefit homeowners and stabilize housing values…” while opponents point to “…numerous legal problems with the proposed use of eminent domain; some centered on the proper use of eminent domain itself and others on attendant constitutional issues related to taking of property or sanctity of contract. Opponents noted strong reaction of financial markets that support home financing in terms of upsetting existing contracts but as well creating an unworkable situation for providing and pricing capital based on the uncertainty of such a use of eminent domain…”  However, the conclusion states, “…there is a rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are “underwater” on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks as provided in federal law…”  

by Dan Krell ©
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of February 17, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.