Underwater: A loan with a balance that exceeds the current market value of the loan.
Underwater: A property with a debt larger than its current market value, which can be sold at a loss to partly cover the outstanding loan.
Solutions for Homeowners Whose Homes Are Underwater
ATTOM Data Solutions, which oversees the nation’s largest property database, has released its Q3 2017 U.S. Home Equity & Underwater Report, which reveals that at the end of Q3 there were 4.6 million properties that were seriously underwater, meaning the combined loan amount secured by the property was at least 25 percent higher than its estimated market value. This was down by more than 800,000 properties from Q2 and down by more than 1.4 million properties from Q3 2016, which is the biggest year-over-year drop since Q2 2015.
“Accelerating home price appreciation this year is increasing the velocity at which seriously underwater homeowners are recovering home equity lost during the Great Recession,” said ATTOM Data Solutions Senior Vice President Daren Blomquist. “Median home prices nationwide are up 9.4 percent so far in 2017, the fastest pace of appreciation through the first three quarters of a year since 2013. Continued home price appreciation is also helping to grow the number of equity rich homeowners across the country compared to a year ago.”
States with the highest rate of underwater properties were Louisiana (19.2 percent); Iowa (14.2 percent); Pennsylvania (14.0 percent); Mississippi (13.8 percent); and Alabama (13.7 percent).
Of the 93 metropolitan areas with a population of 500,000 or more, those with the highest rate of underwater properties were Baton Rouge, Louisiana (20.5 percent); Scranton, Pennsylvania (19.5 percent); Youngstown, Ohio (18.2 percent); New Orleans, Louisiana (17.4 percent); and Dayton, Ohio (16.4 percent).
“Several of the cities with the biggest quarterly increases in underwater properties saw a corresponding increase in share of distressed sales in the first quarter, creating a drag on overall home values, and in the case of Baton Rouge that increase in distressed sales may be in part attributable to the catastrophic flooding there in August 2016,” Blomquist said. “Across the country, the share of seriously underwater homes was higher in high-risk flood zones.”
Other cities are experiencing a turnaround when it comes to underwater properties.
“The number of Seattle homeowners who are considered “seriously underwater” continues to drop and is now at an all-time low of 3%,” said Matthew Gardner, chief economist at Windermere Real Estate. “Thanks to the strong appreciation of home prices in our area, I expect to see this number drop even further as we move into 2018. At the same time, the percentage of “equity rich” homeowners in Seattle continues to rise, reporting a remarkable 103% increase since the end of 2013.”
For homeowners who are underwater, there are several federal programs that offer solutions:
- The Home Affordable Refinance Program (HARP) affords an alternative to traditional refinancing, allowing homeowners to refinance into a new affordable, more secure mortgage.
- The Principal Reduction Alternative enables homeowners whose homes are underwater to reduce the amount they owe on their home.
- The Treasury/FHA Second Lien Program allows owners of second mortgages on their homes to participate in FHA Short Refinance with the authorization of their lender. The program enables the second mortgage to be reduced or eliminated if the total amount of the mortgage debt after refinancing does not exceed 115% of the home’s current value.
According to Raj Wadhwani, a California attorney, “If you are no longer paying, your lender can force a foreclosure sale even if your home is underwater. However, because it is underwater, there will no longer be a security interest for the amount owed that is higher than the fair market value of the home. Thus, a sale of your home would not even generate funds sufficient to pay off your first mortgage holder, which would leave the junior lienholder with nothing.
“In Chapter 13 bankruptcy, we can strip the junior lien off of your home if it wholly underwater. In order to do this, we must file and motion with the Court and provide various documents to the Court to prove that the amount owed on first mortgage is more than the fair market value of the home. After this motion is successfully granted, the loan balance will be treated the same as the other unsecured creditors and, thus, will be paid the same percentage as the other unsecured creditors (for example, credit cards or medical bills). Therefore, the debtor could wind up paying back none or only a small percentage of what was owed.”