Could a Huge Drop in Underwater Mortgages Jumpstart the Economy?

Could a Huge Drop in Underwater Mortgages Jumpstart the Economy?

With more than 10 million American homeowners who are underwater on their mortgages, will the United States economy ever be able to recover?

It would be difficult to argue that the housing market is not one of the major drains on the United States economy and a huge hindrance to its growth. In fact, some would say that the housing market is the number one reason why the economy ended up in the situation that it is in and why we haven’t recovered financially as a nation yet.

Possibly the largest problem with today’s housing market is the number of underwater homes that exist. When a homeowner is “underwater,” it means that they owe more money on their home than what it is actually worth. Today, there are nearly 11 million homeowners in the United States who find themselves in this precarious position. But why do underwater mortgages create such a problem for the housing market?

For one thing, homeowners who owe more on their home than its fair market value are more likely to have their homes foreclosed. Foreclosures are a close tie with underwater mortgages when discussing the main problems with the current housing market. Another problem with underwater mortgages is that the homeowners cannot sell the home without a huge financial penalty. If they owe more than the home is currently worth, they can sell the home for whatever price they can get, but they will still be responsible for the difference between the sale of the home and the amount that is actually owed on the house.

According to an article in the Washington Post, almost 50 percent of the homeowners under the age of 40 currently owe more on their home than what it is worth. This limits their ability to relocate to other areas where jobs are better or to downsize from their current home into something that is smaller and more affordable. 

The federal government has been working overtime in trying to find viable solutions for this problem. Without a significant change in the situation, the economy is simply going to remain about the same as it is right now. One of the solutions that the Federal Reserve has come up with is to buy up to $40 billion of mortgage-backed securities in the upcoming months to help reduce lending rates. The strategy behind this is that many homeowners will refinance their homes at lower rates and this will give them more money to spend which, in turn, helps stimulate the economy.

Unfortunately, underwater homeowners do not usually have this option. It’s difficult, if not impossible, to get a refinance loan on a home for an amount that’s more than what it’s currently worth.

There seems to be some good news, though. The Washington Post reports that more than one million Americans achieved “positive equity” in the last year. That means that they are no longer underwater on their homes and they actually have equity. As a result, they have a better chance of being approved for a refinance mortgage. If many of them start refinancing, they will have extra money to spend each month because they can likely lower their monthly mortgage payments. That still leaves about 10 million American homeowners underwater, which accounts for about 22 percent of all homeowners in the nation. That’s more than four times the rate of underwater mortgages in a healthy housing market.

Until the rate of “negative equity” shrinks, there probably won’t be a huge surge in the American economy coming from the housing market. This is just the beginning of what appears to be a slow process.

Have you considered remortgaging now that rates are at historic lows?  Check the rates where you live.

Image: Image courtesy of jscreationzs at FreeDigitalPhotos.net

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