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Jim Klinge
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Posted by on Apr 27, 2012 in Market Conditions, Thinking of Buying? | 16 comments | Print Print

Recent Underwaters

People who bought in the last two years did so knowing that we have been in the biggest downturn in the history of Amercian real estate – if you didn’t, you should sue your realtor for not telling you!  Plus, what does it mean when he says “borrowers continue to be quickly wiped out” Are people dying from being underwater?  Pull them out of the pool! 

Hat tip to daytrip for sending this in from 

More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.

That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.

It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.

As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity – in which the outstanding loan balance exceeds the value of the home – were FHA-insured mortgages, according to CoreLogic.

Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.

Even for loans taken out in December – less than four months ago and the last month for which data is available – nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.

“The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”

The problem is not uniform around the country. In some areas, such as Washington, D.C., Miami and parts of northern California, prices are on the rise.

CoreLogic predicts the overall U.S. housing market will finally bottom out this year.

And the number of homeowners falling under water each month has decreased significantly since the peak of the financial crisis in 2008 and early 2009.

Still, Khater said, since October 2010 average home prices have fallen 7.4 percent. Overall, CoreLogic data shows that 11.1 million, or 22.8 percent, of U.S. residential properties with a mortgage are in negative equity, unchanged from the summer of 2010.

According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major U.S. metropolitan areas, U.S. home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines.

CoreLogic says a significant factor causing recent home loans to slide under water has been the availability of government-insured mortgages that require only a small down payment.

These loans, insured by the FHA, require a down payment of as little as 3.5 percent of the purchase price, providing only a small cushion of protection against a drop in home prices that could drive a borrower into negative equity.

“This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.”

The U.S. Federal Reserve, in a report delivered to Congress in January, estimated that 12 million American homeowners had negative equity. Of those, the Federal Reserve said, 3 million were borrowers with FHA-insured loans.

CoreLogic’s Khater said: “Low down payment lending in a weak housing market and weak economy begs the question whether we are setting up the FHA to have a multitude of failures down the line.”

Jason Opalka took out an FHA-backed loan on his two-bedroom property in the suburbs of Orlando, Florida, in August 2010. He was helped by Certified Mortgage Planners of Orlando, who negotiated the FHA-backed loan with the lender, Freedom Mortgage, based in New Jersey.

Opalka was refinancing another FHA-backed loan he had obtained in 2008, for $196,000, then at an interest rate of over 6 percent.

Under the refinancing, he borrowed $192,278 at an interest rate of 4.5 percent. Opalka, looking at the paperwork, is still surprised at the down payment he had to make in 2010, for a property valued at the time for little more than the loan was worth and in which he had almost no equity.

His down payment was just $3,000 – or about 1.5 percent of the total loan.

Less than two years later, local real estate estimates now value Opalka’s home at no more than $110,000.

“I’m at least $80,000 under water,” Opalka told Reuters. “We never expected to go under water. We never expected prices to fall like they have. We definitely didn’t see this coming. If I’d known this, we probably would have rented.”

Florida has seen one of the greatest drops in house values since the housing crash of 2008, 30 percent on average since October 2010 and over 50 percent since the height of the bubble in 2006, according to Case-Shiller.

FHA-insured loans were begun during the Great Depression and have traditionally been used to enable lower income Americans to get mortgages.

Historically, FHA loans accounted for 8 percent to 12 percent of the mortgage market. According to the FHA, this rose to 30 percent in late 2009 and to about 50 percent for first-time buyers at the height of the financial crisis.

FHA officials say they are deliberately reducing their market share of loans as the private sector increases its lending. The agency share of home loans is today down to about 25 percent, and will continue to fall, officials say.

Charles Coulter, a deputy assistant secretary in the U.S. Department of Housing and Urban Development, which oversees the FHA, said it was the FHA’s mission to provide affordable housing, particularly in times of financial crisis when private sector financing dries up.

“We are the only opportunity for borrowers who can’t come up with a 5, 10 or 20 percent down payment to get a home,” Coulter said.

He said the size of down payments was “an important risk parameter, it’s something we have been evaluating and a factor we will continue to evaluate.”

Coulter said beginning in 2009, FHA took a number of steps to tighten qualification standards for the government-insured loans.

In January 2009, the minimum down payment for an FHA loan rose from 3 percent to 3.5 percent, and the upfront premium for mortgage insurance has also been raised.

In October 2010, only borrowers with a credit score of 580 or above could get a loan with a 3.5 percent down payment. Those with credit scores between 500 and 579 faced a 10 percent down payment. Those with credit scores below 500 do not qualify for an FHA loan.

FHA officials say the credit score of the agency’s average borrower is 700.

A Fair Isaac Corporation score – known as FICO and the standard evaluation of creditworthiness in the United States. – of less than 620 is usually considered sub-prime.

Manny Bongiovanni, a mortgage broker in Phoenix, who has processed mainly FHA-backed loans in recent years, said most such loans were issued at a 30-year, fixed low interest rate.

“Most of the people I have dealt with have ended up paying less on their monthly mortgage payments than they were when they rented. The good thing is, we have got lots of young families into these homes.

“And if they stay put, they will eventually get equity.”


  1. “This is creating a new wave of underwater borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.”


  2. 3.5% down to borrowers with 580 credit scores? Are you kidding me?


  3. interesting, but not too surprising.
    I bought at the end of 2010 on purpose. 1. It was an incredible house 2. I went actively looking right after the govt freebate handout down payment assistance thing.

    Technically the house is ‘underwater’ based on zillow comps, which we all know is the status quo 😉
    but really dont care per se as I am planning to stay in the house for quite a while and can comfortably afford payments and have savings etc.
    Reading news like this is like watching the stock market on a daily basis to see the numbers go up and down. While a sign of the times, could be wasted energy in the end.


  4. If one have to borrow 80 % or 90% to buy a house, I think it is better to rent.


  5. Am I a bad person if I feel no sympathy for such people?
    I do appreciate folks with the thinking like @James_D though.


  6. “People who bought in the last two years did so knowing that we have been in the biggest downturn in the history of Amercian real estate – if you didn’t, you should sue your realtor for not telling you!”
    JtR – does this mean that you didn’t represent any buyers for the last 2 years or did you have a cya clause in the contract?


  7. I think my track record of disclosing the actual market conditions is well documented – just flip through the last 3,400 posts! 😆

    My buyers are in good shape – one is going to list next week, so we’ll see!


  8. The more leverage you use the more risk you have unless you’re willing to walk. If you’re willing to use a lot of leverage to buy a house then you need to be prepared to stay there a long time or take a total loss. I really don’t have a problem with leverage being available and used, but I do have a problem with people expecting a bailout when that decision doesn’t work out.


  9. I predict the same story in 2014, referencing the 2 years that preceded it.


  10. P.T. Barnum was Right.


  11. My buyers over the last two years were well aware of the risk. They bought homes they could genuinely afford and are in them for the long term. Unless you are a contractor buying a home expecting to resell it for a profit in a couple of years is foolish, and some contractors who didn’t read the market right are getting burned too.


  12. I really don’t have a problem with leverage…

    I do, as the current low interest rates and low down payment requirements are putting people into homes at outrageous income multiples. The higher the leverage, the faster losses can pile up and the harder it becomes for a homeowner to extricate themselves gracefully.

    As is typical, the government is sacrificing the long term for the short.


  13. The government encourages speculation in housing like nothing else: Interest deduction, low dp’s / high leverage, carry forward gains, and non-recourse loans. A fella needs to ask himself why this is and if he really wants to go all in.


  14. the stock market and housing market are the economy these days.


  15. With all the sweets proffered by the Government one can’t help but feel kinda foolish not to take them. poison pills?


  16. I wonder what they are going to do before the election?



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