Negative Equity Increases the Risk of More Foreclosures

Last week Realty Trac released the latest data showing that metropolitan foreclosure were up, and warned that negative home equity could lead to even more foreclosures.

Throughout the country, metropolitan areas in California, Nevada and Florida saw a sharp increase in foreclosure activity. According to Realty Trac, 60 percent of metropolitan areas saw an increase in foreclosures, but warns the problem could get much worse.

The homes currently in the foreclosure process represent $45 billion in negative equity. This represents only a small fraction of the actual 12 million homes with underwater mortgages, representing $1.2 trillion.

“Forty million Americans chose to pay a mortgage every month and even of a small fraction of those chose not to do so, things could compound and get worse much quickly,” says Brandon Moore CEO of RealtyTrac.

Moore says that although federal intervention into the foreclosure crisis addressed some problems such as robo-signing, it did little to address the underwater problem. Under the national foreclosure settlement, banks were required to write down $17 billion in mortgage principles, but this barely scratches the surface of the negative equity problem.

Homeowners who owe more than their homes are worth sometimes decide to walk away from their homes, especially if they have been unable to refinance their loans. In many instances, those underwater must default on their loans before they are able to get a loan modification, which is easier with the help of a foreclosure attorney. For those ineligible for a loan modification, it may just be simpler to allow their homes to go back to the bank instead of struggle to pay their mortgages