Bubble-States Awash in Negative-Equity (Revisited)

Posted on December 5th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I originally posted the negative equity story below on November 10th.  I am hard to shock, but this one is worth revisiting now that analysts and the media think we are going through some major mortgage recovery. Reality could not be further from that. Remember, in bubble states negative equity is so epidemic that 60% of all homes in CA, greater than 95% in NV, 65% in AZ and 63% in FL are in or near negative equity.  Nationally, 41.6% of all home owners are at or near negative-equity and can’t refinance or sell without bringing significant cash into the transaction, which very few ever opt to do.

Rates have come down slightly for the top 5% of all borrowers who can get the best rates offered.  They are now about 5.625%, down from about 6% two weeks ago.  Now speculation is that rates will come down to 4.5%, but I am also hearing this is only for purchase loans obviously in order to help the builders – we need more homes being built, of course.  Nevertheless, in the states that need the most help with their housing markets, the amount of negative and ‘near’ negative equity will keep folks out of the mortgage market even if rates go to zero.

Additionally, for the 95% of folks who do not fit inside the tight lending base-rate box, rates are really not that low.  This is because over the past year Fannie/Freddie have significantly tightened their guidelines. Anyone who lies outside that box pays much higher rates.  I talk about it here… Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most

If it were two years ago, the analysts and media would be correct. During the bubble years everyone fit into the box because it was much larger, and when rates fell 1/2% it really did spur massive refinance activity. It is just not the case today. -Best, Mr. Mortgage


November 10th, 2008 by Mr Mortgage

One of my primary arguments that the foreclosure crisis has a long way to go has to do with to the massive amount of negative equity in the hardest hit, most populated ‘bubble states’. These are the very states that added so much to the great wealth effect.

Negative-equity is FICO-score and loan type blind.  In the new era of ‘my house is my largest investment’, most everyone feels the same way about paying into a massively depreciated asset. This is even more the case when the payment increases on an exotic-type loan such as a 2/28, Pay Option ARM or even a Prime 5/1 Interest Only.

In the hardest hit states, those not in a negative equity position have very little equity remaining given the current data. This is why the all-important move-up buyers are non-existent and over half of the homes sold are from the foreclosure stock. This is also why if rates drop, many will not benefit from refinancing.

With lending tightened to such a large degree, sizable down payments are now required to attain the best financing. Ideally, a buyer wants to extract the down payment and all other purchase expenses through the sale of the property.  However, with the median Loan-to-Value’s in the bubble states being so high there is not enough left over from the proceeds to pay a real estate agent, put a down payment on the new property and cover all of the other costs associated with moving.  People are stuck in their properties unable to move or refinance.

This recent data from Loan Performance below corroborates my research. The first chart shows the amount of negative equity in each state.  In addition, I added the top 10 foreclosure states per Realty Trac in the third column. With the exception of Illinois and Indiana, the top 10 negative equity states are the same as the top 10 foreclosures states. Nevada and Michigan top the list…a solution there may be bulldozers and gasoline.

This second chart shows the median Loan-to-Value in each state.  The top negative-equity states have the highest median Loan-to-Value ratio (littlest amount of equity).  Note that this does not include second mortgage debt so if there are seconds, the CLTV is going to take the Loan-to-Value Ratio below much higher. The housing markets within these states are frozen, as the majority home owners are unable to freely transact.

Important note – these estimates of equity are based upon Loan Performance’s proprietary House Price Index, which may or may not be accurate – home price indexing has been an impossible task for everyone to date.  The numbers could be much worse if their valuation models are off.

The charts above scream loudly about what WILL happen, as loans now considered ‘high-grade’ or ‘Prime’ begin to adjust or even borrowers in 30-year fixed rate loans who put 20% down but bought at the wrong time find it a financially prudent move to de-leverage and walk away.  We are seeing this happen today in ever increasing numbers.

Source: Inman News: Nearly 10 million homes upside down

More Mr Mortgage

68 Responses to “Bubble-States Awash in Negative-Equity (Revisited)”

  1. Homeowners redefaulting after getting aid
    Independent verification that renegociated mortgages don’t stop foreclosures…..

    Mon Dec 8, 2008 3:26pm EST
    By John Poirier and Patrick Rucker

    WASHINGTON (Reuters) – More than half of mortgages modified in a bid to avoid foreclosure fell delinquent within six months, a top U.S. banking regulator (Comptroller of the Currency John Dugan) said on Monday, casting doubt on a proposal to rewrite home loans en masse.

  2. Kind of like second marriages. If it did not work the first time….What are the odds it will work out the second time? Borrowers are unable to pay….no matter what the effing payment is lowered to because they have NO INCOME. Idiots are rampant in government and Bernanke and Paulson must share the “crown”. The president is just a Jester put in place to catch all the political flack, and was cursed with total intillectual impotentence. Jobs drive markets and not credit. This reversal must be made before any “bottom” can be called or the trend reversed.

  3. Peter:

    What do want to bet that those that have defaulted on their mods never received a principle reduction? I imagine that a large number of the mods done in the first part of the year did not result in significantly lower payments.
    “Banks like Chase, Citigroup and Bank of America have only recently put more emphasis on lowering monthly payments.” http://www.nytimes.com/2008/12/09/business/economy/09mortgage.html?ref=business
    As has been stated many times in this forum, principle reductions are necessary if mods are going to be successful.

  4. i would define near net negative equity as not having enough equity to cover a brokers commission,
    so say equity of less then 5%.

    but given this list does not include second mortgages this is going to be very bad, the numbers should be increased
    about 10 percent.

  5. Please someone help me to remember. I vaguely remember reading in the news that congress passed some bill to stop foreclosures until January 2009. Is this true? Any one have any info on this? – Thanks in advance.

  6. Hopefully, the majority of those homeowners will remain employed and not join the ranks of the foreclosed. The full effect of lost equity on consumer spending is yet to be seen.

  7. Sad when a nation we founded to fix a problem (Liberia)…has a stronger balance sheet than we have.

  8. lex-
    Fannie and Freddie are holding off on foreclosures until Januray 9. Many lenders are doing the same.

  9. That was a great post Susan – kudos. I need a couple of days to think through and respond.

    I think more than 20% of home owners are underwater by the way. The primary survey used for that number that gets thrown around is from Zillow who tracks from purchase price. This of course does not take into consideration refi’s or second mortgages. I have been told their internal HPI does not take into consideration foreclosure related sales, which are comps if they are outside of Trustee Sale which most are.

  10. Thank you and will wait for your response.

    The estimate I used is 30% of homeowners are already underwater or close to it. The cost to cure/correct/fix is 1.428 Trillion dollars for approximately 11.9 Trillion dollars of outstanding mortgages.

    Update to the above post is: The most current fiqures I could obtain is there is 12.1 Trillion Dollars of outstanding residential mortgages, which would translate into a 1.452 Trillion Dollars Loss for all investors involved.
    12.1 times 30% of homeowners x40% reduction

    FYI- Only 2.1 Trillion dollars of outstanding mortgages are held directly by the issuers, themselves.

    Assuming ALL of the 2.1 Trillion Dollars of bank held mortgages are the AFFECTED mortgages, that would mean a loss of 840 Billion Dollars.(pretty close to the TARP funds requested)

  11. CC

    Thanks for the compliment, but I disagree on a few points.

    The sub-terfuge you speak of is really the unregulated credit defaults swaps that the industry has engaged in and the allowance of overleveraging of depositors funds that have taken place.

    The reason for TARP was to cover/correct the balance sheets of the banks involved, never the homeowners. Why are there 117 troubled banks on the FDIC’s list?

    The tinkering that has been done so far has only involved protecting the financial system creating “to big to fail” entities, not the market(public). There were no conditions placed on TARP money or its participates, nor on the 7.4 TRILLION DOLLARS of THE TAYPAYERS funds and guarantees provided to the financial market. Where is the deleveraging of the financial system? Or for that matter, the accountablity?

    The housing market did not inflate without outside tinkering involved, why would you think it is decreasing and will continue to decrease without outside tinkering involved?

    My proposal acknowledges that:

    The financial industry has grown to big and needs to be downsized to reflect the current or true need of the public– without the tinkering of creating exotic loan programs that inflated housing prices that exceeded borrowers incomes.

    That the American Public has indeed over leveraged themselves and we must go thru a deleveraging period that is painful but doesn’t have to be devastating. I feel it is better to correct the majority not the minority.

    The individual deleveraging taking place and that will continue to take place is affecting the overall economy. The public’s spending ability accounts for 70% of the economy.

    If the public has less money to spend whether thru loss of income of employment, illiquid assets, lack of or little savings or unable to continue borrowing,or just being frugal, the over economy must also decrease.

    Decreases in all sectors of the economy will occur, travel, construction, retail,personal services, transportation manufacturing, education, entertainment, automobiles etc… It is a domino effect. Each decrease represents a loss of employment.

    The proposal spells out the fact, that while we need credit to be extended to small businesses, we also need for some of that 7.4 TRILLION DOLLARS to be applied to creating over 5 million jobs in various industries not just intrastructures, again majority not minority.

    The proposal does give the public more spending power whether they use that spending power in the economy or just to pay off other bills or save, is up to them.

    Is the swamp draining you refer to homeowners?
    if so which ones, we are now up to prime loans.

  12. Admin

    My apologies, if I actually read the above charts instead of glancing over them, I would have realized you are correct. The charts shows that over 41% of mortgaged homeowners are already in or close to negative equity.

    Do you have a chart that shows the number of mortgages deliquent for each state?

    My total cost to cure will have to be increased to 2.1 Trillion Dollars with the above chart in mind.

  13. Susan,

    Again, your thoughts & recommendations are noble, as is your empathy towards those homeowners in distress at this time. Unfortunate as this catastrophe is, it is necessary.

    Excerpts from your reply above along with my commentary in italics:

    “The individual deleveraging taking place and that will continue to take place is affecting the overall economy. The public’s spending ability accounts for 70% of the economy.”

    This is precisely the crux of the problem. Since when did the public’s ‘spending ability’ constitute a metric – of which the viability of an economy is measured?

    “If the public has less money to spend whether thru loss of income of employment, illiquid assets, lack of or little savings or unable to continue borrowing,or just being frugal, the over economy must also decrease.”

    Agreed. True. Inevitable. It is basic and sound. It’s called saving first, spending later. As in the way we were raised up until about the late 1970’s before borrowing and easy credit became the norm. It was also a time when credit cards were few & far between, ‘lay-away’ was a common form of purchase for the masses and economic ‘growth’ was determined by sound metrics of 5-10X earnings, high dividend yields, low debt, 20% down, cash in the bank and steady growth over time; Not wild swings, house-flipping, market volatility and sweaty palms fearing the economic impact of a dip in ‘consumer spending’.

    “Decreases in all sectors of the economy will occur, travel, construction, retail,personal services, transportation manufacturing, education, entertainment, automobiles etc… It is a domino effect. Each decrease represents a loss of employment.”

    Agreed again. I would argue however, that a majority of ‘industries’ you list are not fundamental to a strong economy – at least not to the extent that those industries have been over weighted as a source of real economic strength.

    “The proposal spells out the fact, that while we need credit to be extended to small businesses, we also need for some of that 7.4 TRILLION DOLLARS to be applied to creating over 5 million jobs in various industries not just intrastructures, again majority not minority.”

    How do we create jobs Susan? More importantly, who shall be responsible for administering my Taxes and creating those jobs – the government? (read: re-allocation of your tax dollars from one area to fund another), or the free market of ideas, innovation and private capital investment?

    “The proposal does give the public more spending power whether they use that spending power in the economy or just to pay off other bills or save, is up to them.”

    ‘Give’ the public more spending power? Look at what you are saying. From whence shall these $$ that we give our fellow citizens to ‘spend’ be created?>/i>

    There is a fundamental misunderstanding taking place here. $7.4 Trillion or $754 Trillion – it matters not. We are BROKE. These dollars must be created and distributed out of thin air – i.e., INFLATION – that you and I and at least a generation ahead of us will have to pay for.

    The bottom line here – again as I’ve mentioned before, is that very few are willing to accept and adapt to the fact that we have been living in a phony economy and beyond our means for the better part of 25 years. That phony economy was based on low interest rates and easy credit – for everyone.

    That easy credit trickled down to:

    – Construction
    – Personal services
    – Transportation
    – Travel
    – Entertainment
    – Automobiles
    – Education
    – And all the rest of the industries you mentioned – and more.

    Now that phony economy is crashing back to Earth and easy credit is over, because we are BROKE.

    Alas, In the intermediate term Susan, I don’t think you’re going to have to worry, because the new administration has made it clear that ‘deficits will have to wait’. There will be reflationary relief in the short to intermediate term, accompanied by rising inflationary costs in every aspect of day-to-day expenses, likely followed by a hyperinflationary spike and concurrent bursting of the bond-market, which will then close the final chapter on our economy, more importantly, our Liberty. Which by the way, not too many seem overly concerned about these days, but they will in due course…

    Peace –


  14. Susan, the fed fix to the dot com bubble aftermath was to lower interest rates resulting in refi’s and thus the addition of lower mortgage payments. Lower mortgage payments naturally result in more disposable income. The other form of economic stimulus was mortgage equity withdrawals (MEW). This was increased through higher home prices. The total national effect of withdrawals on disposable income was 6-9% during the bubble years.

    I have no state data on what the effect of MEW was in the stat of CA but one must assume that it was significantly higher than what the Fed applied nationally in their charts.


    Smoothing out the chart, it would appear that normal times would have a MEW rate of around 1% and above that would be economic “juice”. If you were to subtract the juice of MEW and deficit spending, we would have had falling GDP over the entire period. What this shows is that after you remove the smoke and mirrors, our economy has been in a state of decline that has been artificially masked by stimulus.

    We can continue to throw trillions at stimulus but it does not cover up the fact that the private sector is unable to show growth and keep up the appearance that the USA is some kind of economic miracle. Being that the National response will be to turn inward with deficit spending packages like Japan, we should look at what happened to Japan’s national debt in the process. Japan’s national debt to GDP went from 60% to 160% and climbing. This ratio is between Jamaica and Lebanon.

    Japan did this economic experiment while the world was not in an economic recession. We are embarking this path at the start of one.

    Can all the major economies of the world sell bonds to juice their economies at the same time? Is the world stuck at near zero % interest forever or is something going to give here? The world has been reduced to loaning itself money to survive. The world is building giant national debt bombs that will make the housing debacle look puny.

    This is the larger picture that we are looking at now. At some point in our future, the bump of an interest rate equivalent to the flicking the ash of a cigarette will set of a chain reaction of national debt defaults. While central banks had the power to pull one out of a hat to combat falling banks, when the national currency falls under question, there is no hat left to pull from.

  15. Thank you both for responding. Unfortunately I read your response Bert and lost it somehow, but I basically agreed with your thoughts, with a few exceptions. When it returns I will respond.


    Thank you for the compliment again, but you asked when the economy was related to a metric to show the viability of an economy? It started in 1929 as “Gross Domestic Product”. The
    GDP is derived from all economic data from all industries consisting of all goods and services comsumed by the public to show “economic activity” of the nation.

    If the public has less or no money to spend, the total “economic activity” for ALL industries and services decreases.

    ANY reduction of consumer spending results in a decrease in prices to compete, which results in less profits which results in less productions, which results in less jobs required, which eventually will result in an increase of prices (inflation) for those industries or services directly related to “existing” but the majority of the public has less money to spend making it harder to “exist”. What does that sound like?

    I agree with you both that we have been living in a “phony/make-believe/false” economy for a number of years due to the easy credit, that had created a “credit bubble ” and unneccesary and unheard of profits for Wall Street.===credit default swaps

    The industries I mentioned and didn’t ARE fundamental to the overall economy. Do you think it is only a specific one? Every person can not work in one specific field for an economy to work. They all must be involved, while some might be decreased or eliminated other industries must be created thru your free market ideas, innovations and private capital investments. If they are not, the government OF THE people must START them. AND IT IS OUR TAX DOLLARS, THAT WILL BE USED FOR THE MAJORITY NOT THE MINORITY, democratic society.

    Capitalism only works for as long as it benefits the majority or it becomes a dictatorship of the minority for the majority. (similiar to the financial sector’s mentality)

    A strong ecomony would be one, where the MAJORITY of the area, region, state, country had sufficient funds/income to live, save and enjoy life (without borrowing) while maintaining their personal and public expenses that did not exceed the income or revenues. Oh wait, that sounds like a budget.

    While I agree with you both, that the USA is broke. BUT WE HAVE GREAT RESOURCES AND PEOPLE.

    BUT, here is where we disagree. I don’t feel the American Public experiencing a catastrophe is necessary when it can be reduced and maintained at the current recession without involving a higher percentage of the American public then it already has.

    The loss/correction or cost to cure I speak of for the housing industry is 2.1 Trillion Dollars and it would cost the investors of the mortgages or ANY securization vehicle used to “give” the spending power (savings of the monthly payment) back to the homeowners in questioned.

    The investors invested knowing the risk that investing had not only the probability of “increased” gains but the possiblity of loses, just like any business should know, capitalism.

    I am not a mathematician but it would seem to me that if you as the investor were able to replace a defaulting or potentially defaulting principal mortgage of $500,000,(it doesn’t matter what interest rate=you are not receiving it),that you would only recieve 40-50 cents on the dollar if you foreclosed,
    AND it could be replaced with a new principal mortgage of $250,000.or better at the interest rate of 5 or 6% for a qualified homeowner in a STABLIZED housing market, the cash flow would be better even though the principal balance is reduced, which would you choose? Bottom line is profits. correct?

    I agree the economic strenght (over-weighted) of the economy has been from the “credit bubble from Wall Street to Main Street” that has also burst, at the same time of the housing bubble. That is what you were speaking of right?

    So your suggestion is to let the housing market go, without regard to anything (eventually USA bond market crisis) or anybody (American Public)?

    I on the other hand, as well as Mr. M do not agree with doing or saying nothing when we see a problem that can be reduced and/ or corrected admittedly from different points of view. That is our right for living with “Liberty”.

    I also am not a economist, but as I stated in an earlier post the proposal exceeds 40 pages:

    1- all salaries, bonuses and compensation packages of all executives, upper, middle and lower management would be reduced for any entity receiving or benefitting from a taxpayer infusion/funds, not to exceed the highest paid government employee (the president). Performance equals pay. (* this includes all government sponsored entities, not just the “bail-outs”)

    A way around this is, stock options could be given but if the company does not obtain a profit for any given year the options are returned to the company for the previous YEARS, with a delay of 5 years before being able to cash out for any given year.PERFORMANCE equals capitalism not better negotiations

    2- all dividents for all shareholders from all above companies would be halted until the taxpayer is paid back in full or until profits are really realized, if taxpayer funds were not involved.

    3-all companies in any field would have to realize that profits will be decreased due to the GDP being decreased and they would also be held to abide by the above two conditions before requesting taxpayer funds. (allowing non banks to become banks and the auto industry, with any other industry that comes for a bail out)

    4- There will be no middle class stimulus checks received since the government will be spending the stimulus for the overall ecomomy by creating or maintaining jobs.

    5-There will be no tax cuts to the middle class or extending of tax cuts/benefits to the uppper class as the government of it’s people need the revenue.

    6-The tax on savings accounts would be eliminated to encourage savings. My original proposal had a government matched dollar amount up to $1,000 annually. $1.00 for every $3.00 saved, obviously the limit was increased.

    7- Welfare or unemployment, while not taxed during receipt, will be considered a loan to the individual, it must be paid back without interest for a predetermined amount of time. This would not be initiated for 12 months from passing the new rules.

    8-Credit will be extended to small businesses from banks/government with a business plan that will show a potential of income.

    ****9- Education should play a part in the incomes of the public.

    Seriously, a factory worker who earns $75. a hour vs a doctor who earns the same, doesn’t make sense to me nor the majority of the public. ($75,x35=?x52=$136,500.)or a factory worker who earns $40. a hour vs a police officer who earns the same $72,800. annually.

    10- the pork spending in the government budget accounting for 20% of our over-all economy. It used to be the city,state and federal workers recieved alot less in SAlARY than the private sector BECAUSE of the perks. Now the pay equals or exceeds the private sector and the perks are better.

    While my proposal definately addressed the correction needed for the housing market, it also addressed some of the surrounding industries to level the playing field.

    This weekend is the “Obama Change” weekend when we get a chance to submit our suggestions and points of view, regardless of who you voted for. OUR NEXT PRESIDENT IS BARACK OBAMA, a direct result of our “liberty”.

    I invite everyone to respond or suggest ways/ideas to IMPROVE our economy, NOT JUST CRITICIZE and will record ANY SUGGESTIONS, regardless of my opinions, in a complete typed outline to submit to every senator and President -Elect Obama received by Sunday the 14th of December.

    I will post the outline on this web-site if it is agreeable to “Admin”, who I really hope responds as well.

    Peace (what a pleasant thought) and have a good night, CC and all.

  16. Susan,

    I will close out my contribution to this thread with the following. We will simply have to agree to disagree. My world-view is much different from yours. However, you asked for ideas to ‘Improve’ and not ‘Criticize’. So then, here they are:

    – Shrink the size and scope of government. From bailout programs to 3-letter acronym departments and everywhere in between, save for the what the Constitution prescribes.

    – Return our monetary standard to a Gold-backed system of currency in order to preserve the value of said currency and discourage profligate spending.

    – Encourage individuals and localities to find and implement solutions, not State/Government power.

    Unrealistic? In today’s Nanny-state climate where it’s always somebody else’ fault or where there’s always a do-gooder standing in the wings to use government as their proxy to enact ‘programs’ that will bring ‘equality’ and ‘fairness’?

    Yes indeed, unrealistic.

    So we’ll continue down this road of never-ending government intervention, bailouts, programs, intricate and complex documents – you name it – and of course, all in the name of bringing ‘fairness’ and ‘equality’. All the way to Tyranny.

    Mark my words from here and the last paragraph of my last post – you can take it to your (bankrupt) bank, with 1000% interest, that is where we are headed and You, like the rest of us – freedom lovers or nanny-state cheer leaders, will experience it in one form or another.

    Peace –


  17. Susan, there will be no successful mortgage modification program bailout. The bailout money will be spent on Unions through infrastructure programs, not homeowners mortgage principal write downs. The Unions already run Sacramento and Sacramento will opt for Unionized construction programs over homeowner bailouts. Show me a strong union town and I will show you large empty buildings. Show me a strong unionized government and I will show you a state in peril. California politicians are all standing around adding points to their green cards. The more green points the more anti business. There is nothing that can be done to save California at this point. The new taxes and regulations will strangle out business and create business and job flight. The loss of the tax base will further pressure the remaining Californians. End result more loss of business and higher vacancy rates in both residential and commercial. All remoded loans will again fall underwater and those remaining will have higher debt to disposable incomes after the new taxes come into play (AFTER TAX PURCHASING POWER). Leaving California appears to be the superior play over modification. The current tax shortfall numbers are showing about $3,100 per household at the state level. I assume that city and counties will have additional shortfalls to pass on. All these taxes taken to support government are going to further strangle businesses as there will be less disposable dollars to sling around town.

    This is a terribly bleak outlook Susan. I am not looking forward to this at all because I am stuck here. I am going to have to stick out this nightmare that is coming down the road at me.

  18. BertDilbert:

    California is not the only state affected, agreed it is ONE of the bubble states. Every state has a domino effect on every other state to some extent.

    I live in NY and we also had a 25% decrease in values from the market peak, even though it is only being reported/quoted as 8.8% for 2008.

    Mr. M and I have different “actions” to get to the same basic result, of admitting and allowing lower prices/values in the market and having qualified homeowners reside in those homes.

    While I agreed with your and others bleak outlook at the present and potential future in housing and the economy, I can not understand sitting by doing nothing, just waiting for it.

    There are many things you could do, start by calling/writing your local government officials daily, get your neighbors involved in calling them, send this web-site or others like it to them, send copies of articles to them, develop your own proposal.

    Do something, even if it is picking up the trash on a vacant property in your area. BUT even this has to be reported to the local, state and federal governmnents for acknowledgement. Let them know how big of a problem this is for Main Street, get involved.

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