Fewer Homeowners Are Underwater, But Only Because They’re Being Foreclosed Upon

According to new data released today by the real estate website Zillow, fewer homeowners are underwater on their mortgage — those who owe more in payments than their house is currently worth — than were underwater last year. In 2009, 23 percent of homeowners were submerged, which has dropped to 21.5 percent today.

Of course, that still means that more than one in five homeowners is in the unenviable position of having a mortgage that’s bigger than the value of their house. And the reason for the drop isn’t that the housing sector is healing, but that “more homes entered the foreclosure process.”

“While some of the downward pressure on negative equity is coming from stabilization in home value trends, the larger factor is the enormous volume of foreclosures occurring within the stock of homes in negative equity,” said Zillow chief economist Stan Humphries. This makes sense because, as Charles Hugh Smith notes at DailyFinance, “the data confirms the common-sense expectation that there’s a direct correlation between negative equity and foreclosures”:

At this point, “there are 4.1 million homeowners with more than 50% negative equity,” meaning their homes are worth only half their mortgage.

Zillow noted that “foreclosures again reached a new peak in June, with more than one out of every 1,000 U.S. homes being foreclosed upon during the month.” According to Realty Trac, foreclosure are up in 75 percent of the country’s metro areas. “More than 3 million households are seen getting at least one foreclosure notice this year, and this record will be surpassed slightly at the peak of next year,” Realtry Trac estimated.

The foreclosure crisis is going to remain a rock on top of the economy, holding back any recovery, until it gets somewhat resolved. “It’s certainly a weight on the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “Nothing works all that well in the economy when house prices are falling.” But the programs that have come out of the Obama administration and Congress have not been on a scale commensurate with the problem.

The Home Affordable Modification Program (HAMP) has had nearly 40 percent of the borrowers who begin the program drop out, far more than successfully receive a permanent mortgage modification. And the fixes that Treasury has proposed for the program, while certainly helpful for the families that they reach, are simply too small to deal with the scope of the problem.

Last week, the Cleveland Federal Reserve Bank released research showing that the implementation of judicial loan modification in bankruptcy — known as “cram down” — is a good way to incentivize private loan modifications, as the banks suddenly risk having a judge unilaterally reduce the amount of a loan. Of course, legislation giving judges this ability has come up for a vote repeatedly in Congress, but has been defeated each time, prompting Sen. Dick Durbin (D-IL) to say that the banks “frankly, own the place.”

For more on The Forgotten Foreclosure Crisis, read today’s Progress Report.