Download Mortgage Borrowers Underwater

Half of mortgage borrowers under 40
are underwater
By Les Christie @CNNMoneyAugust 23, 2012: 5:17 AM ET
Nearly half of homeowners under the age of 40 owe more on their home than it's worth. NEW YORK (CNNMoney)
Rising home prices helped nearly one million homeowners emerge
from being underwater on their mortgages during the second quarter.
But younger homeowners are still struggling to stay afloat, according to
report from Zillow.
The percentage of borrowers who owed more on their homes than they were worth fell to
30.9% during the second quarter, down from 31.4% three months earlier, according to Zillow.
Of the 15 million borrowers who were underwater during the quarter, a disproportionately
large number are under the age of 40, said Zillow chief economist, Stan Humphries.
Nearly half, or 48%, of all mortgage borrowers under age 40 are underwater, about twice the
rate of borrowers who are older. And that has created a sort of gridlock that could hinder the
housing market's recovery, he said.
"We hear about tight inventory in many markets, and it's clear where this is coming from," he
said. "Negative equity is trapping young people in their homes, preventing them from selling.
These homes are like the very starter homes potential first-time homebuyers are seeking."
Underwater homeowners who want to sell their home "have tough decisions to make," said
Dean Baker, the co-director of the Center for Economic and Policy Research.
They will either have pay off their mortgage in full at closing -- requiring lots of cash on hand -or undergo a short sale.
Short sales, however, entail getting the bank to forgive the difference between the amount the
home is sold for and the amount owed on the loan. If the bank won't approve it, the sale can't
go through. Even when the bank allows a short sale, the borrower takes a big hit on their credit
score -- a consequence many are reluctant to take.
Still, many homeowners just don't want to absorb the loss, said Humphries. They hang onto
their homes, hoping prices will rebound enough to put them above water again. That's been
evident in many cities in Florida and California, where underwater borrowers are common and
very few homes are for sale.
The impact on the underwater generation: All of this could carry long-term ramifications, for
both the economy and these under-40 borrowers, said Mark Zandi, chief economist of Moody's
Analytics.
Most of the young homeowners who are underwater bought at the height of the housing
market. Now, as they approach middle age, they have nothing to show for their investments.
Unless they can get a short sale, their lives will be difficult to turn around, he said. They won't
have the down payments to trade up to bigger homes or move to other markets. And if there's
any bump in the economic road, they could tumble into default because they don't have any
equity in their home to fall back on.
"For those in their late 30s, this is going to be a big problem," Zandi said.
(For more info on underwater mortgages as of 2014, including percentages by zip code and
predictions for 2015, see http://www.zillow.com/visuals/negative-equity/#4/39.98/-106.92. …Mr. B)