The Term Underwater is not Synonymous With Foreclosure

November 7th, 2008 | Tags: Foreclosed Houses

The term ‘underwater’ is not synonymous with ‘foreclosure’ because most of those who are underwater manage to surface and retain their houses. Underwater does not mean that the house owner is drowning. It means that the value of the house is less than the loan amount. But that is not the end of the world.

However it has to be admitted that number of underwater mortgages have been growing sharply since 2006 because of the fall in the real estate market. Some say as many as one out of six to eight house mortgages are underwater. Mostly those who bought houses in the past few years without making down payments are suffering from this malaise. Economists are worried about this because it is the first step towards foreclosure. With the house having gone down in value the borrowers do not have the incentive to cling to the houses. This results in more foreclosed houses rushing into the real estate market causing prices to further tumble. Those who still have equity on their houses prefer to sell off the houses rather than lose out totally.

The government is making all out efforts to help the foreclosure victims but the fear is that those who do not really need help will jump in or lenders will be motivated to push borrowers into foreclosures. The good news is that lenders like JP Morgan Chase and Bank of America are seriously and sincerely putting into effect plans to help those borrowers who are most at risk.

Another study has shown that in Texas, California, Massachusetts and New York going underwater does not necessarily mean default and foreclosures. A study has been made of over 100,000 underwater mortgages by the Boston Federal Reserve Bank in 1991. It was observed that only 6.4% surrendered their houses within the following three years. The majority continued as usual with mortgage payments relying on the hope that eventually the price of property would increase. According to the economists the house owners usually lost their houses only after they could not afford the payments or after losing hope in the real estate market’s ability to recover.

Generally house owners fall behind for personal reasons like loss of job, divorce or grave illness. This time foreclosures are higher than previously because the borrowers had bought houses well beyond their means and now reality is pushing them into foreclosure.