You wouldn’t know it from the national media, but just because your home loan is underwater — meaning you owe more than the house is worth — that doesn’t mean you’re headed toward foreclosure. In fact, it may not even be a remote possibility. Here are some interesting facts that indicate “underwater” doesn’t usually equal “foreclosure.”
First, some background. According to data from First American CoreLogic, about 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a “negative equity” position in June 2009. More pessimistically, the expected percentage of “underwater” loans may rise to 48% or 25 million homes according to a study released by Deutsche Bank earlier this year.
Make no mistake, "owning" a home with a value that doesn’t meet your debt obligation is a stressful experience. And there’s no getting around the fact that homeowners with homes that are underwater are in greater jeopardy of falling into foreclosure than any other class of homeowner. That said, being underwater doesn’t guarantee a foreclosure death sentence.
Says who? Says a new study from the Boston Federal Reserve Bank. The study’s authors, Christopher L. Foote, Kristopher Gerardi and Paul S. Willen of the Boston Federal Reserve Bank examined roughly 100,300 homeowners whose mortgages were deemed underwater in Massachusetts in the last housing bubble in 1991.
Despite the falling home values, and the rising foreclosure rates, the study found that only a small portion of the 100,000 actually lost their houses, despite having negative equity in their home.