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Could Underwater Mortgages and Foreclosures Delay Recovery?

Foreclosures have been sweeping the country for nearly two years. News of improprieties in the foreclosure process has been sweeping the news for weeks. The effect of the overall foreclosure crisis and the economic meltdown in 2007 runs deeper on the overall housing market in Ohio and across the country.

Housing prices have fallen drastically as foreclosed homes have increased the supply of available homes on the market. Millions of homes across the country are not worth the current principle balance of the mortgage on the home. Some experts believe that the overall economy will continue to suffer due to the decreased housing market for some time to come.

As this blog has reported, some homeowners who are underwater on their mortgage have sought relief under the bankruptcy code. However, millions of Americans who are underwater continue to pay the mortgage payments, and intend to continue to pay into the future.

A recent report by Moody's Analytics says that there are roughly 15 million homes are underwater on their mortgage in the nation. More than 50 percent of the homes that are encumbered beyond their market value are underwater by 25 percent or more. More than 4 million homeowners owe the mortgage lender more the twice the market value on their home.

Many of the owners that have underwater mortgage have high interest rates but cannot refinance, due to the market value. Banks will not grant a new loan without sufficient security. The government's HAMP program is generally unavailable in the absence of hardship.

Many of the homeowners that are underwater are ready in their personal lives to move into a larger home. The housing market requires homeowners to sell starter homes and move up to larger family homes in order to grow. Many homeowners cannot afford to move up due to the negative equity in the starter home.

The inability to grow the housing market bleeds into overall economy. People are servicing their underwater mortgages to the tune of billions of dollars. That money is not available in the consumer market. Private consumer spending accounts for 70 percent of the U.S. economy.

Historically it is the return of the housing market and consumer spending that has brought the American economy back to strength after a recession. Economists believe the doldrums in the housing market based, in part, upon high rates of foreclosure could have a lasting effect that will drag on the economy for some time to come.

Source: Los Angeles Times, "Millions of homeowners keep paying on underwater mortgages," Don Lee, 1 Nov 2010

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