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Underwater mortgages affect 28 percent of American homes

During the first quarter of this year, the housing market continued to struggle across the country. Market values of homes fell more during the first three months of the year than in any other quarter in 2008. Home prices fell 3 percent in the first quarter 2011. Zillow Inc. says more than 28 percent of American homeowners are now underwater on their mortgage.

The numbers do not necessarily translate to the number of foreclosure proceedings filed across the country. Often a distressed homeowner can consider filing for bankruptcy protection to put a halt to a foreclosure proceeding. Bankruptcy can help many Ohio homeowners retain their home after falling behind in mortgage payments. However, a mortgage that is underwater may present a homeowner with a different analysis of their finances.

Depending upon the degree to which a mortgage is underwater, some individuals choose to surrender their home into a bankruptcy rather than lose it to foreclosure. In Ohio, the banks are permitted to seek a deficiency judgment if the proceeds of a foreclosure sale do not cover the outstanding mortgage and other specified costs. A chapter 7 bankruptcy discharges the homeowner's obligation to pay the debt and eliminates the deficiency.

Some banks do not seek a deficiency judgment due to the time and expense involved in some situations, including the two year statute of limitations in collecting on a deficiency judgment. Nonetheless, if the bank does not pursue a deficiency judgment after foreclosing on an underwater home, there may be tax consequences related to the forgiveness of the debt.

While the market value of American homes fell, foreclosures during the first quarter of this year also fell. Lenders worked on a backlog of cases that arose during the "robo-signing" scandal, according to RealtyTrac Inc. Earlier this year the real estate information service predicted foreclosure filings are likely to jump as much as 20 percent this year.

Meanwhile the raw number of American homes with negative equity reached 16.2 million in the first three months of this year. That compares to 13.1 million mortgages that were underwater in first quarter 2010, according to Zillow. Zillow Chief Economist Stan Humphries told Bloomberg the company gets "tired of telling such a grim story, but unfortunately this is the story that needs to be told."

Humphries says part of the difficulty in jump starting the housing market is the continuing unemployment rate. The Department of Labor says unemployment rose to 9 percent in April, after recording an 8.8 percent unemployment rate in March.

Source: Bloomberg, "U.S. 'Underwater' Homeowners Increase to 28 Percent, Zillow Says," John Gittleston 9 May 2011

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