According to an article on the Wall Street Journal website, a recent study released by the real estate data firm CoreLogic Inc. shows that if you have a second mortgage on your home, you are much more likely to be an underwater borrower. Nearly 40% of all underwater mortgaged homes are those that carry more than one loan. This is yet another catastrophe adding to the devastated housing market.
In contrast, home owners with just one mortgage are much less likely to be underwater. Only about 18% of homeowners who only have only one loan are underwater. Additionally, the data also shows that those who carry 2nd mortgages have a higher negative equity average of about $83,000, where negative equity in single mortgage homes averaged considerably less at $52,000.
One area the study did not cover was a practice often seen during the housing boom often called cash out equity. This is when a homeowner would refinance their home and then cash out the equity that was available. Data from the Federal Reserve board indicates that 2.69 trillion dollars was given out by banks during the housing boom to home owners who either added second mortgages to their homes or cashed out some of the value in their home during a home refinance.
The Wall Street Journal article reported that:
According to Federal Reserve Board data, homeowners took out a total of $2.69 trillion from their homes at the height of the housing boom between 2004 and 2006. That tally includes cash-out refinancings.
“Easy access to home equity loans during the housing boom put borrowers who extracted home equity at more risk,” said Mark Fleming, CoreLogic’s chief economist. “The price declines were felt more severely by people who took out home-equity loans.”
It is clear that second mortgages on homes are impeding the housing market recovery. While there are programs out there to help homeowners, those borrowers that are underwater have a hard time qualifying for assistance. While not always impossible it is certainly difficult for them to refinance, participate in a loan modification program or be approved for a short sale. First and second mortgage companies need to agree on the details and that can be a challenge. This has lead many underwater borrowers to literally walk away from their homes. These homes are then repossessed by the lenders and added to the already long list of foreclosed homes on the real estate market.
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