Page 432 - untitled
P. 432
THE FORECLOSURE CRISIS
hardship, or because mortgage payments increase. And second (in the opinion of
many, now the more important factor), the home’s value becomes less than the debt
owed—in other words, the borrower has negative equity.
“The evidence is irrefutable,” Laurie Goodman, a senior managing director with
Amherst Securities, told Congress in : “Negative equity is the most important
predictor of default. When the borrower has negative equity, unemployment acts as
one of many possible catalysts, increasing the probability of default.”
After falling from their peak in to the spring of , home prices have
rebounded somewhat, but improvements are uneven across regions. Nationwide,
. million households, or . of those with mortgages, owe more on their mort-
gages than the market value of their house (see figure .). In Nevada, of homes
with mortgages are under water, the highest rate in the country; in California, the
rate is .
Given the extraordinary prevalence and extent of negative equity, the phenomenon
of “strategic defaults” has also been on the rise: homeowners purposefully walk away
from mortgage obligations when they perceive that their homes are worth less than
what they owe and they believe that the value will not be going up anytime soon.
By the fall of , three states particularly hard hit by foreclosures—California,
Florida, and Nevada—reported some recent improvement in the initiation of foreclo-
sures, but in November Nevada’s rate was still five times higher than the national av-
erage. Foreclosure starts climbed in states from their levels a year earlier, with the
largest increases in Washington State (which has . unemployment), Indiana
(. unemployment), and South Carolina (. unemployment), according to the
Mortgage Bankers Association.
In Ohio, the city of Cleveland and surrounding Cuyahoga County are bulldozing
blocks of abandoned houses down to the dirt with the aim of creating a northeastern
Ohio “bank” of land preserved for the future. To do this, authorities seize blighted
properties for unpaid taxes, and they take donations of homes from the Department
of Housing and Urban Development, Fannie Mae, and some private lenders. Now,
the county finds itself under increasing duress, having endured , foreclosures in
. After years of high unemployment and a fragile economy, the financial crisis
took vulnerable residents and “shoved them over the edge of the cliff,” Jim Rokakis,
Cuyahoga’s treasurer, told the Commission.
In a spring survey, of the responding mayors ranked the prevalence of
nonprime or subprime mortgages as either first or second on a list of factors causing
foreclosures in their cities. Almost all the mayors, , said they expected the fore-
closure problems to stay the same or worsen in their cities over the next year.
“There has been no meaningful decline in the inventory of distressed properties
found in the housing market,” Guy Cecala, the chief executive and publisher of Inside
Mortgage Finance Publications, told a congressional panel overseeing the Troubled
Asset Relief Program in October . “It is hard to talk about any recovery of the
housing market when the share of distressed property transactions remains close to
percent.” 
