The media and politicians continue to ignore the real albatross on the economy, under water mortgages.
Why throw away good money after bad? It's a
frequently-asked question in the five most expensive real estate markets in the mainland United States--San Jose, San Francisco, Orange
County, Los Angeles and San Diego--where over a million home mortgages are under
water. That's nine times the number in all of New York State. In fact, that's
more than 30 other states combined.
you default, your credit score will take a hit," advises Jane Bryant Quinn on CBS MoneyWatch.
"But as long as you pay all your
bills on time, both before and after the default, your walk-away will become
less important after a couple of years."
No one is counting on a strong recovery of home
prices any time soon. Even during normal
times, real estate markets go through multi-year cycles. The value of a typical
home purchased in Los Angeles in 1990 fell by 25% within
five years; by 2000, the cumulative home price appreciation after a decade was
Of America's 11 million homeowners with negative equity,
a majority live in the four sand states where the real estate bubble was
concentrated--California, Florida, Arizona and Nevada. Over three million live
in California and Arizona, where a borrower can hand over the keys to the
lender and walk away. These are two antideficiency states, where the lender
has no recourse beyond the collateral property. So of course it makes sense that wealthy homeowners would
default on their mortgage loans. They live where in places home prices were the
highest and the fell the steepest, and where the consequences of default are the
least onerous. The New York Times overlooked the "where" and "why" of the story.
The wealthy are also less dependent on consumer
credit. They can buy cars for cash; and charge expenses on their debit cards.
So for them, it's easy to make a fresh start. But the mortgage debt doesn't go
away. It's simply pushed off to the banks insured by the Federal government. The
rest of us pick up the pieces.
In Phoenix, total home mortgage debt exceeds the
market value of all homes with
mortgages. The 58% of homeowners with negative equity are seriously under
water, while the remaining 42% with positive equity worry about continued
deterioration of their home values. (CoreLogic's disclosures do not include
homes with no mortgage.)
if the economy is the, quote, No.1 issue," said John McCain when he was running
for President in January 2008, "the real issue will remain America's security. And if they choose to say, "Look, I do not need this guy, because he's not as good on home loan
mortgages,' or whatever it is, I understand about that, I will accept that
verdict," he told Florida voters. "I am running because of the transcendental
challenge of the 21st century, which is radical Islamic extremism."
Since then, Phoenix home prices have fallen by 38 percent. No wonder he wants
to talk about immigration.
For over 20 years, David has been a banker covering the energy industry for several global banks in New York. Currently, he is working on several journalism projects dealing with corporate and political corruption that, so far, have escaped serious scrutiny by mainstream media. He is trained as a lawyer.