A homeowner who for weeks had been trying to sell her home called Gustave White Sotheby’s International Realty’s Liz Taber last week with a problem: her home’s value on the market is now less than her mortgage is worth.
“So she called yesterday and said, ‘Tell us what we have to do to sell it. Tell us what the price is,’” recounted Taber, a broker and the manager of the Providence office. “And the first step was finding out what the balance on her mortgage is – and then I doubt if it’s going to sell for that either. So it’s moving toward a short sale.”
In Rhode Island, about 12.1 percent of mortgage holders are now in similar situations, holding mortgages that are worth more than the market value of their homes. It’s commonly known as being “underwater.”
Of the 207,145 mortgages in Rhode Island, 25,015 are worth more than the home’s value. Another 32,889, or 15.9 percent, are “nearing” negative equity, according to a report released late last month by First American CoreLogic, a Sacramento, Calif.-based real estate data collector.
The issue isn’t unique to the Ocean State. Nationally, 7.63-million mortgage holders have negative equity in their home, representing 18 percent of all mortgages held in the United States, First American CoreLogic reported.
But Mortgage Loan Originator Michael Conley, who operates a Warwick office for Milwaukee-based Shelter Mortgage, said that mortgage holders that don’t have adjustable-rate mortgages should be fine.
“Until you sell it, until you want to refinance it, it doesn’t make a difference,” he said. “And most of the people who bought in the last two years, they’re not looking to sell – they’re going to stay where they are.”
From a national perspective, the amount of underwater mortgage holders in Rhode Island puts it about in the middle of the pack: the 22nd highest rate in the country. Nevada has the highest amount, with 47.8 percent underwater, and Michigan is second, with 38.6 percent.
Both Massachusetts and Connecticut have lower percentages, according to the report. In Massachusetts, 10.4 percent of mortgage holders owe more than their homes are worth and in Connecticut 7.4 percent do.
Rhode Island Housing Communication Director Jo-Ann Ryan said last week that that might be because Rhode Island had the “dubious distinction” of having the highest percentage of subprime lending in the early 2000s.
“Obviously, compounding this is the fact that the reason many mortgages are underwater is that a lot of them were adjustable-rate, negative am[ortization] loans,” Ryan said. “So the amount the consumer was paying monthly wasn’t even covering the interest that was accruing on the principal balance.”
Those who borrowed money in a way they could afford aren’t going to have a problem if their home is underwater, Ryan said. And Rhode Island Housing’s portfolio of about 12,000 mortgages – including many first-time homeowners – has been performing “very well, compared to the rest of the country and the rest of the state.”
The rise in underwater mortgage holders is also directly linked to the ongoing drop in median home values across the state, she said. Rhode Island prices soared because many people were investing in real estate earlier this decade, when the market was strong.
“I think in 2003, appreciation was up as high as 22.4 percent,” Ryan said, adding that the average yearly appreciation is about 5 percent.
“But also because there was such a growth in property values, folks were financing their homes to pull the equity out,” Ryan said. “They got themselves in trouble because there were just a plethora of exotic mortgage programs available and folks got in over their heads.”
Only three states in the county have loan-to-value percentages lower than Rhode Island. Nationally, outstanding mortgage debt equals about 66 percent of the United States’ $11.94 trillion total residential property value. Rhode Island’s $36.14 billion in outstanding mortgage debt puts it at a loan-to-value ratio of about 57 percent, according to American CoreLogic.
The CoreLogic report followed the company’s August 2008 LoanPerformance House Price Index. In that report, Chief Economist Mark Fleming wrote that “we expect house prices to maintain their steady state or potentially begin to further accelerate downward in light of the economic pressures. No news currently points to an expectation for an improvement in price levels in the near term.”
In 2006, the median value of a single-family home in Rhode Island was $282,500, according to the Rhode Island Association of Realtors. But the median value for the second quarter of this year was $250,000, an 11.5-percent drop from two years earlier.
RIAR President Paul Leys – principal of Gustave White Sotheby’s International Realty in Rhode Island who took over at RIAR on Monday, Nov. 17 – said the amount of underwater mortgage holders in Rhode Island will likely shrink.
“Nobody wants to see anyone in a negative equity position, underwater,” he said, “but we’re doing all right as far as the national average.”
And, he added, a house is a long-term investment and should be viewed in the context of a cyclical housing market.
Shelter Mortgage’s Conley added that as long as underwater homeowners haven’t lost their jobs and can make their payments, they should be fine. “It’s like the stock market, values will eventually come back or stabilize,” he said.
Ryan agreed, saying Rhode Island Housing has been working with mortgage holders who are having issues – including being underwater and those facing foreclosure. Since November 2007, it’s been running a help center in Providence. She said Rhode Island Housing is optimistic that the market will rebound soon.
“I think [the number of underwater borrowers] is a sign of the times,” Ryan said. “However the good news is that seven out of eight are not underwater.”
Taber, who has had a few underwater customers who are looking to sell, said the situation might lead to more short sales and foreclosures in the coming months. The homeowners that need to sell can’t afford to sell for less than their mortgage, she said.
“We were hopeful that the big push would be that the banks don’t want to own real estate,” she said. “That they don’t want to get into any of this – instead of being greedy, they would realize where the hit is and that it needs to be shared by the homeowner and them to some degree. Banks put the appraisals through. They said the house was worth that amount at that point. And now the houses aren’t worth that.” •
