RealtyTrac CEO Brandon Moore appeared on CNBC’s Closing Bell with Maria Bartiromo today, providing insight on why properties already in foreclosure only represent the tip of the iceberg when it comes to the potential housing market risk.
Moore shared that loans in the foreclosure process represented $45 billion in negative equity, which effectively equates to losses the banks backing those loans will have to absorb when they complete foreclosure or approve a short sale — except for in the rare cases where the banks are willing and able to go after the distressed homeowner for any losses not covered by the sale of the foreclosed home or the short sale.
But the much bigger pool of distress looming over the market is the 12.3 million loans with negative equity, or underwater, that have not yet started the foreclosure process. RealtyTrac estimates that these underwater loans represent $1.2 trillion in negative equity — an amount that is 26 times the negative equity associated with loans already in the foreclosure process.
Right now the majority of those 12.3 underwater homeowners are continuing to make their monthly mortgage payments, but the longer the housing market malaise drags on the more likely those homeowners will be to stop making those mortgage payments — whether by choice or by circumstances beyond their control.
The irony is that government intervention into the foreclosure process in an effort to prevent improper foreclosures is prolonging the housing market slump by slowing down the efficient market disposition of those distressed properties — thereby creating uncertainty about the so-called shadow inventory and fostering an environment where irresponsible homeownership is effectively rewarded.
Moore’s point might be summarized this way: government intervention in the foreclosure problem has thus far been penny-wise and pound foolish, devoting the most resources to the smallest part of the problem while largely ignoring one of the root causes behind the more visible problem.
The recent foreclosure settlement between 49 state attorneys general and the nation’s five biggest lenders is at least attempting to address that root issue of negative equity, assigning $17 billion toward mortgage principal write downs, but even that is a drop in the bucket compared to the total $1.2 trillion in negative equity.
We’d like to hear your ideas on addressing the negative issue dilemma. Please post your thoughts in the comments section below.
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