How Many Homes Are Underwater? | Potentially 40% Of All Owners With A Mortgage Underwater

This is an excerpt of an interview Steve Forbes did with Nouriel Roubini. Professor Roubini is famous for predicting the housing crash.

Talking points as relates to residential real estate:

1) He believes that prices are at the bottom. He is expecting another 5% drop in values on a national level.

2) 12,000,000 homes are currently underwater…negative equity…they owe too much.

3) Added to the 12,000,000 are another 8,000,000 who are nearly underwater…they owe almost what the house is worth. (Taken together, thats potentially 20,000,000 underwater owners) What does this mean….

4) If prices do indeed fall another 5% (as he and many others are expecting) that means there will be (as mentioned in #3) 20,000,000 underwater owners. Translated: There are 50,000,000 homeowners WITH a mortgage. So, if there is indeed another 5% loss in property value 40% of ALL OWNERS WITH A MORTGAGE WILL BE UPSIDE DOWN.

5) Roubini suggests that the only real solution to ending this housing crisis…is….negative equity forgiveness. What we are calling a ‘Radical Refinance’. Read Professor Roubini’s proposal..and share your thoughts..

Forbes: You mentioned housing. Commercial real estate has been a shoe that people have been expecting to drop now for over two years. Is that going to drop? Or are the banks going to find a way to absorb that?

Roubini: In some sense, the problems of the commercial real estate have not been resolved, either. Price-wise, actually, commercial real estate has fallen in price level more than housing. It’s 40%, as opposed to 30%, based on what is the index of commercial real estate prices.

Many properties are also deeply underwater. You have about $2 trillion of mortgages or exposure, half of it has been securitized. Most banks are holding this stuff, still 100 cents on the dollar, on their books, even it’s worth more like 50, 60 at best. And the Fed has decided to use regulatory forbearance to fudge it, to pray and delay, extend and pretend.

Forbes: Right.

Roubini: And these problems have not been resolved. A lot of this exposure, actually, is among the smaller banks or the medium sized regional banks. And if they’re to write down these assets, the capital losses will be significant. So for the time being, it’s kicking the can down the road and hoping that maybe prices start realizing the recovery. But there is such a glut of capacity throughout the country that I think that, you know, we’re going to stay in this slump for quite a while.

Get Out Of The Slump

Forbes: What would it take to get out of the slump?

Roubini: Well, in the case of residential real estate, I would say prices and quantities have fallen so much from the peak, that probably they are close to the bottom. But the trouble is that you have millions of houses that are deeply underwater. 12 million of them already underwater today. And about another 8 million have a mortgage with a loan to value ratio between 95 to 100%.

That means that the 5% correction in national home price–something that I expect–is going to put another 8 million houses underwater. That means 20 million out of the 50 that have a mortgage, or 40% of houses with a mortgage, are going to be underwater.

And I think that a good chunk of the household sector is effectively insolvent–is buried under a mountain of mortgage debt, credit cards, auto loans, student loans, personal loans. And once you have such a massive problem, you cannot resolve it case by case, household by household. You need to have something of an across the board reduction of that burden to restructure just the face value of these mortgages.

Now you can convert, like we do for corporate restructuring, some of that debt into equity if you reduce the face value and then you make the creditor effectively a shareholder in the house by giving them the upside to warrants. So maybe a solution would be like in corporate restructuring, to convert some of these debt into equity so that at least if the prices rise again, there’ll be some of the upside for the creditors. But we need to do something more significant than we’ve done so far.

Forbes: Why have the government efforts to do something about housing been such a failure so far?

Roubini: Well, in some sense, we’ve done too much, in some sense, we’ve done too little. You know, if you need an across-the-board reduction in the face value of the mortgages, some legislative action has to be taken to induce banks or induce the creditors to take these kind of losses. I think that the government has been partly resistant because of a moral hazard problem.

If you start giving debt forgiving to some households and maybe incentivize others who are paying their mortgages now to talk away from them. So I think that some people senior in the White House have told me that that’s their concern, that you have a moral hazard problem that you have to deal with.

I think there are ways of dealing with that. You could say anybody who has defaulted up to a certain date will get his debt reduction, after that, not. You can make it mean tested. And there are ways to limit that moral hazard problem. But back in the thirties we create an institution that took over all the mortgages that reduce the face value, converted them into longer term, lower interest rate debt, and people stayed in their homes. And they were able, eventually, to pay it back. If we don’t do something radical probably we’ll have this kind of case by case process are going to take decades to resolve. And the cancer in the housing is going to stay with us.