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Even Prime Mortgages are at Risk

Jan 29, 2008
By now most American consumers have heard about the sub-prime mortgage crisis. It would be difficult not to have heard about it. What many consumers have not heard much about is the increasing belief that even homeowners with prime mortgages may be facing some issues in the near future.

Of particular importance is the threat of lower home values, even for those with the best of credit and the best of mortgage loans. It is no secret that as homes in a particular area begin to fall into foreclosure proceedings, surrounding homes will lose value. The problem seems to work exponentially, too, meaning the more homes that are being lost the more value surrounding homes lose.

A recent survey conducted by Zillow.com, an online real estate community, concluded that on average home values across the nation were down more than 5.5 percent from just one year ago. In some of the worst hit areas of the nation, that percentage is even higher.

The troublesome news that goes along with this is that according to Zillow.com upwards of 15 percent of nationwide homeowners who purchased their homes within the last twelve months are now in a position where they owe more on the home than what it is currently valued at. The number is even a little worse for those who purchased a home two years ago.

Most experts would offer up that temporary negative home equity is not something that should cause a person or nation to panic, unless the person cannot afford the higher mortgage payments caused by rate adjustments. It may take as long as five years before the market settles down, and if homeowners, especially those with prime loans, can simply ride it out, they value of their homes should begin to rise again.

One issue that will certainly complicate the ride it out advice is when prime loan homeowners need to move because of a job transfer or some other reason. The usual tactic is to sell the current home when it becomes apparent that a move is in the works.

If the value of the home has decreased because of sub-prime foreclosures in the areas, the owner will, of course, see less profit on the sale. Even homes under the most advantageous of mortgage loans will have to be appraised prior to a sale. If the surrounding area has lost value due to foreclosures, the owner can probably expect that his home is worth less too.

Some of the lost value can be absorbed by homeowners if the amount is not too high. For those homeowners who happen to be in hard hit areas, the loss of value may be too high to absorb and may have even caused the home's value to be less than what is owed on it. For these homeowners, the entire sale of the home may be in jeopardy.

At present, there is not much that a homeowner can do to prevent loss of value in the home if the home is located in a foreclosure area other than try to ride it out, as mentioned above. Some legislation is in the works that may help many sub-prime borrowers from having to see foreclosures, and that may be best bet yet in keeping home values fair and equitable.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Refinance and Mortgages
Visit RICS Sees More Bad News For House Prices
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