Freefalling housing prices have put Massachusetts homeowners and lenders in a sticky situation: 18 percent of all mortgages in the state are “underwater,” an analysis by Banker & Tradesman shows.
A mortgage is considered “underwater” when the amount left on the loan exceeds the value of the home, and can often lead to short sales, foreclosures, bankruptcy filings and big losses for banks’ balance sheets
Especially hard hit are Massachusetts’ urban centers, where values were artificially pumped up during the subprime boom and many under-qualified buyers were shoehorned into high loan-to-value mortgages.
In Dorchester, 66 percent of all mortgages are underwater. In Lawrence it’s 65 percent, and in Brockton the figure is 64 percent. In Worcester, the second largest city in New England, 47 percent of mortgages there are underwater, according to data compiled by The Warren Group, publisher of Banker & Tradesman.
Problem Solvers?
Dan Crane, undersecretary of the Office of Consumer Affairs and Business Regulation, said the key to stemming the swift decline in housing values is to keep neighborhoods intact, avoid foreclosures, and spur growth in the spring housing market.
Median statewide single-family home values dropped from $325,000 in January 2008 to $259,250 in January 2009, a decrease of 20 percent, according to The Warren Group data.
Crane said Fannie Mae and Freddie Mac’s new loan modification program, set to be announced this week, would greatly help embattled mortgage holders stay in their homes.
“It’s a combination of stopping the downward spiral, and having the modification of the loans, so people will stay in their homes,” Crane said. “What’s going to be required there with those types of loans is that the lender is going to have to take a haircut.”
Crane also said the two-tiered program announced Friday by the Department of Housing and Community Development, Mass Housing and the Massachusetts Housing Partnership would encourage people to purchase and rehab foreclosed homes.
The first tier is a soft second mortgage program with increased eligibility for buyers of REO properties in those 39 cities and towns. The second tier is the rehab funds for homebuyers in the 19 municipalities with the most dire foreclosure problems. The program will give up to $20,000 for condo or single-family home purchasers, and $40,000 for multi-family home buyers.
“We know we need to stimulate the spring housing market, and we think that this is one of the ways we can do it,” Crane said.
Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, said most people who bought a home in the state’s urban centers in the last three years are underwater, regardless of the quality of their mortgage.
“I don’t think that’s a lending phenomenon; it’s more of a real estate [value] reduction phenomenon,” Cuff said.
Cuff acknowledged the dramatic rise and fall of property values was linked to hybrid mortgage products doomed to fail from the start, but not all of the underwater mortgages were bad mortgage products.
Some of those mortgages are salvageable, but some of those are not, he said.
“Even those [bad mortgages] to a degree, I think the lender is going to take a haircut,” Cuff said. “I don’t know how far they’re going to take a haircut, and I don’t know where the tipping point is where they say, ‘No, [we are going to] foreclose.’ I think that the efforts that have gone on for loan modification have been extremely aggressive.”
Unfortunately, many mortgages in Massachusetts are held and serviced by out-of-state companies. For those mortgages still in Massachusetts lenders’ portfolios, modifications are an option as long as it is profitable for the lenders not to foreclose.
“For things in our portfolio, we modify interest rates and we modify the terms,” said Christopher Dannen, vice president and residential lending sales manager of Bank of Western Massachusetts. “Whatever we think we need to do to keep people in the house, [we’ll do it], assuming it makes sense. We have to do whatever makes sense.”
Regardless of the efforts by the state and federal governments, the market will eventually have to undergo a correction.
“At some point in time, the natural financial laws of nature have to take effect, and the market has to clear itself,” said Peter Milewsky, director of mortgage insurance at Mass Housing. “At that point in time, new buyers will come back into the market and buy properties.
“There is an opportunity with the money coming out of Washington, and the neighborhood stabilization funds … for people to buy [foreclosed homes], and to rehab and repair them, and occupy them in what will now be an affordable and sustainable ownership circumstance,” Milewsky said. “I think that’s going to provide an extraordinary boost.”
