Report: One in Five Homeowners Are ‘Under Water’

More than one in five homeowners are “under water,” or owe more money on their house than it is currently worth, according to a new study by, a real estate research service. Negative equity occurs when the value of a home drops below the value of the homeowner’s mortgage. In the past year, average home prices fell 14.9 percent nationwide.

Although historically, negative equity will resolve over time, it can lead to foreclosure when homeowners need to sell or refinance a home in the first few years after a purchase, before they have built up significant ownership equity.

In recent years, many homeowners bought houses with adjustable rate mortgages (ARMs), which offer a low “teaser” interest rate — and low payments — for a set period of time, often two to three years. At the end of the initial period, the mortgage then “adjusts” to the market interest rate, which can dramatically increase the monthly payment account.

Homebuyers who took out ARMs during the 2000s were assured by lenders and mortgage brokers that they would be able to sell or refinance their homes before the interest rate was scheduled to adjust, avoiding the increase in monthly payment. However, when housing values dropped, many homeowners discovered they were not eligible to refinance their mortgages because they didn’t have enough equity in the home.

In other cases, homeowners facing unemployment or financial difficulties may no longer be able to afford payments and wish to sell their house. But if they cannot sell the house for enough to pay the full amount of the mortgage, the lender can refuse to allow the sale to take place.

Homeowners that are unable to make mortgage payments are often forced into bankruptcy — but may still end up losing their home if they are unable to come to agreement with their mortgage lender.

Last month, the Senate rejected a bill sponsored by Senator Richard Durbin, D. Ill., that would have given bankruptcy judges the ability to rework defaulted home mortgages on family homes to an affordable value. The bill could have prevented up to 1.7 million mortgages from falling into foreclosure, according to estimates by the Center for Responsible Lending and the National Association of Consumer Bankruptcy Attorneys.