The following is from reader NII who sent his comments and the article from Calculated Risk:

WHY I AM CONCERNED THAT THE FORECLOSURE PROBLEM IS STILL BAD.

FROM BELOW: “….close to 5 million properties with more than 25% negative equity.”

NII: That is 5 million out of 50 million mortgages, i.e., 10% of total are potential foreclosures. Using $200,000 as average value of 25% underwater mortgages, I get $1,000 billion in potential value for mortgages going into foreclosures. U.S. bank reserves are $1,300 billion. Mortgage foreclosures still matter.

Depending on how many foreclosures come from this “likely” group, that number would then be added to Real Estate Owned (REO) numbers of ~ 600,000. REO is bank’s owning homes after foreclosures. Fannie, Freddie, FHA, VA own another 287,000 homes. That total is 872,000 homes to be sold from foreclosures.

With a potential off part, perhaps the majority,  of the 5 million under water by 25% likely to go into foreclosure, the foreclosure overhang has a long way to go. Housing prices and housing starts will reflect this foreclosure overhang for several years at least.

ARTICLE: An interesting story of why people walk-away from mortgage.  Note the condo is on the market for the sale price in 1999–$179,000 with a mortgage of $240,000 in 2011 and a purchase price of $312,000 in 2006. The family’s annual income is $150,000 versus the sale price of $179,000.

———————————————————————————————————-

Saturday, May 21, 2011 Walking Away in Chicago by CalculatedRisk on 5/21/2011 09:54:00 PM

From Mary Ellen Podmolik at the Chicago Tribune: Sinking values prompting homeowners to consider strategic default as best business decision (ht Ann)

Marty Likier … put almost 20 percent down to purchase a $312,000 townhouse in Westmont in 2006 and lived there until two years ago, when he remarried and bought a home in Chicago Ridge. For a year he rented the townhouse. When a change in rules at the community meant Likier’s days as a landlord would end, he called his lender and asked if he could rework the loan, but he didn’t have enough equity left to refinance the $240,000 mortgage.
…
Likier … decided last fall that the struggle wasn’t worth it.

He listed the townhouse … [and has dropped the price to] $179,000, which is lower than the unit sold for when it was built in 1999. He stopped paying the mortgage in January and recently was served with foreclosure papers.

Despite the fact that he and his wife are employed and have an annual household income near $150,000, he’s comfortable with his decision.

A few comments:
• These properties with large negative equity positions are like ticking time bombs for the banks. Eventually these owners will grew tired of the monthly loss, and try to take action. Corelogic reported there were 11.1 million properties with negative equity at the end of last year, and close to 5 million properties with more than 25% negative equity.

• It sounds like this owner could afford the payment as long as he had the unit rented. If the homeowner association changed the rules, he might have legal recourse.

• And talking about recourse … Illinois is a judicial foreclosure state and a deficiency judgment is pretty automatic. With his household income, Mr. Likier will probably be hearing from the bill collectors soon (Ann notes that it would help if his new wife makes most of the income since she probably wasn’t on the condo loan).