Negative Equity Mortgages and Reverse Exchanges

A recent WSJ report indicates that more than 32% of all mortgaged properties in the United States were in negative or near equity position as of June 30,2009. An additional 2.5 million mortgaged properties were approaching negative equity.

The five states with the largest negative equity share accounted for nearly half the nation's remaining states. Nevada, Arizona and and Florida had the largest number of negative equity mortgages. California and Michigan were the other top-ranked states for negative equity loans.

Negative equity - also known as "underwater" or "upside down" - means the borrower owes more on a mortgage than the home is worth. Near negative equity is when mortgages are within 5 percent of being in a negative equity position. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

While negative equity continues to be the dominant driver of the mortgage market because it leads to foreclosures, the good news is it actually declined slightly this quarter. Other recent news indicates home price declines are moderating or flattening - possibly indicating we are at the low point in the cycle. Of course, continued bad news in unemployment figures, a worsening commercial real estate market and cold weather seasonality could lead to further declines.

We've noticed a a couple of interesting trends in this negative equity market. It appears a growing number of our long-term, real estate investor clients feel it is the right time to get back in the real estate market and make additional purchases. The trouble they are now finding is that many of the lender-owned properties are receiving multiple offers or it is taking some time to get closed. The other interesting observation is that it still seems somewhat difficult to obtain financing. We've had a number of exchanges that weren't completed because lenders were unwilling or unable to lend on replacement property.

If you are considering buying, and find that perfect property, it may not be wise to wait until your sale occurs. This is where a reverse exchange may make sense. By having your replacement property already lined up and financed, your exchange will not fail because you were continually getting outbid in what appears to be a fabulous opportunity or because of an inability to obtain timely financing. For more information on the benefits of a reverse exchange and how 1031 Corporation, as a bank-owned QI, is uniquely positioned to assist with your reverse exchange, please give us a call at 888-367-1031.