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50% of Mortgages Underwater By End of Next Year

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While listening to Meet the Press yesterday a scary statistic was thrown out that 50% of the mortgages in the country would be underwater by the end of next year. Doing a little digging found that Karen Weaver of Deutsche Bank published this in a report issues last week. An underwater mortgage is a loan whose principle exceeds the property value which it was borrowed on.

The housing bubble pushed housing prices up hard, and it seems like the 13 or so years of growth are collapsing far faster then they grew. It is little wonder that banks are not loaning money right now. With some area's projecting a 25% decline in housing prices, I wouldn't want to make that bet either. The question is what to do about it.

The Obama administration has been pushing for federally funded loan adjustments. Surprisingly only about 7% of those eligible have actually applied for the program (Meet the Press again). Even so, that pushes the burden of the loss onto the tax payers (or more accurately our Chinese loans) which isn't an optimum solution economically but from a political point of view there is little choice. No politician is going to let that many people take a loss on their watch.

A more scary notion is how much the value of their home means to the average baby boomer retiree. While these folks are not (for the most part) paying mortgages, they are counting on a decent valuation of their home as part of their retirement nest egg. Falling home prices, egged on by tighter lending standards and the collapsing bubble, means a smaller nest egg. I expect that the increasingly large political faction of retiree's will start rallying for the government to make up the difference either through increased social security checks, or some direct stipend to the aged population. Given the numbers that this group will bring to the table, no politician can afford to ignore them.