negative equity

Front page of today’s Wall Street Journal:

One Family’s Journey into a Subprime Trap

FULLERTON, Calif. — Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.

…With a December “reset” on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses’ loan balance may exceed the value of their home.

….And with thousands of mortgage banks and brokers threatened with extinction, lenders that embraced all kinds of risky loans two years ago are enforcing increasingly strict standards. They are refusing even to consider extending new credit to people like the Monteses who lack any equity in their homes.

….Until recently, the Montes family didn’t seem like the type that would find itself faced with foreclosure. They live in a solid neighborhood and are both employed and in good health. “My wife and I make pretty good money,” says Mr. Montes. Mrs. Montes works as a school secretary. Together, they earned nearly $90,000 last year.

….Being stuck with little or no home equity is no longer a rare situation. Christopher Cagan, director of research at First American CoreLogic, a housing and mortgage data supplier in Santa Ana, recently found that nearly 7% of 32 million U.S. households studied as of December owed more than their homes were worth, based on computer estimates of the property values. An additional 4% had home equity of 5% or less. Since then, house prices have edged down in much of the country, erasing more home equity.

Be warned.