Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan[1]. In the United States, assets (particularly real estate Real estate is a legal term that encompasses land along with improvements to the land, such as buildings,fences, wells and other site improvements that are fixed in location -- immovable. Real estate law is the body of regulations and legal codes which pertain to such matters under a particular jurisdiction and include things such as commercial) with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".
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Overview
This can occur when the value of the asset stays fixed but the loan balance increases because loan payments are less than the interest, a situation known as negative amortization In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed. The typical assets securing such loans are real property - commercial, office and residential. The typical loan is one secured when the property owner mortgages the property to secure the loan. When the loan is nonrecourse Nonrecourse debt or a nonrecourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the the lender can only look to the security, that is, the real property when the borrower fails to repay the loan.
Applied to the owner-occupied housing market Real estate economics is the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The closely related fields of housing economics is narrower in scope, concentrating on residential real estate markets as does the research of real estate trends focus on the, a general fall in the market value Market value is the price at which an asset would trade in a competitive Walrasian auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some circumstances of a mortgaged A mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be house or condo is the usual cause of negative equity. Negative equity in the owner-occupied market has sometimes occurred when the owner obtains second-mortgage home-equity loans so that the total loans exceed the home value when the loans are first made. This means that if the borrower immediately defaults on the loan, repossession Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. Note that repossession is a "self-help" type of action in which the party having right of ownership of the property in question takes the property back from the party having and sale of the property by the lender will not raise enough cash to repay the amount outstanding, and the borrower will both have lost the property and may still be in debt. Some states like California require lenders to choose between going after the borrower or taking repossession, but not both.
The term was widely used in the United Kingdom The United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands. Northern Ireland is the only part of the UK with a land border, sharing it with during the economic recession between 1991 and 1996, and in Hong Kong Hong Kong is a Special Administrative Region of the People's Republic of China. Situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour. With land mass of 1,104 km2 (426 sq mi) and a population of seven million people, Hong Kong is one of the most between 1998 and 2003, which led to increased unemployment and a decline in property prices, which in turn led to an increase in repossessions Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. Note that repossession is a "self-help" type of action in which the party having right of ownership of the property in question takes the property back from the party having by banks and building societies A building society is a financial institution, owned by its members, that offers banking and other financial services, especially mortgage lending of properties worth less than the outstanding debt.
It is also common for negative equity to occur when the value of a property drops shortly after its purchase on a loan. This occurs regularly in automobile loans, where the market value of a car might drop 20-30% "as soon as the car is driven off the lot."
Since 2007, those most exposed to negative equity are borrowers who obtained high value mortgages that were commonplace prior to the credit crunch A credit crunch is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit, as they are most at risk from property price falls.[2]
American cities in 2007
Low mortgage rates throughout the 2000s and loose lending standards encouraged a housing bubble A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements to form in the US from 2002 onwards. Speculation pricing increased throughout the United States. As property prices peaked in the United States in 2006/2007, so too did the demand made by evacuees as they started to move back to their home states. The subprime crisis made banks tighten lending, causing the housing bubble to deflate further. People who bought at the time of the highest prices are now left with property that is impossible to sell at the inflated purchase price.
See also
- Mortgages A mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be
- Negative amortization In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount is then added to the total amount owed to the lender. Such a practice would have to be agreed
- Loss mitigation Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner that will prevent foreclosure. These new terms are
References
- ^ America's foreclosure plan: Can’t pay or won’t pay?, Paragraph 5, The Economist The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in an office in the City of Westminster, London. Continuous publication began under founder James Wilson in September 1843. While The Economist calls itself a "newspaper", each issue appears on glossy (February 19, 2009).
- ^ Ruth Jackson, The return of negative equity, MoneyWeek (April 18, 2008).
- Irwin, Robert. Home Seller's Checklist: Everything You Need to Know to Get the Highest Price for Your House. McGraw-Hill Professional. p. 180.
- Nerad, Jack (1996). The Complete Idiot's Guide to Buying or Leasing a Car. p. 129.
- http://www.edmunds.com/advice/strategies/articles/104952/article.html
- http://money.cnn.com/2005/08/04/real_estate/buying_selling/home_equity_falling/index.htm
External links
Categories: Mortgage Categories: Contract law | Debt | Real estate | Real property law | Retail financial services | Credit | Terms and concepts of the 2000s United States housing bubble Categories: United States housing bubble | Economics terminology
Property Abroad News
The NHF said the OE research showed that some homeowners could be stuck in negative equity for at least another five years as the property market struggled ...
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Hanford Negative Equity Map
Oliver Wright Esq.
Sat, 22 Aug 2009 19:53:11 GM
More than 15 million U.S. mortgages (%32 of all mortgaged properties) were net . negative. as of June 30, 2009. June's . negative equity. share was slightly lower than the 32.5 percent as of the end of March 2009, reflecting the recent ...
