Entering the new year, California continues to be the blue lagoon for the mortgage mess. It is one of five states leading the nation in "underwater" mortgages, where the value of a home is less than what the homeowner owes on the mortgage. That situation extends the housing meltdown to homeowners with good credit.
As 2010 begins, the governor and lawmakers have an opportunity to make a new start, ensuring that California leads the nation in getting homeowners above water. While federal measures can help, they do not fully address California's situation or those in the same leaky submarine – Nevada, Arizona, Florida, Michigan. Those states will have to forge solutions.
Thirty-five percent of California mortgages are under water, according to First American CoreLogic. In the Sacramento metro area, it is 44 percent. For its own self interest, California in 2010 should vow to be a national leader in dealing with this issue.
Law professor Brent T. White, in an important new paper, "Under Water and Not Walking Away," describes the problem: A young professional couple with excellent credit and a solid income bought an average three-bedroom house in Salinas for $585,000 in 2006. Their monthly payment is $4,300. Then the housing bubble burst and their house now is worth only $187,000 – though they still owe $560,000 on their mortgage. He estimates it would take them more than 60 years just to recover their equity.
The problem for them – and 2.4 million of 6.9 million California mortgage holders (the most in the nation) – is that lenders failed to ensure that homes were actually worth what they sold for. Lenders in the appraisal process simply ignored bubble prices if the borrower seemed able to make monthly payments.
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