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Monday, Dec. 22, 2008 | Nearly 30 percent of homes in San Diego County with a mortgage are worth less than their owners owe on their mortgage, according to new data.

The 29.4 percent share of county homes “underwater” or “upside-down” compares to 27.4 percent for the state and 18.3 percent for the nation. The San Diego County data was prepared for voiceofsandiego.org by First American CoreLogic, and was the only county-level data of its kind released for the quarter ending Sept. 30.

For many underwater homeowners, their incomes and monthly payments will allow them to wait to sell until their homes are again worth more than what they owe the bank. But the statistic is an important indication of how many homeowners could be forced into short sales or foreclosure if they lose their jobs, need to move, or fall behind on their payments. Eventually, if the gap grows too large between the balance of the mortgage and the value of the house, some might walk away.

“We’ve seen if they think there’s no hope, they’re a lot more likely to bail — even people who can make the payments,” said Jim Klinge, real estate broker in North County. “But I think there’s probably just as many people who recognize they got themselves into something that’s going to take a long time to unravel and they’re going to stick it out.”

Many underwater homeowners purchased their properties in the height of the real estate boom with small or nonexistent down payments. In some neighborhoods, though, even a 20 percent down payment might have already been wiped out as values across the region have fallen by more than 30 percent, according to the Standard & Poor’s/Case-Shiller Home Price Index. Some owned their house for a while before the boom but refinanced in the housing heyday, taking advantage of the rapid appreciation in value for homes in the region.

The share of homeowners facing dropping home values has led to a spike in activity for the county assessor, who’s received a record number of requests for adjustments from homeowners seeking to be taxed on what their houses are worth now, not what they paid for them.

Since July 1, the office has received 40,900 requests, said David Butler, chief deputy county assessor. That’s more than the office has ever received in such a period of time. Informed of the number of local homeowners who are underwater, Butler was taken aback.

“Wow — that’s huge,” he said. “That’s kind of disheartening.”

The underwater statistic lets some air out of the hope that the recent drop in traditional mortgage rates will help the real estate sector turn around. Mortgage brokers have seen a surge of activity as homeowners seek to refinance into a mortgage in the 5 percent range from higher-cost loans. But a homeowner has to have equity in order to refinance. The new figures show nearly one-third of the county’s owners have negative equity.

Refinancing and reducing your monthly payment isn’t just about getting out of an onerous loan, said Mark Goldman, mortgage broker and real estate professor at San Diego State University.

“You could also improve your household cash flow,” he said. “But in order to get that you have to equity in your house.”

Borrowers who used adjustable-rate mortgages to purchase their homes during the boom will be more desperate to refinance in the coming months and years. Many loans innovated during the boom had introductory low rates for three or five or 10 years until a reset point when the loan’s payments ratchet up.

Some loans were negatively amortizing for a period of time, meaning the borrowers weren’t even paying the full interest accruing on their loans each month. For many borrowers, the decision to use those loans was predicated on the assumption the market would continue to rise, and they’d be able to easily refinance when the reset came into a more traditional loan.

The First American CoreLogic data doesn’t include a breakdown of how many underwater loans are adjustable-rate.

The underwater statistic refers only to homes with a mortgage in San Diego. The region has about 1 million housing units, nearly 597,000 of which are owner-occupied, according to Census Bureau estimates from the 2005-2007 American Community Survey. Of those owner-occupied housing units, about 458,000 have mortgages, meaning one-quarter of the owner-occupied units are owned free and clear.

That ratio doesn’t count second homes or investment properties, though those properties do count in the First American underwater report.

The firm used its databases of public records to figure out how much mortgage debt each property had outstanding, and to calculate each property’s estimated current value in light of recent sales in the database. To come up with the negative equity share, the firm subtracted the home’s value from its mortgage debt. A negative number means that property is in a position of negative equity.

Examining the share of homeowners underwater reignites a discussion of a moral obligation to make a mortgage payment no matter how a house’s value changes. This downturn has lessened the stigma of foreclosure and has spawned the creation of businesses like You Walk Away, which promises to aid homeowners contemplating foreclosure.

That doesn’t make the question of whether to let a house fall into foreclosure any easier, Goldman said.

“Everybody gets angry at people who are walking away from their homes,” Goldman said. “But I have not talked to one person in this whole thing who just capriciously walked away from their home. They’re in agony when this happens.”

And there’s not much solace for other homeowners who blast them for walking away.

“The people who did the right thing, bought within their means, 30-year-fixed, saved up a down payment — good for them,” Goldman said. “They’re still underwater.”

Local real estate analyst Gary London said the underwater statistic was somewhat irrelevant in the market — a number that only matters if an underwater homeowner decides to sell.

Still, continuing economic strife and a rising unemployment rate could put more people in a position of distress. For all other homeowners, he said, “This is the time in the market when you keep your blinders on.”

“If you sell right now you’re by definition either distressed or stupid,” London said.

Fred Eckert, title rep at Chicago Title, tried to find the silver lining for the underwater statistic:

“On the plus side — 70 percent are still OK,” he said.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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