Homeowners trapped by low values Many baby boomers drowning in debt

August 15, 1993|By New York Times News Service

Beth Divney always believed that owning a home was sound advice. And, until recently, such wisdom seemed infallible. After all, home prices in most places hadn't declined since the Great Depression.

For much of the 1970s and '80s appraisals soared in most areas, impelled by a demographic bulge of baby boomers buying their first houses, lenient lending practices, tax incentives and the aggressive marketing of co-ops and condominiums.

But now Ms. Divney is one of tens of thousands of recent homebuyers, many of them young professionals, who own homes that have declined in value, often to the point that the home is worth less than the outstanding mortgage, a condition ** known as negative equity, which some bankers refer to as being "under water."

With little hope of selling at a profit or even refinancing to lower their monthly mortgage payments, the only options for these homeowners, many of whom have outgrown their homes, are taking a substantial loss; staying put and paying down their mortgage until it is at least smaller than the home's appraised value; renting out their home and risking not covering their mortgage, or walking away and damaging their credit.

Brokers have a name for these homebuyers, who are drowning in debt. They call them Nebbies -- negative equity baby boomers.

In Ms. Divney's case, with an $11,000 down payment, she bought a co-op in the Forest Hills section of the Queens borough of New York City, that is now worth half of the $110,000 she paid in 1987.

Even if she finds a buyer willing to pay $55,000, she would have to pay her bank about $35,000 to satisfy the mortgage; she has already paid $9,000 on her mortgage.

"I'm hoping there will be a miracle, perhaps there will be some sort of semi-recovery in the market," she said. "Almost everyone I know tells me I should let the bank foreclose and take it back."

Balancing debts

Instead, Ms. Divney, who is a mortgage broker, rents the apartment and each month pays the $577 difference between the $750 in rent she collects and the combination of her $905 mortgage and $422 monthly maintenance costs. She also pays $1,200 a month in rent for her apartment in the Murray Hill section of Manhattan.

"I didn't expect to make a fortune," she said. "But now I have learned that you only buy things that you want to live in and you are committed to."

No one knows the precise number of Nebbies -- the term coined in 1991 by Sherman Whipple, a demographer and market strategist in Hingham, Mass. Lenders rarely reappraise property if payments are being made. And changes in appraisal prices can vary wildly within the same sampling areas.

For example, Mr. Whipple noted that in parts of New York in 1990 the value of some apartments declined by as much as 30 percent, while others did not change.

Several studies, though, help gauge the extent of negative equity. They also show how the situation is compounded by the rising use of second mortgages and home equity lines of credit.

Common problem

Mr. Whipple's 1991 study, for example, found that about 53 percent of 1,000 homeowners he surveyed in southeastern New England had a negative net worth, chiefly because of a rising amount of installment debt and a loss of home equity spent when they took out second mortgages and home equity loans.

His sample group consisted of homeowners who were 35 to 54 years old, held professional or managerial positions and had incomes averaging $55,000 (and a median income of $70,000).

He said his survey sample also represented 16 percent of the region's work force, suggesting that at least 8 percent of the total work force in southeastern New England had a negative net worth.

A study by the Federal Home Loan Mortgage Corp., or Freddie Mac, found 12 percent of the borrowers in its portfolio did not have enough equity in their homes to be able to refinance. The study did not separate those homeowners with zero or negative equity from those who had positive equity, but in amounts too small for refinancing.

"There are a lot of people out there who don't even know they have negative equity," Ms. Divney said. "They say they owe $135,000 on their mortgage, and their home is worth about $135,000. They don't understand that a bank won't refinance at 100 percent."

When banks will step in

Generally, banks will refinance only if the would-be borrower has a loan-to-value ratio of no higher than 75 percent or 80 percent, though in some rare instances mortgages are refinanced when the outstanding balance is equal to 90 percent or 95 percent of the appraised value for the home -- if the borrower does not intend to withdraw cash from the deal.

"Just a few years ago, people thought that real estate was the key to achieving their financial objectives," said Ellen Feldschreiber, a broker with Manhattan Mortgage Co. "Now, these same people have lost control of their financial future because of the real estate they purchased."

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