How the Second-Mortgage Crisis is Gaining Momentum

Real Estate (NYSE:IYR) data firm CoreLogic Inc. is expected to release a report today bearing more nasty news for an already battered housing market. The findings of the report say that 38% of borrowers that took out second-mortgages on their homes are “underwater,” or owe more on their mortgage pay-backs than the value of their homes. An additional 18% of borrowers who didn’t take out second mortgages are facing the same dilemma. Not all bad news from the CoreLogic findings, as the study also reports a modest decline in the number of Americans with outstanding underwater mortgages, down to 22.7% from 23.1% in the fourth quarter of 2010.

Even given the decline, the figures are alarming. Many had presumed that the economy had moved on from the mortgage debacle more fluidly, but with an estimated 11 million Americans still reportedly underwater in their home-loans the road to recovery now looks steeper.  According to the WSJ, the decline is not even indicative of economic progress, on the other hand, “The modest decline wasn’t a sign of an improving market. Rather, the change reflected completed foreclosures, which reduced the total number of homeowners in the market, CoreLogic said.”

Mark Zandi, Chief Economist at Moody’s Analytics (NYSE:MCO) say the implications of underwater mortgages extend far beyond the home, “When a homeowner’s house is underwater, it’s harder to get a credit card or a car loan, you can’t put your home up for a small business loan. There are all sorts of little, pernicious effects that you don’t necessarily think about.”

The effects may not be so little for the economy at large. With Case-Schiller reporting a 4.2% decline in home prices nation-wide in the first quarter 2011, largely a product of the swath of cheap foreclosed properties on the market, the next wave of foreclosures that may be prompted by underwater second mortgages only promises further fall-offs in home values. Not only will the real-estate market continue to suffer, the financial sector may take another hit as well as owners of the debt may face another round of write-offs. More from the WSJ, “More than 40% of that debt is on the books of the nation’s four largest banks: Wells Fargo (NYSE:WFCBank of America Corp. (NYSE:BAC), JP Morgan Chase and Co. (NYSE:JPM), and Citigroup Inc. (NYSE:C). Requiring big writedowns on those loans could burn through banks’ capital.”

With these banks face a mounding platter of legal issues already, further write-offs could put lenders in financial strain and cause them to dump on the credit market in turn by extending less capital to borrowers.  Look out below, home-owners.

Watch these homebuilder stocks and see how the news makes an impact: M.D.C. Holdings Inc. (NYSE:MCD), D.R. Horton Inc. (NYSE:DHI), Toll Brothers Inc. (NYSE:TOL), The Ryland Group Inc. (NYSE:RYL).