'Underwater' Homes: A Crisis Persists in Bay Area, Nationwide

A new study on the continuing fallout from the collapse of the housing market calls on both loan holders and government at all levels to take stronger action to address the still widespread crisis of "underwater homes" — properties for which mortgage payers owe more than their homes are worth.

One of the solutions suggested — seizure of underwater homes by local governments under eminent domain — is already being attempted by the city of Richmond in the face of fierce opposition from the local real estate industry.

The report, "Underwater America," was produced under the auspices of UC Berkeley's Haas Institute for a Fair and Inclusive Society and catalogs cities and ZIP codes still burdened with large numbers of underwater homes years after the declared end of the Great Recession.

The study, using data from real estate data firm Zillow, names Hartford, Connecticut as the hardest-hit U.S. city, with 56 percent of homes underwater. Among ZIP codes, a swath of more than a dozen zones northwest of Atlanta shows underwater numbers ranging from 65 percent to 76 percent.

The list of hardest-hit cities includes several in the Bay Area and Northern California: Vallejo is listed at No. 25, with 36 percent of homes underwater. Others in the region include Stockton, Modesto, Fairfield, Antioch, Richmond, Sacramento and Salinas. Other California cities named are concentrated in the exurban belt north and east of Los Angeles and in the San Joaquin Valley, including Victorville (with the state's highest underwater rate, 40 percent) Lancaster, San Bernardino, Palmdale, Visalia, Fresno, Bakersfield and Rialto. Nineteen of the 395 hardest-hit ZIP codes are in California.

The study says that most underwater communities typically have several things in common. They generally have large African-American and Latino populations and household income well below the national median of roughly $51,000. And the study says that these communities and their residents were the most frequently targeted by predatory loan practices. In 2006, for instance, 52.8 percent of all new home loans to African-American borrowers were classified as "high-price" loans. The figure for all Latino borrowers was 44.9 percent; for whites, it was 17.5 percent.

The report argues that the persistence of deep pockets of negative equity shows that government attempts to deal with the housing crash and subsequent foreclosure crisis have been "woefully inadequate." The paper makes five broad suggestions for immediate action:

1. Both private lenders and government-sponsored loan holders should reduce the principal on underwater mortgages to current market values.
2. If loan holders are unwilling or unable to reduce the principal on underwater loans, they should allow the loans to be purchases by public or nonprofit entities that are willing to restructure them.
3. Local municipalities should use all options at their disposal to facilitate the goal of resetting mortgages to current market values, including the use of "reverse eminent domain" to acquire mortgages in order to restructure them with fair and affordable terms. ("Reverse eminent domain" is the program being attempted in Richmond.)
4. Lenders and investors who own already-foreclosed homes should sell them to entities that will convert them to affordable housing.
5. Local municipalities should use all the options at their disposal, including "reverse eminent domain," to facilitate the goal of turning vacant, foreclosed properties into affordable housing.

Here's the complete study, "Underwater America," from the Haas Institute: