BluefoxToday blog : An 800 Pound Gorilla Called Negative Equity Is Lurking

An 800 Pound Gorilla Called Negative Equity Is Lurking

gorillaWhile the administration continues to talk about modifying mortgages, about “shaming” lenders and servicers who fail to perform to some pre-determined standard, an 800 pound gorilla called negative equity is lurking in the corner. At some point the gorilla will pounce and crush those who stand in its way. It will crush already depressed housing prices; and it will do so because no one has faced the reality of its existence.


Negative equity, a beast that has decimated the wealth of millions of homeowners across the nation, must be confronted as an integral part of the modification process; not doing so invites more foreclosures and will wipe out the remaining equity of those who had been spared from the ordeal. But if this danger exists, why is everyone avoiding it? Why do the politicians establish mortgage modification programs that ignore one of the core problems of this housing crisis?


Politicians by their very nature avoid complex or controversial issues that might endanger their political power, and look to short-term or temporary solutions for problems that demand more bold actions. This issue demands such boldness and leadership. Of course unemployment is the other major issue, and while it’s much more difficult to solve, resolving the problem of negative equity would make it easier for those whose income has been lost or reduced to remain in their homes.


What we need is a leader who is willing to address Congress and the nation; to lay out the cold, hard facts and to present a program that would require lenders to reduce principle balances so they are in line with current appraised value. Would that be unfair to those of us who have seen our homes value drop, but are still making our payments? Who cares? The issue has nothing to do with fairness. Life isn’t fair.


Dramatically slowing the foreclosure process would certainly benefit all who remain in their homes, by keeping neighborhood values from dropping even more. And it would bring an end to the chaos that will continue to disrupt the housing market until home values have fallen so much that everyone suffers.


I’m not a fan of government intervention. Government by its very nature usually creates problems equal to the ones it solves; but there is nothing “normal” about the crisis we face. Unless something is done to deal with the problem of negative equity, we will see more foreclosures than many could imagine; and they will continue for years, depressing the housing market and disrupting the economy.


The issues involved in dealing with negative equity are complex and will, of necessity, demand showing preference for one group over another, but to ignore the problem is to invite disaster for all.

The housing Guru: The one source for all your housing questions

Comment balloon 25 commentsJohn Mulkey • December 04 2009 06:32AM


Good read and very true.

Posted by Wendy Hodges, Davis & Hodges (Re/Max Southern Shores) about 9 years ago

Wendy - Thanks for stopping by!

Posted by John Mulkey, Housing Guru ( about 9 years ago

Hi John.  Not particularly uplifting...

I too have concerns about the housing market. 

I enjoyed your take.

Thanks for writing,


Posted by Ken Tracy, Helping clients buy and sell since 2005 (Keller Williams Realty Infinity) about 9 years ago

John -

Thanks for the post.  I agree.  This is far from a "normal recession".

Posted by Joel Prince, Hixson/Soddy Real Estate Broker (The Principle Group, Inc) about 9 years ago

Ken - Thanks for your comments.

Joel - The guys in DC need to understand that a different tact is required.

Posted by John Mulkey, Housing Guru ( about 9 years ago

I am just not sure if they got the balls to do this .... how long have we been hearing of programs to help out homeowners underwater ???

Posted by Gene perez (Greater Mortgage Solutions & Valley Hills Realty ) about 9 years ago

Gene - I agree that they don't currently exhibit the willingness to do what it's going to take. The previous administration's program flopped, and so has this ones.

Posted by John Mulkey, Housing Guru ( about 9 years ago

John, Even the present crisis creates opportunity. Going forward all parties are going to be proactive or reactive.  It's a matter of timing. 

Posted by Steve, Joel & Steve A. Chain (Chain Real Estate Investments & Mortgage, Steve & Joel Chain) about 9 years ago



You are very right. In Canada, we have not seen the enormous decline in values, but the risk is still there.



Posted by Brian Madigan, LL.B., Broker (RE/MAX West Realty Inc., Brokerage (Toronto)) about 9 years ago

Steve - There are always opportunities, but we're dramatically limiting them by ignoring the problems we face.

Posted by John Mulkey, Housing Guru ( about 9 years ago

Brian - I think you're in better shape overall than we are, and we're in line for millions of foreclosures if we don't put forth a serious effort to slow them.

Posted by John Mulkey, Housing Guru ( about 9 years ago

John: This is an excellent observation on negative equity. Your title seems well deserved.

Posted by Matt Grohe, Serving the metro since 2003 (RE/MAX Concepts) about 9 years ago


It seems that no one really has a good answer to solving negative equity. Writing down the principal to market would kill a bunch of banks, although one day it may have to go to that.

Posted by Esko Kiuru about 9 years ago


There's at least another 2 million with less than 5% equity. That's going to hit the fan.

Posted by Terry Chenier (Homelife Glenayre Realty) about 9 years ago

Matt - Thanks for your comments.

Esko - That's where the government can step in and use some of the TARP and stimulus money to actually make a difference.

Terry - At least, and if you consider that homeowners have to pay 6% or so in commission to sell their home, the numbers get worse.

Posted by John Mulkey, Housing Guru ( about 9 years ago

Thanks for your thoughtful post, John.  The problems with the people in DC is that they have no answers AND think they are so much smarter than everyone else, they are not willing to listen to those who may. 

The overwhelming majority of Members of Congress are lawyers by training and don't have a clue how markets work or how a typical family (their constituents) live.  

They get sweetheart deals on mortgages that you and I would never get and they don't have to pay their taxes until they are caught.  And the Adminstration isn't any better.  I read a startling statistic that less than 8 percent of the President's staff and Cabinet have ANY private sector experience- so they don't understand business or markets either.  Sorry to be so cynical :) but I don't expect much as far as answers to this economy to come from Washington.

Posted by Suzy Morris (The Morris Team) about 9 years ago

John, I understand everyone trying to come up with a solution to this massive problem and looking for the government to come up with something, but what makes you think that the government, Fed and the banks are the solution? Didn't they help start this problem? How are these same people, who we complain about getting big bonusus, going to come up with a solution that will only line their own pockets? And the government, did anyone happen to catch the hearings for the Fed Chairman Yesterday? Those of us who owned houses in the 80's and 90's have to remember the same problem, I lived through it with my own house! If we keep looking for quick fixes, we will make it worse in the long run.....but I will say, this type of discussion needs to be had by all....Let's not just leave it up to the politicians.....Thanks for the post

Posted by Steve Hubbell, Realtor, Waterfront Specialist (EXiT Realty Chesapeake Bay) about 9 years ago

Suzy - I've seen the same statistic on the administration's lack of private sector experience and think that's a big part of our current problems.

Steve - Having me say I think government can offer a solution is like "pulling teeth," but I don't see any other possibility.  Left alone, we'll have millions more foreclosures over the next several years; we must do something.  In the end, however, it's only a suggestion; I don't think they're listening.

Posted by John Mulkey, Housing Guru ( about 9 years ago

To address this problem seriously, we'll have to wait until there's a new administration. The only thing the Chicago thug administration cares about is expanding their own power. The solution you hope for would re-empower the individual homeowners.

Posted by Jon Budish (Resident Realty) about 9 years ago

Jon - Unfortunately we'll have millions of foreclosures in the interim.

Posted by John Mulkey, Housing Guru ( about 9 years ago

The drop in equity during the 80's does not compare. The Gorilla of 2009 is beating his chest trying to get DC to listen. He has a story to tell that deserves a new solution.

Posted by Kate Kate about 9 years ago

Maybe disaster for all is the best way to do it since it is equitable. I suspect that the Government won't allow disaster for all.

Maybe if we elected politicians for life it might allow them to actually look for long-term solutions instead of short-term electrable solutions. Hmmmmm. I might be onto something.

Happy December!

Posted by Not a real person about 9 years ago

Russel - Allowing disaster for all would mean disaster for the politicians, but that's not necessarily a bad thing. As for electing politicians for life, we already do that in some areas; and they don't seem more effective because of their tenure.

Posted by John Mulkey, Housing Guru ( about 9 years ago

It's interesting to follow the gradual evolution in thinking by the voters, and the posters here on AR.  Last year at this time the "me too" crowd was decrying the attempts by the government to help out distressed homeowners -- think "bailout".

Now we are not hearing so much about those bailouts but we are hearing more about the need for the government to get involved. No one seems to have a good solution in mind, but the consensus seems to be building that the government must do something.

We are hearing less about "socialism" and more about "solutions" as more of us become aware that this is more than just a cyclical housing price downturn.

I agree with many others that the government usually creates more problems than it solves, but in this case we may have to rethink this. We must be ready to explore any and all of the possiblilities. 

Posted by Thomas McCombs (Century 21 HomeStar) about 9 years ago

Thomas - As I've previously stated, I think government is rarely the solution to market problems; however, this isn't our traditional recession.  Government could help, though I doubt they'll offer anything meaningful.

Posted by John Mulkey, Housing Guru ( almost 9 years ago