Every day brings a new headline in the newspaper about the mortgage mess in the U.S. If you believe what the media says, most Americans are on the verge of losing their homes.

 

Like much of the news, the news of the mortgage market has been sensationalized by the media. Unfortunately, the real news never finds its way into the pages of the local newspaper or on the evening television newscast.

 

Here are the facts:

 

• In January 2008, about 493,000 homes were in some stage of foreclosure proceedings. That is about double the level of a year ago. 

• There are 75,000,000 homeowners in the U.S. Foreclosures represent about 0.65 percent of all homes in the U.S. That’s about two-thirds of one percent of all homes.

• About 51,000,000 homeowners have a mortgage. Foreclosures represent about 0.96 percent of these homeowners. That’s just under one percent.

• Said another way, 99.3 percent of all homeowners are NOT in trouble; 99.0 percent of all homeowners with a mortgage are NOT in trouble.

• The amount of money owned by homeowners in foreclosure is relatively small: an estimated one-half of one percent of all mortgage debt outstanding. Most of the homes in foreclosure are lower-priced homes. Further, the entire mortgage won’t be written off; rather, some percentage – perhaps 15-20 percent of the value of the mortgage – will be lost, but the rest will be recouped when the house is sold.

 

IDEX Online Research recently put the question – why are the financial markets were reacting so violently to such a seemingly minor problem – to Al Broadus, former Federal Reserve Governor (Fifth District, Richmond, Virginia) and former member of the Federal Open Market Committee (FOMC). Broadus is a professional colleague and personal friend who now observes the market from afar. His response was this: because Wall Street has packaged mortgages into complex financial instruments, no one knows where the exposure to these foreclosed mortgages lies. No one knows who actually holds the bad debt. When this uncertainty is resolved, market stability is expected to be restored.

 

Guest Commentary: Cheryl Russell

Recently, Cheryl Russell who is editorial director of New Strategist, which publishes a newsletter called American Consumers Newsletter as well as books about American demographics (newstrategist.com), wrote a piece titled “Most Homeowners Are Not in Trouble.” Her comments are spot-on. Unfortunately, her commentary doesn’t make for sensationalism in the media, so it has not been widely reported.

 

With her permission, we have reprinted the article below. You may sign up for a free subscription to the American Consumers Newsletter by going to the website (newstrategist.com).

 

Most Homeowners Are Not in Trouble

By Cheryl Russell, editorial director, New Strategist Publications

 

"Tapped-Out Consumer" was the recent headline in a Business Week article about the unfolding housing crisis. The New York Times chimed in with the sweeping claim that "Everyone from first-time homebuyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn't go bad."

 

Everyone made bets? Time out. Let's check those breathless reports from the frontlines of the housing crisis.

 

In fact, the unfolding housing crisis is hurting only a tiny percentage of homeowners. To get a realistic perspective, you have to look beyond the numerator – the people in trouble. You must also consider the denominator – the total number of homeowners. The denominator is a HUGE number. Last year there were 75 million homeowners in the United States. Few of them are in trouble.

 

Here's why: nearly one-third of the nation's homeowners – 24 million – own their home free and clear. That means they have no mortgage, no home equity loans, and are in no danger of foreclosure. While the decline in housing values may make them uncomfortable, it will not affect their bottom line unless, for some reason, they have to sell their house before housing prices resume their historically slow upward climb.

 

Things are not all that bad for the 51 million homeowners with a mortgage either. Most have managed their asset wisely. Unfortunately, the same cannot be said of the nation's financial institutions, which is the reason our economy is on the brink of recession. Let's look at the facts.

 

1. Most homeowners with a mortgage have a traditional loan. Fully 81 percent of homeowners with mortgages have a fixed-rate loan with a median interest rate of just 6 percent.

 

2. Most homeowners have a substantial cushion of equity in their home, a cushion that will protect them from all but the most catastrophic price drops. Homeowners with a mortgage owe, on average, only 55 percent of their home's value – leaving room for a substantial price decline before they are in hot water.

 

3. Most homeowners have NOT used their home as an ATM machine. Only 13 percent of the nation's 75 million homeowners even have a home equity loan. This fact bears repeating because the media narrative has "everyone" spending down their housing equity on granite countertops and large-screen TVs. To repeat, more than 85 percent of the nation's homeowners do NOT have a home equity loan.

 

Of course, in a housing market as large as ours, even a small percentage in trouble means millions are drowning. Only 3 percent of homeowners with a mortgage owe more than their house is worth, for example, but that 3 percent amounts to 2.5 million homeowners. But these numbers are a far cry from "everyone." Everyone did not make foolish bets, but the unfolding crisis shows that everyone will be hurt by the few homeowners and the many financial institutions that did.