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The Basics

An invisible threat to home values

If you're living in or hunting for a house in an attractive neighborhood, take a closer look. If other folks are facing foreclosure, you'll pay the price in lost property value.

By Bankrate.com

A convenient location, good schools, well-maintained homes and a modest inventory of properties for sale: These are the traditional cues that homeowners and buyers look for to ensure that home values will hold up in a neighborhood.

But whether values sink or stick is now dependent on an invisible factor: the mortgage balances of homeowners in the area.

Approximately one-third of all mortgage holders have loan balances that are higher than the current value of their homes, according to a recent government report on federal anti-foreclosure programs.

Homeowners in this unfortunate position are dubbed "underwater" borrowers.

As their tide of debt rises above what they could get from selling, such owners have less incentive to care for their properties, which depresses area prices further, according to the Congressional Oversight Panel's report on the Troubled Asset Relief Program, or TARP.

And if they experience financial distress, underwater owners are more likely to lose properties to foreclosure, with the resulting empty homes adversely affecting prices up and down the block.

Spotting signs of home abuse

Sometimes it's evident that mortgage balances are sabotaging neighborhood values.

John Sullivan, the president of the National Association of Exclusive Buyer Agents, has encountered relatively new subdivisions that normally would look fresh, with finishing touches being added, such as additional landscaping.

Instead, lawns are scraggly, windows are dirty, and other signs of home abuse abound.

Sullivan says it's a safe assumption that owners got "easy 100% financing" a few years ago, when the developments began, and now price declines have left owners in the red. Some may have already been foreclosed upon.

Many underwater owners are clustered in newer developments, as those who took out mortgages in 2006 and 2007 are the most likely to have debt toppling their home values, says Sam Khater, a senior economist with First American CoreLogic.

But not all underwater borrowers are found in new developments that already exhibit telltale signs of owners' mortgage misfortune. Khater says it's not until mortgage debt falls about 20% below home values that foreclosures start occurring with more frequency.

A matter of public record

Because neighborhoods cluttered with underwater owners are likely to see further value drops, Evan Feldman, an agent with ZipRealty in Wellington, Fla., tries to alert buyers to the threat. "I try to educate them as much as I can. I don't want them saying later, 'How could you not tell me this?'" (Read "Foreclosure nearby? It's your problem.")

Though it might seem that the size of a homeowner's mortgage is strictly between the homeowner and the lender, mortgage data are public record. County recorders or county clerks record a lien for the amount of a mortgage each time a loan is made.

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Some counties offer such records online. You can search using a borrower's name, an address or a personal identification number from other online tax records.

While it might feel like prying into neighbors' financial lives, homeowners worried about what's happening to values in a neighborhood can use the data as another indicator of what's ahead. (For more indicators, read "When will your housing market recover?")

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Not all counties offer data online. Many still keep records at the courthouse the old-fashioned way, says Jacqueline Byers, the director of research and outreach at the National Association of Counties.

Byers warns that recorded mortgage balances don't reflect the amounts that borrowers have paid down through monthly payments or prepayments.

Consumers in counties not providing online access might find it too bothersome to dig through paper records. However, real-estate agents often can get the data online through services that mine public records and sell the information to subscribing real-estate businesses. First American CoreLogic's Khater say his company has a subsidiary providing just such services.

This article was reported by Marilyn Kennedy Melia for Bankrate.com.

Published Dec. 17, 2009

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