Millions owe more on their homes than homes are worth

CHICAGO - Joey Goldner always approached real estate with a gardener's zeal. He'd plant his money in a building, patiently care for it and watch its worth grow. For 30 years, it was a brilliant avocation -- right up until the heavy thud of the housing market helped flip Goldner's mortgage upside down.

Facing debilitating health problems, Goldner refinanced his Chicago-area home repeatedly, only to wind up with a $729,000 mortgage on a house that eventually sold for $450,000.

In real estate circles that's called being underwater -- owing more than the value of a home. Goldner is just now coming up for air.

"I kept refinancing it to pay the mortgage," he said. "I kept hoping the market would level off. I never imagined this would happen."

Few did. But an estimated 12 million American mortgage holders now owe the bank more than their homes are worth. And with housing prices still sliding and the credit crunch worsening, the number of so-called upside-down mortgages is expected to rise to record levels.

Within a year, Moody's Analytics predicts, a whopping 30 percent of all U.S. mortgage holders will owe more on their homes than they are worth. In some California communities, according to real estate service firm Zillow.com, negative equity already is the norm.

The effects of this are many.

The risk of default rises -- and it's good to recall that it was people defaulting on their home loans last year that set much of the current economic crisis in motion. Home equity lines of credit -- even for people who pay their mortgages faithfully -- will be harder to come by. And woe to those who lose a job or get sick.

"If you have some kind of disruption to your income and you can't make your mortgage payment, it's going to be very hard for you to refinance or anything like that," said Mark Zandi, chief economist for Moody's. "This was the bedrock of most people's savings, their home."

Goldner walked away from his three-bedroom home once he could no longer make the mortgage payments. A friend who is a real estate broker was able to arrange what's called a short sale -- the home was sold for less than Goldner owed, all the proceeds went to the bank and the remainder of Goldner's mortgage debt was forgiven.

"I feel very fortunate to be out of that place and moving forward, unlike a lot of people in this kind of situation," Goldner said. "That's one big debt off my shoulders."

Real estate agents say short sales, once unthinkable, have soared.

Goldner's situation -- in which his health cost him his livelihood and in turn led to insurmountable debt -- is an extreme case. But the upside-down effect will change the financial equation for millions of people who do not face an immediate crisis.

Matt Bender and Susan Flynn of Chicago's West Ridge neighborhood are among those who, all of a sudden, are staring down a financial hit.

The couple are expecting a baby in January, but Bender's nicely rehabbed third-floor condo is too small and the stairs are too numerous to regularly cart a newborn -- and the equipment he or she will require -- up and down.

They need a house, desperately, but to get one they must first sell the condo. It has been on the market for a while at $6,000 less than what Bender paid for it three years ago. They've had nary a nibble.

They are now forced to hold their breath and go underwater. If and when they sell the place, Bender will have to tap into his savings to pay off the rest of his mortgage.

"You've got to feel lucky to have a place to live and a job, I suppose," said Bender, a grade-school teacher. "But this is pretty humbling. And we're kind of stuck."

To avoid a loss, Bender and Flynn may end up having to wait and buy a home together after their baby is born rather than before.

"We just never thought we'd be faced with this," Flynn said. "Real estate was supposed to be the one investment you could really count on."