A decade after the housing collapse began, Cleveland and Akron are among the worst large cities in the nation for homes that are worth way less than the mortgages on the properties.
In fact, among 88 metropolitan areas with populations of 500,000 or more, Cleveland has the largest percentage of seriously underwater properties, according to a new report from Attom Data Solutions of California, which compiles property databases.
Further, among the five worst cities in the nation, all but one were in Ohio. Behind Cleveland at No. 1 is Las Vegas at No. 2, followed by Akron, Dayton and Toledo. In all cases, at least 20 percent of the homes with mortgages are seriously underwater.
Attom defines "seriously underwater" as homes whose owners owe at least 25 percent more than the estimated market value of the property.
Myra White, a vice president at Howard Hanna Real Estate in Shaker Heights, says "the fraudulent exploitation of 1998 to 2008, resulted in these heartbreaking numbers."
Greater Cleveland was the epicenter of the predatory lending/subprime lending disaster that led to homeowners refinancing their homes for substantially more than the home was worth, often at exorbitant interest rates and with huge balloon payments that required the loan to be paid off after a few years.
In other cases during that decade, people bought homes they couldn't afford after lenders forged or disregarded loan documents. Lenders often didn't care whether the homeowners later defaulted, because by that time, the lender would have sold the loan to another bank.
Even among the strongest borrowers who bought homes in 2006-08 with at least 20 percent down, it was not uncommon for those homes to lose 30 to 50 percent in the next few years.
In part because of unethical lending, and in part because of the sour economy, one out of every six homeowners in Ohio was at least a month behind on his mortgage payments in 2009. In addition, about one of every 20 Ohio homeowners with a mortgage was in foreclosure at that time.
Unethical appraisers who inflated home values helped cause the financial crisis. Now, White said, it seems many homes are being undervalued.
"I know that some appraisers ran amok for 10 years," White said, "but I sometimes feel that in Cleveland and perhaps also the First Ring suburbs, their negativity is playing a role in keeping values depressed...It's almost as if appraisers are perpetuating a self-fulfilling prophecy that Cleveland values cannot recover."
The results don't necessarily have any immediate impact on the homeowners or the neighborhood, as long as the current property owners continue to pay their loans. But homeowners with underwater mortgages can have less motivation to make their payments. They also may be more apt to not keep up with home maintenance; they may want out of their homes but be unable to sell because they'd owe money to their bank after selling, unless their lender would agree to a short sale.
However, Attom says several of the cities with big increases in underwater properties also saw big increases in distressed sales in the first quarter, and that can create "a drag on overall home values."
The 20 to 22 percent underwater levels in Cleveland and other big cities in Ohio compares to about 10 percent seriously underwater nationwide.
Economist Ken Mayland of ClearView Economics in Pepper Pike said people with underwater mortgages are "locked in," and this can prevent them from moving to a home that better suits their needs or is more affordable, and can stop them from moving to a city or state with better economic prospects. He called it "the Cleveland curse."
This region simply has recovered more slowly than most parts of the country. In the Cleveland-Elyria-Mentor area, average prices of single-family homes are still down nearly 9 percent from their mid-2006 peak and are close to 2003 levels.
Cleveland-area home prices were up 4.5 percent in February from a year before, according to a report last month from Case-Shiller. Across 20 major U.S. cities, however, prices jumped 5.9 percent from February 2016.
Across the country, there were about 5.5 million seriously underwater homes as of March 31, according to the Attom report. That's up slightly from Dec. 31, when it was 5.4 million, but down from a year ago, when the underwater total was 6.7 million.
Daren Blomquist, senior vice president at Attom Data Solutions, said the problem with homeowners who owe more than their home is worth is declining overall, but "it remains stubbornly high in often-overlooked pockets of the housing market."
Areas in the Midwest, central Florida and Las Vegas are the most vulnerable. Plus, nearly one-third of homes worth less than $100,000 remain seriously underwater, he said.
On a percentage basis, the current 9.7 percent nationwide is a significant improvement from the 12 percent figure from a year ago.
Cleveland also had one of the largest increases in underwater properties compared with last quarter. The cities with the biggest increases last quarter were Baltimore; Philadelphia; McAllen, Texas; Cleveland and St. Louis. In Cleveland, the number of seriously underwater homes jumped by 7,600 last quarter.
Two other Ohio cities, Columbus and Cincinnati, were among the Top 10 for a quarterly increase.
