Foreclosures Leaves Fewer Borrowers Underwater
The share of mortgage borrowers who were underwater â€“ meaning they owed more on the loan than their home was worth shrank during the third quarter. But analysts say the news is hardly encouraging since the decline is being attributed to a rise in foreclosures rather than a rise in home prices.
According to data released Monday by CoreLogic, 10.8 million, or 22.5 %, of all residential properties with mortgages were in negative equity at the end of the third quarter of this year, down from 11.0 million, or 23 %, in the second quarter. Itâ€™s the third consecutive quarter that the company has reported a decline in the number of underwater borrowers.
This is due primarily to foreclosures of severely negative equity properties. The slide in home prices thatâ€™s returned to most markets is likely to undo recent declines in the number of borrowers who are upside down on their mortgage.
Negative equity is a primary factor holding back the housing market and broader economy, but the good news is that negative equity is slowly declining and the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity.
An additional 2.4 million borrowers had less than 5% equity in the homes at the end of the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.50% of all residential properties with a mortgage nationwide.
CoreLogicâ€™s market data shows that negative equity remains concentrated in five states. Nevada 67 %, Arizona 49 %, Florida 46 %, Michigan 38 % and California 32 %.
Some of these same hard-hit states, however, also saw the largest declines in negative equity during the third quarter. Alaska experienced the biggest decrease, falling 1.8 %, followed by Nevada -1.6 %, Arizona -1.4 %, California -1.2 % and Florida -0.9. Â Idaho and Alabama are the only states with noticeable increases in their negative equity ratios last quarter. This comes as no surprise given they are currently the two top states for home price depreciation.
Although the level of negative equity is very high, CoreLogicâ€™s study found there are still many homeowners with equity. Nearly half of New York borrowers have 50 % or more positive equity, which leads the nation, followed by Hawaii 43 %, Massachusetts 40 %, Connecticut 39 % and Rhode Island 40 %.
This aggregate level of negative equity declined is approx $744 billion, which is a 3 % decline from Q2 2010 and a 7 % decline from the end of 2009 when it stood at $800 billion.
Homeowners in negative equity are not likely to behave similarly to homeowners with equity, because their financial interest has disappeared and has only a small prospect of returning soon given price trends. The lack of equity means upside down homeowners are not likely to maintain and improve their property and are more likely to behave like renters.