Posted on August - 27 - 2010
Foreclosures Leave Fewer Mortgages Underwater
The number of “underwater” mortgages declined in the second quarter of the year, but that’s mainly because some of those borrowers lost their homes to foreclosure, according to a new report out this week.
The real estate data company Corelogic reported this week that 11 million homeowners, representing 23 percent of outstanding U.S. mortgages, were in negative equity in the second quarter of the year; that is, the amount owed on their mortgage exceeded the value of their home. That was down from 11.2 million previously and marked the second straight quarterly decline in underwater loans.
Loan-to-value ratio a major factor
Unfortunately, that decline was primarily due to foreclosures, the report said, and not rising or stabilizing prices. Practically the entire decline was among borrowers whose loan-to-value ratios exceeded 125 percent; that group, which is associated with a higher risk of default or foreclosure, shrank to 4.8 million homeowners, down from 5 million in the first quarter. “Negative equity continues to both drive foreclosures and impede the housing market recovery.” said Mark Fleming, chief economist with CoreLogic. “With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time.”
Homeowner mobility limited
The report noted that negative equity is limiting homeowner mobility, saying there is a clear relationship between negative equity and declining conventional home sales (i.e., nondistressed) at both the community and state levels. Areas with low levels of negative equity showed much smaller declines in home sales since 2005 than areas with high levels of negative equity, suggesting that declining property values were limiting homeowners ability to move to new locations. Negative equity was also found to create a type of vicious circle when it came to price appreciation. Properties with 50 percent equity or more were found to appreciate an average of more than 1 percent from the fourth quarter of 2009 to the second quarter of 2010, whereas homes in negative equity declined 1.5 or more, with average decreases up to 2 percent for homes underwater by 50 percent or more.
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