Negative equity numbers rise

By Frank Weir Legal News First American CoreLogic, the first company to develop a national, state and city-level negative equity report, has released third quarter data that includes a proprietary model which factors in loan amortization and utilization rates for home equity lines of credit (HELOC), providing a more precise view of "underwater borrowers." According to First American CoreLogic, nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September 2009. As a point of comparison, using the previous methodology, which did not account for amortization or HELOC utilization, the Q3 negative equity rate would have been 33.8 percent. Negative equity, often referred to as "underwater" or "upside down," means that borrowers owe more on their mortgage than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both. Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide. The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates. Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity. The bulk of 'upside down' borrowers, as a group, share the following characteristics: * Financed their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity. Negative equity continues to be a problem even for 2009 originations as evidenced by a negative equity share of 11 percent and another 5 percent near negative equity; * Purchased newly built homes that are concentrated in a small number of states. For homes built between 2006 and 2008, the negative equity share is over 40 percent; * Relied on adjustable rate mortgages (ARMs); * Bought less expensive properties. The average value for all properties with a mortgage is $270,200, but properties in negative equity have an average value of $210,300 or 22 percent less. The average mortgage debt for properties in negative in equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000. The aggregate property value for loans in a negative equity position was $2.2 trillion, which represents the total property value at risk of default, against which there was a total of $2.9 trillion of mortgage debt outstanding. "This enhanced methodology provides a more precise picture of this significant problem that so many homeowners are facing," said Mark Fleming, chief economist with First American CoreLogic. "Negative equity continues to be pervasive and to impact almost every segment of the housing market," he said "The recent improvement in home prices this past spring and summer has slowed the increase in negative equity, but it will take a significant rebound in home prices, which we are not expecting, to offset the dampening effects of negative equity in the most depressed states." Published: Fri, Dec 11, 2009

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