Real Estate & Mortgage Insights

Number of Underwater Homeowners Fell in Third Quarter but Prices Declined as Well

According to the latest report from data analysis company CoreLogic, fewer American homeowners were underwater on their mortgage loans during the third quarter of 2011 than the second. However, with home prices continuing to fall, this drift may not stick.

During the third quarter, 10.7 million homeowners, 22.1 percent of all mortgage holders, across the country owed more on their homes than they are worth. That's down slightly from the 10.9 million, or 22.5 percent, during the second quarter.

"Although slightly down, negative equity remains very high and renders many borrowers vulnerable when negative economic shocks occur, such as job loss or illness," Mark Fleming, chief economist at CoreLogic, said in a statement.

A high percentage of underwater loans is a major concern as those borrowers are essentially stuck in their homes. Typically, these borrowers can't qualify for refinance loans because their loan-to-value ratios are too high. They can't sell because they would have to come up with the difference themselves and for the majority, that amount is no small sum. For the 8.6 million conventional loans borrowers with negative equity, they owe an average of $70,000 more their homes are worth.

In the event of a household economic crisis, like losing a job, many homeowners are unable to widen their employment search areas, since they are unable to get out of their home loans anyway. And if they can't find a job quickly, they soon fall behind payments and go into foreclosure.

The latest statistics, therefore, are less than encouraging. The drop in the figures was not a product of borrowers recovering equity; it reflected the roughly 200,000 borrowers across the nation who lost their homes to foreclosure during those three months.

CoreLogic also reported that the number of those in danger of going underwater – those with less than 5 percent equity in their homes – was 2.4 million. That portion of the population could soon join the ranks of negative equity soon than later as the Standard & Poor’s Case-Shiller index recently reported that home prices fell 0.6 percent in September from August and were down 3.6 percent from the previous year.

"The plunging collapse of prices seen in 2007 to 2009 seems to be behind us," says David Blitzer, chairman of the S&P index committee, but he warned that "any chance for a sustained recovery will probably need a stronger economy." The unemployment rate has remained in the painful range of 9.0 percent to 9.2 percent since April, not leaving much room for economic development. Until that rates starts dropping, prices will have a hard time stabilizing for good.

A few states are feeling the pain more than others. The top five states with the highest percentage of underwater borrowers were Nevada, Arizona, Florida, Michigan and Georgia, which edged out California for the first time. In Nevada, 58.3 percent of all homeowners are upside down in their loans. New York has the lowest rate with just 6.3 percent of borrowers underwater.

There may be hope for some of these borrowers, as the government has recently expanded its refinance program to those with negative equity, but for the majority, they will either fall into foreclosure or simply have to wait out the housing recovery. Unfortunately, both options mean a painful housing recovery for the whole country.



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