Negative equity continues to diminish the severity of foreclosure for many homeowners. Numerous industry studies show that borrowers become more likely to defaulton their mortgage or simply walk away from the debt obligation when they owe more on the home than it is worth. Despite that home values appear to be stabilizing in some markets, the number of underwater homeowners continues to grow.
According to a new study released by First American CoreLogic Tuesday, more than 11.3 million residential properties were in negative equity at the end of 2009. That equates to 24 percent of all homes in the United States with mortgages, up from 23 percent, or 10.7 million homes, at the end of last year's third quarter. All told, the nation's homeowners are a combined $801 billion underwater.
First American says an additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near-negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
""Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners,"" said Mark Fleming, chief economist with First American CoreLogic. ""Since we expect home prices to slightly increase during 2010, negative equity will remain the dominant issue in the housing and mortgage markets for some time to come.""
According to First American's analysis, negative equity continues to be concentrated in five states, where property values have plummeted significantly since the housing bubble burst.
As of the end of last year, Nevada had the highest percentage negative equity, with 70 percent of all of its mortgage properties underwater. It was followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (35 percent).
Among the top five states, the average negative equity share was 42 percent, compared to 15 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.2 million) had the largest number of negative equity mortgages accounting for 4.6 million, or 41 percent, of all negative equity loans.
Last week, President Obama said he would give $1.5 billion to housing finance agencies in these states, which can be used to develop mortgage assistance programs to help underwater borrowers negotiate with lenders to write down mortgages.
First American says the rise in negative equity is closely tied to increases in pre-foreclosure activity and is a major factor in changing homeowner default behavior. Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property value, owners begin to default with the same propensity as investors, the company explained.
Those conclusions don't bode well when juxtaposed with the current market figures. The segment of borrowers that are 25 percent or more underwater account for over $660 billion, or 82 percent, of all negative equity. The average equity for an underwater borrower in Q4 was -$70,700, up from -$69,700 in Q3 2009.
On the other end of the scale, about 23 million, or 49 percent, of all homeowners with a mortgage have at least 25 percent equity in their home, and some 12 million have at least 50 percent equity in their home.