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Underwater Ratio Improves but Seconds Sinking

The number of mortgage borrowers who owe more on the loan than their home is worth decreased slightly during the first quarter, ""CoreLogic"":http://www.corelogic.com reports, but the firm sees a problem area among homeowners with second mortgages.
[IMAGE] New data released by CoreLogic Tuesday shows that 10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity as of the end of March. That's down from 11.1 million, or 23.1 percent, at the end of last year.

An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the first quarter. Together, negative equity and near-negative equity mortgages accounted for 27.7 percent of all residential properties with a mortgage nationwide. In the fourth quarter, these two categories stood at 27.9 percent.

CoreLogic says not only has the decline in home prices been a clear force driving negative equity, but borrowers with second mortgages, such as home equity lines of credit, have a significantly higher risk of slipping into a negative equity position.

The company found that while only 18 percent of borrowers with no home equity loans were underwater at the end of the first quarter, 38 percent of borrowers with home equity loans were in a negative equity position. CoreLogic notes that over 40 percent (4.5 million) of all negative equity borrowers have home equity loans.

On top of raising the probability of a negative equity position, CoreLogic says home equity loans raise the severity of that position.

According to the company's analysis, a negative equity borrower without home equity loans is upside down by an


average of $52,000, versus an average of $83,000 for underwater borrowers with second mortgages.

Generally, the default rate rises as the current combined loan-to-value ratio (CLTV) increases. However CoreLogic found there are differences between default rates for negative equity borrowers with home equity loans vs. those without.

At moderate levels of negative equity (up to 115 percent CLTV), the default rate for borrowers with home equity loans is slightly higher than those without. However, for those with severe negative equity (115 percent CLTV and above), the relationship reverses and the default rates for mortgage loans without home equity perform slightly worse.

CoreLogic reports that overall, Nevada had the highest negative equity percentage during the first quarter with 63 percent of all mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (36 percent), and California (31 percent).

While the average negative equity borrower was upside down by $65,000, there were wide disparities by state.

New York borrowers were upside down by an average of $129,000, the highest average in the nation, followed by other high housing cost states: Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).

Ohio's negative equity borrowers were upside down by $31,000, the lowest average in the nation, followed by Indiana ($34,000) and Minnesota ($38,000).

""Many borrowers in negative equity are still able and willing to make their mortgage payments,"" said Mark Fleming, chief economist with CoreLogic. ""Those in negative equity and impacted by an income shock of some kind, such as a job loss, divorce, or death, are much more likely to be at risk of foreclosure or a short sale. The current economic indicators point to slow yet positive economic growth, which will slowly reduce the risk of borrowers experiencing income shocks.""

Still, Fleming added, ""[T]he existence of negative equity for the foreseeable future will weigh on the housing market recovery by holding back sale and refinance activity.""

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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