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With Negative Equity Still Rising, Dodd-Frank Could Make Things Worse

Fourth quarter data from ""CoreLogic"":http://www.corelogic.com reveals negative and near-negative (mortgages with less than 5 percent equity) equity mortgages account for 27.9 percent of all residential properties with a mortgage nationwide, and the company says recent legislation could make a gloomy situation even darker for the hardest-hit states.


Negative equity increased in the last quarter of 2010, rising from 10.8 million properties underwater in the third quarter to 11.1 million in the fourth.

Today, about 23.1 percent of all residential properties with a mortgage are underwater, and an additional 2.4 million borrowers have near-negative equity.

At the end of the fourth quarter, Nevada had the highest negative equity percentage with 65 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent).

Not only that, Nevada also had the highest average loan-to-value (LTV) ratio for mortgaged properties at 118.


Next was Arizona with 95 percent, Florida with 91 percent, Michigan with 84 percent, and Georgia, with 81 percent.

According to the report from the Santa Ana, California-based company, legislation enacted by the Dodd-Frank Act in 2010 will have a negative effect on states that have higher LTVs. Dodd-Frank enacted the qualified residential mortgage designation (QRM), which many have speculated will feature a mandatory 20 percent down payment.

""Clearly, higher down payments are necessary to reduce credit risk for lenders and securitizers,"" read the report, ""but given the majority of homebuyers are repeat buyers who use current equity as the bulk of their equity, states that have a lower proportion of borrowers with 80 percent LTV or less will be adversely affected because repeat buyers will not have sufficient down payments to buy new homes with QRMs.""

The report continued, ""Nevada will be the most negatively impacted by the QRM exemption, because few homeowners have 20 percent equity or more in their home. Other hard-hit foreclosure states that would be negatively impacted include Georgia and Colorado.""

The total level of negative equity increased to $751 billion in Q4, up from $744 billion in Q3. More than $450 billion of the total negative equity dollars include borrowers who are underwater down by more than 50 percent.

""Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties. Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish,"" said Mark Fleming, Corelogic's chief economist.

About Author: Joy Leopold


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