Due to the ongoing fall in home prices across the country and the slower foreclosure activities during late 2011, the number of homeowners who are underwater is continuously rising. Last week,a data released by CoreLogic Inc. (CLGX - Snapshot Report), a leading provider of information, analytics and business services, shows that underwater mortgages or negative equity rose to its highest level since 2009, when the company started tracking the data.
According to CoreLogic report, nearly 22.8% or 11.1 million of the entire mortgage residential properties in the U.S. were underwater in the October–December quarter, up from 22.1% or 10.7 million in the prior quarter. Additionally, about 2.5 million borrowers’ home value was merely 5% more than the loan value (close to underwater).
The total value of underwater mortgages was $717 billion in the fourth quarter of 2011. Out of this, nearly $342 billion was related to first liens without home equity loans, while first liens with home equity loans accounted for $375 billion. CoreLogic used the data related to 48 million properties with a mortgage (85% of all mortgages in the U.S.) as the base.
Further, as per CoreLogic’s report, Nevada had the highest rate of underwater mortgage, which is nearly 61%. This was followed by Arizona with 48% mortgaged homes underwater, Florida with 44%, Michigan with 35% and Georgia with 33%. Together, these five states had an average negative equity share of 44.3%. The remaining 45 states had a combined average underwater mortgage share of 15.3%.
Underwater mortgage mainly occurs as a result of a fall in the value of the property, non-payment or restructuring of debt to avoid foreclosure and negative amortization of mortgages or a combination of these. Additionally, when a mortgage is underwater, the homeowner cannot refinance the loan and has almost no alternative but to continue making payments with a hope that the property will regain its original value.
Moreover, underwater mortgage slows down home sales. As of now, the homeowners, who would have otherwise sold their houses, will have to wait for the home prices to rise before they decide on selling these. Also, at times the mortgage providers do not allow the borrowers to sell their property at lower price than owed on the mortgage.
However, there are signs that the foreclosure activities would increase in the upcoming months. Last month, a $25 billion settlement deal took place among 49 states’ attorneys general, the regulators and five mortgage servicers – JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report), Ally Financial Inc. and Wells Fargo & Company (WFC - Analyst Report). The deal is expected to speed up the rate of the foreclosure activities, which was almost frozen till now. Hence, this will help to bring down underwater mortgages.
We believe that until underwater mortgages decline and foreclosure pipeline clears, the recovery in the housing and mortgage markets will remain very slow.