by Jann Swanson

Over Half-Million Underwater Mortgages Turned Positive in Q2

Sep 12 2012, 10:12AM

The proportion of homeowners with negative or near equity in their homes declined in the second quarter of the year with 600,000 borrowers reaching a state of positive equity during the quarter making a total of 1.3 million so far this year. Negative equity refers to a mortgage with a balance greater than the value of the home.

CoreLogic released a report Wednesday morning showing that 10.8 million homeowners, or 22.3 percent of those with a mortgage, were underwater at the end of the quarter, down from 11.4 million or 23.7 percent at the end of the first quarter. An additional 2.3 borrowers* were classed as near-negative with less than 5 percent equity in their home. Twenty-seven percent of all mortgaged homes nationwide had negative and near-negative equity mortgages at the end of the second quarter compared to 28.5 percent a quarter earlier.

The dollar value of negative balances was $689 billion at the end of the quarter, down $2 billion from Q1. CoreLogic attributed the decline largely to improving house prices. Despite their negative equity position 84.9 percent of these homeowners continue to pay their mortgages, a slight increase from 84.8 percent in the previous period. In a report earlier this week, LPS noted that negative equity is, however a leading indicator of mortgage delinquencies. The CoreLogic chart below reinforces that correlation.

"The level of negative equity continues to improve with more than 1.3 million households regaining a positive equity position since the beginning of the year," said Mark Fleming, chief economist for CoreLogic. "Surging home prices this spring and summer, lower levels of inventory, and declining REO sale shares are all contributing to the nascent housing recovery and declining negative equity."

"Nearly 2 million more borrowers in negative equity would be above water if house prices nationally increased by 5 percent," said Anand Nallathambi, president and CEO of CoreLogic. "We currently expect home prices to continue to trend up in August. Were this trend to be sustained we could see significant reductions in the number of borrowers in negative equity by next year."

CoreLogic said that 6.6 million underwater borrowers hold only a single mortgage compared to 4.2 million who hold both first and second mortgage liens. The average homeowner in the first group has average underwater equity of $51,000 and account for $689 billion in aggregate negative equity; those in the second group are upside down by $84,000 for a total of $353 billion.

The bulk of negative equity is concentrated in the low end of the housing market. For example, for low-to-mid value homes (less than $200,000), the negative equity share is 32 percent, almost twice the 17 percent for borrowers with home values greater than $200,000.

At the end of the second quarter, just over 17 million borrowers had LTVs between 80 and 125 percent which would qualify them for refinancing through the Home Affordable Refinance Program (HARP) under the original requirements first introduced in March 2009. The lifting of the 125 percent LTV cap via HARP 2.0 opens the door to another 5 million borrowers.

Nevada had the highest percentage of mortgaged properties in negative equity at 59 percent, followed by Florida (43 percent), Arizona (40 percent), Georgia (36 percent) and Michigan (33 percent). These top five states combined account for 34.1 percent of the total amount of negative equity in the U.S.

*Elsewhere in the report CoreLogic states, "As of Q2 2012, there were 1.8 million borrowers who were only 5 percent underwater. If home prices continue increasing over the next year, these borrowers could move out of a negative equity position" This number appears to be reflected in Nallathambi’s quote.

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