Westchester County Home News: One in Four Homes Worth Less than the Outstanding Mortgage

Nearly a quarter of homeowners who still owe on their mortgage are underwater or upside down, meaning they owe more on their home than it is now worth, according to new research published this week by First American CoreLogic.

The real estate data provider says nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity.

Perhaps even more disquieting is that the numbers would go even higher if First American CoreLogic used the same methodology it’s previously used to calculate negative equity. In its latest report, the company said it factored in two pieces of information not reflected in earlier studies, in order to provide a “more precise view of underwater borrowers”: how much of the loan principal has been paid down and how much of a home equity line of credit (HELOC) is being used.

First American CoreLogic explained that as a point of comparison, using the previous methodology, which did not account for amortization or HELOC utilization, the Q3 negative equity rate would have been 33.8 percent.

The distribution of negative equity is heavily concentrated in five states, where housing prices have nosedived.

A staggering 65 percent of mortgages in Nevada are upside down. Arizona and Florida were both close to the half-mark with 48 percent and 45 percent, respectively. In Michigan, where the auto industry’s troubles have taken their toll on every aspect of the economy, 37 percent of mortgages are in negative equity territory. And you certainly can’t leave out California, which took the No. 5 spot, with an underwater ratio of 35 percent.

To put the numbers into perspective, the average negative equity share for all the remaining states was just 14 percent.

According to First American CoreLogic, the rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors are much more likely to default on their mortgages once they cross into negativity. First American CoreLogic says the default rate for investors is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity.

The company also noted in its study that the bulk of upside down borrowers share certain set of characteristics. They financed their properties between 2005 and 2008, with adjustable rate mortgages (ARMs), and they bought less expensive properties.

Mark Fleming, chief economist with First American CoreLogic, said, “Negative equity continues to be pervasive and to impact almost every segment of the housing market. The recent improvement in home prices this past spring and summer has slowed the increase in negative equity, but it will take a significant rebound in home prices, which we are not expecting, to offset the dampening effects of negative equity in the most depressed states.”