The research firm CoreLogic says the share of mortgage borrowers who were underwater – meaning they owed more on the loan than their home was worth – shrankduring the third quarter. But analysts say the news is hardly encouraging since the decline is being attributed to a rise in foreclosures rather than a rise in home prices.
According to data released Monday by CoreLogic, 10.8 million, or 22.5 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of this year, down from 11.0 million, or 23 percent, in the second quarter. It’s the third consecutive quarter that the company has reported a decline in the number of underwater borrowers.
“This is due primarily to foreclosures of severely negative equity properties,” CoreLogic explained in its report. The company also warned that the slide in home prices that’s returned to most markets is likely to undo recent declines in the number of borrowers who are upside down on their mortgage.
“Negative equity is a primary factor holding back the housing market and broader economy,” said Mark Fleming, CoreLogic’s chief economist. “The good news is that negative equity is slowly declining, but the bad news is that price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity.”
An additional 2.4 million borrowers had less than five percent equity in the homes at the end of the third quarter, CoreLogic reports. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.
CoreLogic’s market data shows that negative equity remains concentrated in five states. Nevada had the highest negative equity percentage with 67 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (46 percent), Michigan (38 percent), and California (32 percent).
Some of these same hard-hit states, however, also saw the largest declines in negative equity during the third quarter. Alaska experienced the biggest decrease, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9).
Idaho and Alabama are the only states with noticeable increases in their negative equity ratios last quarter. CoreLogic says this comes as no surprise given they are currently the two top states for home price depreciation.
Although the level of negative equity is very high, CoreLogic’s study found there are still many homeowners with equity. Nearly half of New York borrowers have 50 percent or more positive equity, which leads the nation, followed by Hawaii (43 percent), Massachusetts (40 percent), Connecticut (39 percent), and Rhode Island (40 percent).
There are some states that have what CoreLogic described as “barbell distributions” of somewhat higher negative equity shares as well as higher percentages of borrowers with at least 50 percent positive equity. Rhode Island is the most extreme example as it ranks in the top 15 for both negative equity and for states with the highest share of 50 percent or more positive equity. To a lesser degree Massachusetts, New Jersey, Washington, D.C., and California exhibit similar trends.
According to CoreLogic’s report, the aggregate level of negative equity declined to $744 billion, which is a 3 percent decline from Q2 2010 and a 7 percent decline from the end of 2009 when it stood at $800 billion.
CoreLogic says homeowners in negative equity are not likely to behave similarly to homeowners with equity, because their financial interest has disappeared and has only a small prospect of returning soon given price trends. According to the company’s analysts, the lack of equity means upside down homeowners are not likely to maintain and improve their property and are more likely to behave like renters.