Foreclosures help winnow 2Q number of US homes with mortgages higher than property is worth

By Alex Veiga, AP
Thursday, August 26, 2010

Number of underwater mortgages in US fell in 2Q

LOS ANGELES — Foreclosures are helping to thin the ranks of U.S. homes with mortgages that exceed what the properties are worth, new data shows.

Real estate data provider CoreLogic said Thursday there were 11 million homes with so-called underwater mortgages at the end of June. That’s down from 11.2 million at the end of March and represents the second consecutive quarterly decline. The number of underwater mortgages typically rises when home prices are falling.

Foreclosures, rather than rising home prices, accounted primarily for the declines.

“They basically were just flushed out of the system,” said Sam Khater, CoreLogic’s senior economist. “There is a small decline and that’s good news. The bad news is it’s occurring via foreclosures.”

The higher the number of homes with underwater mortgages, the greater the probability of more defaults.

In all, 23 percent of U.S. homes with mortgages were underwater at the end of June. Another 2.4 percent of homeowners with a mortgage had less than 5 percent equity in their home, making them more likely to end up underwater if home prices drop further.

The total number of underwater mortgages represent roughly $2.9 trillion in mortgage debt, according to the firm.

Years of falling home values combined with longtime homeowners borrowing against the equity in their home has left millions owing more on their home than its worth.

When a mortgage is underwater, the homeowner often can’t qualify for mortgage refinancing and has little recourse but to continue making payments in hopes the property eventually regains its value.

The slide in home prices began stabilizing last year, but prices are expected to continue falling in many markets due to still-high levels of foreclosures and near double-digit unemployment.

That means homes purchased at the height of the real estate boom are unlikely to recover lost value for years.

Faced with that situation, homeowners sometimes stop making payments and walk away from their homes in so-called strategic defaults. Others end up losing their homes to foreclosure because of missed payments due to job loss or medical bills.

Underwater mortgages also dampen home sales, because homeowners who might otherwise sell their home refuse to take a loss or can’t get the bank to agree to a short sale — when a lender lets a borrower sell their property for less than the amount owed on the mortgage.

Home sales have been weaker in areas where there are a large number of homeowners with negative equity in their home, Khater said.

“Those homeowners can’t sell,” he said. “They’re trapped.”

The majority of the underwater mortgages are concentrated in five states: Nevada, Arizona, Florida, Michigan and California, CoreLogic said.

Among those, Nevada had the highest rate at the end of June, with 68 percent of its residential mortgages underwater.

In Arizona, half of the home mortgages were underwater. In Florida, it was 46 percent. In Michigan, the rate was 38 percent, while in California it was 33 percent.

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