More than 22% of mortgages still underwater

by JON PRIOR

Nearly 11 million properties, roughly 22.5% of all U.S. homes, were worth less than the underlying mortgage in the second quarter, according to CoreLogic (CLGX: 11.75 +2.98%).

The percentage of properties in negative equity declined slightly from 22.7% the previous quarter and down from 24% one year ago. Another 2.4 million borrowers held less than 5% equity in their home, what analysts call near-negative equity. CoreLogic also showed nearly three-quarters of all underwater borrowers are paying above-market interest on their home loans.

"High negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery," said Mark Fleming, CoreLogic chief economist.

More borrowers could be in danger of falling underwater. JPMorgan Chase (JPM: 32.715 +0.91%) analysts expect home prices to drop another 5% by the beginning of 2012, pushing the amount of underwater borrowers to 15 million, according to a research note released earlier in the month. If prices drop more, possibly 10% further, the number of borrowers in negative equity would approach 20 million.

The Obama administration continues working on a proposal to boost refinancings, which many include eliminating some negative equity restrictions on Fannie Mae and Freddie Mac loans. Some analysts believe such a program would have only modest impact, but CoreLogic showed nearly 28 million outstanding mortgages hold above-market rates and, in theory, should be able to refinance.

Of these, 8 million borrowers are in negative equity.

Some believe the new plan from the administration will be a revamp of the Home Affordable Refinance Program, which allows Fannie and Freddie borrowers with up to 125% LTV to refinance.

But more than 40% of borrowers with LTVs above that limit are trapped with mortgage rates above 6%. Only 17% of borrowers with positive equity have rates at that level.

Negative equity also affects sales. Traditional home sales in areas with low negative equity numbers dropped 61% since the peak in 2005, compared with an 83% drop in areas with more underwater borrowers.

Roughly 60% if borrowers in Nevada were underwater in the second quarter, the highest percentage of any state but down from 68% one year ago. It was followed by Arizona at 49% and Florida at 45%.

"The hardest hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices," CoreLogic said.

URL to original article: http://www.housingwire.com/2011/09/13/more-than-22-of-mortgages-still-underwater

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