Foreclosures Drive Small Decrease in Underwater Homes
In math two negatives make for a positive. In the mortgage marketplace however, when foreclosures drive a decrease in the number of properties with negative equity it is not a good sign.
CoreLogic, Santa Ana, Calif., reported a second consecutive quarterly decline in national negative equity rates from 24% in the first quarter to 23% in the second quarter “primarily due to foreclosures.”
And in the words of CoreLogic’s chief economist Mark Fleming, negative equity will not only drive foreclosures but also will “impede the housing market recovery.”
So far up to 11 million of the 47 million properties with a mortgage (that represent 85% of all mortgages in the U.S. which are part of the CoreLogic database) are “underwater,” down from 11.2 million in the first quarter.
Meaning these borrowers who are facing a decline in property value, an increase in mortgage debt, or both, represent very high foreclosure risk.
Therefore it is not surprising the largest decrease in negative equity occurred among those with loan-to-value ratios in excess of 125%. Within this group the number of negative equity borrowers fell to 4.8 million, down from 5 million last quarter.
To paint a better picture of the situation CoreLogic reports that by the end of the quarter an additional 2.4 million borrowers had less than 5% equity in their homes, otherwise branded as near negative equity. So in total, negative equity and near negative equity mortgages accounted for nearly 28% of all residential properties with a mortgage nationwide.
These findings bring up obvious concerns: How many more of these underwater mortgages will fold over into foreclosure in the future? How many homeowners will give up and walk away?
And that is not easily predictable.
“With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time,” Fleming said.
It is widely believed that the threshold or the loan-to-value level that is most probably going to trigger the so-called walk away defaults and foreclosures is at 125%.
According to MBA’s chief economist Jay Brinkmann, various complicating factors are at play. While the primary factor is the amount of negative equity, the existence or not of a second-lien mortgage tied to the primary loan is another. And what makes it difficult to assess the situation, he said, is that most industry reports combine data about the firsts and seconds so there is no separate reporting.
Brinkmann says foreclosures may be affected by a higher than 100% loan to market value but they are not caused by second liens. The primary reasons that translate into foreclosure remain loss of employment, costly health problems, or divorce.
The loan-to-value threshold that may lead to “walk away” delinquencies differs by state because of variations on deficiency judgment laws, he explained. “The bulk of that” is seen in California where lender-servicers are not permitted to pursue a borrower because of that deficiency, but that is not true in other states that have not experienced the same depreciation levels.
Brinkmann argues that while there is a larger number of “walk away” delinquencies in California, “it is not clear whether the reason is an over 90% drop in home prices or simply because the state laws in California favor walking away.” CoreLogic’s quarter data show that in California up to 33% of all properties are underwater.
It is one of the top five states that continue to feature the highest concentration of negative equity in the country led by Nevada with 68% and the highest percentage of mortgaged properties underwater, followed by Arizona at 50%, Florida at 46% and Michigan at 38%.