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Report Shows 20% of Mortgages Are Now Underwater

Santa Ana, CA-In its latest negative equity report, First American CoreLogic here found that 8.3 million borrowers or 20% of all mortgaged properties are now in a negative equity position, up from 7.6 million or 11% as of the end of September 2008.

During the fourth quarter of 2008, an average of 230,000 borrowers a month slid into a negative equity position. California led the way with a monthly average of 43,000 new negative equity borrowers, followed by Texas (16,000), Nevada (15,000), Florida (14,000) and Virginia (14,000).

In the last year, the value of mortgaged residential properties has declined by more than $2.4 trillion, and one half of this loss occurred in California.

The company found that there are an additional 2.2 million mortgaged properties approaching negative equity, which are defined as mortgages within 5% of being in a negative equity position. Negative equity and near negative equity mortgages combined account for 25% of all residential properties with a mortgage nationwide.

As of the end of 2008, the total value of residential properties was $19.1 trillion, down $2.4 trillion from $21.5 trillion in December 2007. California lost more than $1.2 trillion in housing value last year, accounting for roughly half of the national decline in property values.

Nevada has the highest percentage of negative equity as more than half of all mortgage borrowers in that state are now "upside down." The average loan-to-value ratio for properties with a mortgage in Nevada was 97% or less than $8,000 in equity, leaving the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values.

Michigan was ranked second in the nation with a negative equity share of 40%, which is double the national negative equity share. Arizona (32%), Florida (30%) and California (30%) rounded out the top five states. The average negative equity share for the top five states was 31.9%. If the top five ranked states are excluded, the negative equity share for the remaining states was 13.9%.

In terms of the number of borrowers "underwater," California ranked first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million), Texas (497,000), Michigan (459,000) and Ohio (435,000).

More than 2.2 million, or 5.3% of all mortgaged properties, are in a severe negative equity position with LTVs of 125% or more, according to First American CoreLogic. More than 70% of these mortgages are in five states, California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000) and Arizona (122,000).

Based on the report, future changes in the negative equity shares will be driven by two components, the distribution of equity and home price declines. Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines. The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices. This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states.

"The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize. The worrisome issue is not just the severity of negative equity in the 'sand' states, but the geographic broadening of negative equity that is expected to occur throughout the year," said Mark Fleming, chief economist for First American CoreLogic.

The LoanPerformance and Case-Shiller home price indices have been decoupling over recent months driven by different seasonal adjustments, While data is adjusted, California has continued to show a relatively strong performance, while Massachusetts came in weaker than expected.

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