23% of all Borrowers Underwater, Says First American CoreLogic

Falling house values plunged nearly 10.7m of all residential properties with mortgages into negative equity as of September, according to quarterly data by First American CoreLogic, the property and ownership information provider subsidiary of The First American Corp. (FAF). As of the end of Q309, 23% of all mortgaged residential properties — or nearly one in four — were “underwater,” or worth less than the outstanding mortgage. This quarter’s data includes a model that factors in loan amortization and utilization rates for home equity lines of credit (HELOCs). Without accounting for either factor, the Q309 negative equity rate would have been 33.8%, CoreLogic said. Another 2.3m mortgages were approaching negative equity as of September, with less than 5% equity. Together, the rate of negative and near-negative equity accounted for nearly 28% of all mortgaged residential properties. “The rise in negative equity is closely tied to increases in pre-foreclosure activity,” CoreLogic said in the quarterly report. “At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity.” The report adds: “For the highest level of negative equity, investors and owners behave very similarly and default at similar rates.” The majority of underwater borrowers shared key characteristics in the Q309 report. Most loans were originated between ’05 and ’08, with ’06 representing the peak year with 40% of loans in negative equity. Many underwater borrowers bought newly built homes and relied on adjustable-rate mortgages. Negative equity mortgages are concentrated in Nevada with 65% negative equity in the state, Arizona with 48%, Florida with 45%, Michigan with 37% and California with 35%. In terms of actual numbers of mortgages, California and Florida had the largest numbers of negative equity mortgages with 2.4m and 2m respectively. These 4.4m loans account for 42% of all negative equity loans, according to CoreLogic. Write to Diana Golobay.