Tuesday, November 24, 2009

Negative Equity Report for Q3

by Bill McBride on 11/24/2009 04:00:00 PM

Here is the Q3 negative equity report from First American CoreLogic mentioned last night. From the report:

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth.

Data Highlights
  • Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

  • The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans
  • Negative Equity by State Click on image for larger graph in new window.

    This graph shows the negative equity and near negative equity by state.

    Although the five states mentioned above have the largest percentgage of homeowners underwater, a number of other states have 20% or more homeowners with mortgages with little or negative equity.

    Sever Negative Equity Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

    The second graph shows homeowners with severe negative equity for five states.

    These homeowners are far more likely to default.
  • The rise in negative equity is closely tied to increases in pre-foreclosure activity. 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. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.
  • Pre-foreclosure rate by negative equity Here is figure 4 from the report.

    The default rate increases sharply for homeowners with more than 20% negative equity.

    This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.

    Note below that negative equity is still a problem for buyers in 2009!
    • The bulk of ‘upside down’ borrowers, as a group, share certain characteristics. They:
  • Financed their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity (Figure 5). Negative equity continues to be a problem even for 2009 originations as evidenced by a negative equity share of 11 percent and another 5 percent near negative equity.
  • Purchased newly built homes that are concentrated in a small number of states. For homes built between 2006 and 2008, the negative equity share is over 40 percent.
  • Relied on adjustable rate mortgages (ARMs)
  • Bought less expensive properties. The average value for all properties with a mortgage is $270,200, but properties in negative equity have an average value of $210,300 or 22 percent less (Figure 8). The average mortgage debt for properties in negative in equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000. The aggregate property value for loans in a negative equity position was $2.2 trillion, which represents the total property value at risk of default, against which there was a total of $2.9 trillion of mortgage debt outstanding.
  • Most homeowners with negative equity will probably not default, but this does show that there could be several hundred billion more in losses coming from residential mortgages.

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