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Number of Underwater Homeowners Declining

The percentage of US homeowners who were “underwater,” meaning they owed more on their mortgage than their home was worth, fell during the second quarter as banks began seizing the homes of those that had stopped making payments.  According to a report from CoreLogic Inc., there were 10.88 million homes, or 22.5 percent of US households with a mortgage, in which the homeowner had negative equity as of June 30th.  Both numbers are lower than the 10.91 million, or 22.7 percent of households underwater in the first quarter. 

The report also indicated there were another 2.42 million homeowners with more than zero but less than 5 percent equity in their homes as the second quarter drew to a close.  That brings the cumulative percentage of US households with zero or near-zero equity to 25.7 percent at the end of June.  The chief reason for the decline is an increase in the rate of foreclosures as banks become accustomed to new regulations and streamline the foreclosure process.  The ratio of mortgage debt to home prices, meanwhile, remains very high.

Among the many issues impeding a recovery in the nation's housing market, negative equity is causing many homeowners to simply walk away from their mortgages.  As this contributes to the foreclosure rate, there results a type of “domino effect,” wherein higher foreclosures lead to declining home prices, which then result in more underwater homeowners.  President Obama, in his speech before Congress last week, proposed making low-cost government-backed loans available to more Americans with the goal of reducing the default rate and boosting consumer spending.

According to CoreLogic's report, nearly three of every four underwater homeowners have a primary mortgage with an above-market interest rate, or above 5.1 percent, while the average rate for a 30-year fixed mortgage is in the low 4s, reaching an all-time low of 4.12 last week.  At the end of the second quarter, Nevada had not only the highest number of foreclosure filings but also the highest percentage of underwater homeowners, at 60.4 percent, down from 68.0 percent in the same quarter a year earlier.  Arizona had the second-highest negative equity rate at 49 percent, followed by Florida at 45, Michigan at 36, and California at 30 percent.