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Mar 02 2012

Homeowners Still Losing

Despite what you hear about the economic growth, that silver lining is lightening. The negative equity in residential housing increased in the last quarter of 2011. In other words, 22.8% of all homes in the US are worth less than than they were when purchased. As per Core Logic that is an increase of 10.7 million homes, an increase of 0.7% from the third quarter.

CoreLogic … today released negative equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011. An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter.

“Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011. The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology. The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline. While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures.” said Mark Fleming, chief economist with CoreLogic.

h/t Calculated Risk

And there is no relief in site for the vast majority of these homeowners, not even from the Foreclosure Settlement, as the Brookings Institution points out:

First, the borrower must be underwater, meaning owing more in mortgage debt than the house is worth. According to CoreLogic, there are 11.1 million underwater borrowers. Second, loans backed by Fannie Mae or Freddie Mac are not eligible for the principal reduction. According to analysis by the Federal Reserve of data from LPS Applied Analytics and CoreLogic, as of December, 14.1 percent of Freddie Mae loans were underwater and 11.3 percent of Fannie Mae loans were underwater. Taking the midpoint, and assuming there are 26 million Fannie or Freddie loans (about half of the number of existing loans), then there are approximately 3.3 million Fannie and Freddie underwater loans, bringing us to 7.8 million remaining borrowers eligible for the principal reduction. Third, the borrower must be delinquent or facing imminent default to qualify for the principal reduction. According to the Federal Reserve (PDF), approximately 28 percent of underwater borrowers are not current on their payments, bringing us to 2.2 million remaining borrowers. Third, the agreement is with the five largest mortgage servicing banks. According to Inside Mortgage Finance, the five banks service 55 percent of all loans, bringing us to 1.2 million remaining borrowers. Fourth, only owner-occupied homes are eligible. According to CoreLogic, 82 percent of underwater borrowers are owner occupied, bringing us to 1 million remaining borrowers.

There is another complication, in that some of these loans are held on the banks’ balance sheets, and others are part of mortgage-backed securities owned by outside investors. For the latter, the banks are contractually obligated to minimize losses to the investors, meaning it is unlikely they can reduce principal on these loans without facing the ire (and possible lawsuits) from the investors. Department of Housing and Urban Development Secretary Donovan acknowledged this problem by suggesting that the banks will target the principal reductions to the loans that they hold on their balance sheets. According to CoreLogic, about 41 percent of underwater borrowers had home equity loans, which typically are held on banks balance sheets. So even if these borrowers’ first loans do not qualify for a principal reduction, their second loans – which represent the bulk of their negative equity – do. Also according to CoreLogic, about 9 percent of underwater borrowers had no second loan and had their first loan held on banks’ balance sheets. Applying this 50 percent leaves us an estimate of 500,000 loans eligible for the principal reduction.

That’s just half of the homes the settlement was supposed to help. Thanks, Barack

h/t David Dayen at FDL News Desk

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