On Tuesday, data released by CoreLogic Inc. (CLGX), a leading provider of information, analytics and business services, stated that nearly 23.1% or 11.1 million of all U.S. residential mortgage properties were underwater in the October-December quarter. The fourth quarter figures stood even higher than the 22.5% or 10.8 million households’ loans that were underwater in the preceding quarter.
The total amount of underwater mortgages was $751 billion in the fourth reported quarter, up from $744 billion in the earlier quarter, but down from $800 billion in the year-ago quarter. CoreLogic used data related to 48 million properties with a mortgage (85% of all mortgages in the U.S.) as the base.
In December, home prices had fallen to its lowest point since the housing bust. This was the driving factor behind the 3% rise in underwater mortgages during the quarter. Additionally, about 2.4 million borrowers’ home value was merely 5% more than the loan value (close to underwater).
As per CoreLogic’s report, Nevada had the highest rate of underwater mortgage. About 65% of the mortgaged home property in Nevada was underwater, followed by 51% in Arizona, 47% in Florida, 36% in Michigan and 32% in California. However, there were just nine states that had less than 10% of their total mortgaged home property underwater.
When a mortgage is underwater, the homeowner cannot refinance the loan and has almost no alternative but to continue making payments with a hope that the property will finally regain its original value. But with high levels of foreclosure and unemployment, home prices are further expected to fall by another 5%-10% this year.
With further declines in home prices, the biggest rises in underwater mortgages are expected in Alabama, Idaho and Oregon as they have the largest number of properties that are close to underwater presently.
Moreover, underwater mortgage slows down home sales. Homeowners, who would have otherwise sold their houses, will now wait for the home prices to rise before selling. Also, at times the mortgage providers do not allow the borrowers to sell their property at lower price than owed on the mortgage.
Further, many banks require about 20% of the home value as down payment, which again makes it increasingly difficult for the home owners to sell their property. However, Obama administration is planning for a 10% down payment requirement on loans guaranteed by Fannie Mae (FNMA) and Freddie Mac (FMCC).
At present, underwater mortgage is one of the menacing problems confronted by the U.S. financial markets. Despite the introduction of Home Affordable Modification Program (HAMP) by the government in 2008, underwater mortgage problem has not diminished.
Currently, state attorneys general (AGs) are trying to resolve issues related to improper mortgage foreclosures with various large mortgage providers such as JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC).
We believe that until underwater mortgages fall and foreclosure mess is resolved, the recovery in the housing and mortgage markets will remain very slow.