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The View from Underwater

Based on the latest Corelogic report on negative equity, 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.

Of the total of about 48.718 million mortgages, roughly 10 percent have a loan-to-value (LTV) ratio of 125 percent or more – that constitutes about 4.8 million loans. Another 1.6 percent have a LTV of 120 to 124 percent about 2 percent have a LTV of 115 to 119 percent, 2.4 percent have a LTV of 110 to 115 percent, 3 percent have a LTV of 105 to 110 percent, and 4 percent have a LTV of 100 to 105 percent.

Note that a 10% price gain will remove 3.5 million people from an underwater status into the clear. Of the 11.1 million upside-down borrowers, there are 6.7 million first liens without home equity loans. This group of borrowers has an average mortgage balance of $219,000 and is underwater by an average of $51,000 or an LTV ratio of 130 percent.

For all first-lien-only borrowers, the negative equity share was 18 percent, while 41 percent of all first-lien-only borrowers had 80 percent LTV or higher. The remaining 4.4 million upside-down borrowers had both first and second liens and bigger trouble. Their average mortgage balance was $306,000 and they were upside down by an average of $84,000 or a combined LTV of 138 percent.

The negative equity share for all first-lien borrowers with home equity loans was 39 percent, more than twice the share for all first-lien-only borrowers. Over 60 percent of borrowers with first liens and home equity loans had combined LTVs of 80 percent or higher.

The states with largest share of underwater homeowners are in Nevada, Arizona, Florida and Michigan, Georgia, and California.  To get them all above water, prices would need to rise 25% at least.  And that may take about 7 years. An alternative currently under discussion is principal reduction strategies.

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Selma Hepp, Research Economist

Selma Hepp, Research Economist, regularly monitors and writes columns on latest academic research in housing and urban economics, foreclosures, international housing markets, and demographic trends. Selma also reports on federal and state metropolitan planning policy impacts.

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