Twenty-three percent of all residential properties, or nearly 10.7 million units, had mortgages that were in negative equity as of September, First American CoreLogic reports.
An additional 2.3 million mortgages were approaching negative equity, meaning they had less than 5% equity. Together, negative equity and near negative equity mortgages account for nearly 28% of all residential properties with a mortgage nationwide, the firm says.
The distribution of negative equity is heavily concentrated in five states, with Nevada having the highest percentage (65%), followed by Arizona (48%), Florida (45%), Michigan (37%) and California (35%).
Among the top five states, the average negative-equity share was 40%, compared to 14% for the remaining states. In numerical terms, California and Florida had the largest number of negative equity mortgages, with 2.4 million and 2 million, respectively.
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, once investor-owned properties tread into negative-equity territory, the default rate is typically 2% to 3% 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.
The bulk of upside-down borrowers, as a group, share certain characteristics, First American CoreLogic finds. The borrowers often financed their properties between 2005 and 2008, with 2006 being the peak year (where 40% of borrowers were in negative equity); purchased newly built homes that are concentrated in a small number of states; and relied on adjustable-rate mortgages (ARMs).
Underwater borrowers also typically 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. The average mortgage debt for properties in negative equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000.
he 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.
SOURCE: First American CoreLogic