Negative equity growing

Here is an article that came across my desk today from CNBC that could have profound consequences on everybody's real estate investing business:

The number of borrowers who owe more on their mortgages than their homes are worth took a huge leap in the fourth quarter of 2010. A full 27 percent of borrowers are now “underwater” on their mortgages, up from 23 percent in the previous quarter, according to a new report from Zillow. Foreclosure moratoriums and falling home prices are to blame.

Adding to a slew of negative reports on home prices, Zillow found home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. The home buyer tax credit, which inflated home prices artificially in the first half of the year, resulted in a Fall hangover. Home prices plunged 5.9 percent compared to the fourth quarter of 2009.

With foreclosure moratoriums in place due to charges of faulty paperwork at some of the nation’s largest mortgage servicers, many homes with underwater mortgages that should have been repossessed by lenders were not, and instead boosted volume in the negative equity pool. Falling prices didn’t help.

“Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short-term, mean we’re getting closer to the bottom,” notes Zillow’s chief economist, Dr. Stan Humphries.

Home prices generally lag home sales, on the way up and on the way down. Home sales have gained over the past few months, but with distressed sales, that is foreclosures or short sales, making up anywhere from 25 to 50 percent of a local market’s numbers, prices will continue to be under pressure for some time.

Negative equity is one of, if not the, primary drivers of mortgage default, but as banks ramp up repossessions, the percentage of underwater loans should fall back to previous, albeit historically high, percentages.

While local markets in Florida, California and Arizona that suffered most from the subprime mortgage collapse continue to post high negative equity rates, other less likely candidates are climbing. Over one third of Chicago borrowers owe more than their homes are worth, and in Atlanta over half are underwater. Denver and Minneapolis are also well over the national rate.

Negative equity not only makes it harder to sell a home, it also makes it more difficult to modify a troubled loan. Some also blame negative equity for high redefault rates on loan modifications, as some borrowers choose to walk away.