RealEstateEconomyWatch.com

Moderate income to low income homeowners are twice as likely to be underwater on their mortgages, owing more than their homes are worth, making them much more vulnerable to default than those who bring home a bigger paycheck.

The latest negative equity report from CoreLogic found that for low-to-mid value homes valued at less than $200,000, the negative equity share is 54 percent for borrowers with home equity loans, over twice the 26 percent for borrowers without home equity loans.

Of the total $717 billion in aggregate negative equity, first liens without home equity loans accounted for $342 billion aggregate negative equity, while first liens with home equity loans accounted for $375 billion. Over $230 billion in negative equity is from homes valued at $200,000 or less.

There were 8.8 million negative-equity conventional loans with an average balance of $269,000 that are underwater by an average of $70,000. There were 1.7 million underwater FHA loans with an average balance of $169,000 that are underwater by an average of $26,000.

The link between income and negative equity was first identified in 2008, when a found that negative equity disproportionately affects low- and moderate-income borrowers, who may have purchased homes beyond what they could afford.

A 2010 Federal Reserve study found that when mortgage debt exceeds 150 percent of the property’s value, half of the defaults are driven purely by negative equity. The study looked at borrowers who purchased homes in 2006 in Arizona, California, Florida and Nevada, using non-prime financing with zero down payments. During the subsequent period to September 2009, 80 percent of these borrowers had defaulted. The Fed study further showed that 80 percent of the defaults were driven by both loss on income and negative equity.

The CoreLogic data shows 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.

Nevada had the highest negative equity percentage with 61 percent of all of its mortgaged properties underwater, followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent). This is the second consecutive quarter that Georgia was in the top five, surpassing California (29 percent) which previously had been in the top five since tracking began in 2009. The top five states combined have an average negative equity share of 44.3 percent, while the remaining states have a combined average negative equity share of 15.3 percent.