Real Estate Investors Walk Away Before Homeowners

FACL_Negative_Equity_Media_Alert_Q3_112409_Final.pdf

When they owe more on a property than it is worth, investors are more likely to stop paying on their mortgage and default than owners living in a primary residence.

A new report on negative equity by First American CoreLogic found that nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity.

Together, negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

Investors tend to default on their mortgages once they are in negative equity more ruthlessly than homeowners. Their default rate is typically two to three percent 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. On the other hand, borrowers with equity in their homes tend to have very low default rates.

“The recent improvement in home prices this past spring and summer has slowed the increase in negative equity, but it will take a significant rebound in home prices, which we are not expecting, to offset the dampening effects of negative equity in the most depressed states,” said Mark Fleming, chief economist with First American CoreLogic.

The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms,

California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans.

Among property types, negative equity is higher among condo owners (27 percent). About 22 percent of owners of single family homes are underwater.

Owners who are underwater on their mortgages tended to finance their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity. They purchased newly built homes that are concentrated in a small number of states. For homes built between 2006 and 2008, the negative equity share is over 40 percent. They also 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 or 22 percent less. The average mortgage debt for properties in negative in equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000.

For a preview of the study, click on the link at the top of the story.