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Only 10.7 Percent of All Mortgaged Homes Still Underwater

Nearly 950,000 homes returned to positive equity in the second quarter of 2014, bringing the total number of mortgaged residential properties with equity in the U.S. to more than 44 million.

Nationwide, borrower equity increased year over year by approximately $1 trillion in Q2 2014.  Approximately 5.3 million homes, or 10.7 percent of all residential properties with a mortgage, were still in negative equity as of Q2 2014 compared to 6.3 million homes, or 12.7 percent, for Q1 2014, according toe .  This compares to a negative equity share of 14.9 percent, or 7.2 million homes, in Q2 2013, representing a year-over-year decrease in the number of homes underwater by almost 2 million (1,962,435), or 4.2 percent.

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

For the homes in negative equity status, the national aggregate value of negative equity was $345.1 billion at the end of Q2 2014, down $38.1 billion from approximately $383.2 billion in the first quarter 2014. On a year-over-year basis, the value of negative equity declined from $432.9 billion in Q2 2013, representing a decrease of 20.3 percent in 12 months.

Of the 44 million residential properties with positive equity, approximately 9 million, or 19 percent, have less than 20-percent equity (referred to as “under-equitied”) and 1.3 million of those have less than 5 percent (referred to as near-negative equity). Borrowers who are “under-equitied” may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall.  In contrast, if home prices rose by as little as 5 percent, an additional 1 million homeowners now in negative equity would regain equity.

“The increase in borrower equity of $1 trillion from a year earlier is evidence that things are moving solidly in the right direction,” said Sam Khater, deputy chief economist for CoreLogic. “Borrower equity is important because home equity constitutes borrowers’ largest investment segment and, as a result, is driving forward the rise in wealth for the typical homeowner.”

“Many homeowners across the country are seeing the equity value in their homes grow, which lifts the economy as a whole,” said Anand Nallathambi, president and CEO of CoreLogic. “With more and more borrowers regaining equity, we expect homeownership to become an increasingly attractive option for many who have remained on the sidelines in the aftermath of the great recession.  This should provide more opportunities for people to sell their homes, purchase a different home or refinance an existing mortgage.”

Also, in the second quarter Fannie Mae and Freddie Mac prevented nearly 80,000 foreclosures nationwide in the second quarter, raising the total number of foreclosures prevented since the start of the conservatorship in September 2008 to 3.3 million, the Federal Housing Finance Agency (FHFA) said in its report on foreclosure prevention for Q2 2014 released on September 24.

The measures taken by the two GSEs to prevent foreclosures have helped about 2.7 million borrowers remain in their homes in the last six years, with approximately 1.7 million of those borrowers receiving permanent loan modifications. The number of foreclosures prevented is down 10 percent from Q1, when GSE measures stopped almost 89,000 foreclosures.

The number of delinquent loans more than 60 days past due declined 5 percent quarter-over-quarter, according to FHFA. As of the end of Q2 (end of June 2014), there were approximately 688,000 such loans, the lowest level since the conservatorship began six years ago. The number of seriously delinquent loans (more than 90 days past due or in foreclosure) fell 2.1 percent at the end of the quarter.

Close to 49,000 borrowers received permanent loan modifications in Q1, down nearly 11 percent from 55,000 in Q1. However, FHFA reports that about 37 percent of those who received permanent loan modifications were able to reduce their monthly payments by more than 30 percent in Q2.

The number of short sales and deeds-in-lieu of foreclosure for Q2 totaled approximately 14,500, down slightly from the 14,900 completed during Q1. The total amount of short sales and deeds-in-lieu since the conservatorship began stood at 581,400 at the end of Q2.

REO (bank owned) inventory declined by 10 percent for Q2, from about 145,900 down to 131,500, according to FHFA. Meanwhile, third-party sales and foreclosure sales also dropped by 10 percent from Q1 to Q2, down to 42,800. Foreclosure starts ticked slightly upward for Q2, from 84,700 to 85,500.

Highlights as of Q2 2014:

Nevada had the highest percentage of mortgaged properties in negative equity at 26.3 percent, followed by Florida (24.3 percent), Arizona (19.0 percent), Illinois (15.4 percent) and Rhode Island (14.8). These top five states combined account for 32.8 percent of negative equity in the United States.

Texas had the highest percentage of mortgaged residential properties in an equity position at 97.3 percent, followed Alaska (96.5 percent), Montana (96.4 percent), North Dakota (96.0 percent) and Hawaii (96.0 percent).

Of the 25 largest Core Based Statistical Areas (CBSAs) based on population, Tampa-St. Petersburg-Clearwater, Fla., had the highest percentage of mortgaged properties in negative equity at 26.2 percent, followed by followed by Phoenix-Mesa-Scottsdale, Ariz. (19.5 percent), Chicago-Naperville-Arlington Heights, Ill. (17.9 percent), Riverside-San Bernardino-Ontario, Calif. (15.4 percent) and Atlanta-Sandy Springs-Roswell, Ga. (15.3 percent).

Of the largest 25 CBSAs based on population, Houston-The Woodlands-Sugar Land, Texas had the highest percentage of mortgaged properties in an equity position at 97.5 percent; followed by Dallas-Plano-Irving, Texas (97.0 percent); Anaheim-Santa Ana-Irvine, Calif. (96.4 percent); Portland-Vancouver-Hillsboro, Ore. (96.1 percent) and Seattle-Bellevue-Everett, Wash. (95.4 percent).

Of the total $345 billion in negative equity, first liens without home equity loans accounted for $180 billion aggregate negative equity, while first liens with home equity loans accounted for $165 billion.

Approximately 3.2 million underwater borrowers hold first liens without home equity loans. The average mortgage balance for this group of borrowers is $227,000. The average underwater amount is $57,000.

Approximately 2.1 million underwater borrowers hold both first and second liens. The average mortgage balance for this group of borrowers is $297,000.The average underwater amount is $77,000.

The bulk of home equity for mortgaged properties is concentrated at the high end of the housing market. For example, 94 percent of homes valued at greater than $200,000 have equity compared with 84 percent of homes valued at less than $200,000.

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