New Data Shows One-Fifth of all Mortgages Underwater

Salem Shows 10.1 Percent of Mortgages in Negative Equity.

Images: First American CoreLogic

(SALEM, Ore.) - More than 8.3 million U.S. mortgages, or 20 percent of all properties with a mortgage, were in a negative equity position as of December 31, 2008, according to newly released data from First American CoreLogic.

This compares with 7.6 million, or 18 percent, of all mortgages in negative equity as of September 30, 2008. Approximately 700,000 additional borrowers slid into a negative equity position in the last quarter.

Negative equity, often referred to as "underwater" or "upside down," means a borrower owes more on their mortgage than the home is worth. In addition, the data shows there are 2.2 million mortgages nationwide that are approaching negative equity.

These are defined as mortgages within 5 percent of being in a negative equity position. Together, negative equity and near negative equity mortgages account for 25 percent of all residential properties with a mortgage nationwide.

In Salem, 5,538, or 10.1 percent, of all properties with a mortgage are in negative equity. An additional 2,215 mortgages, or 4.0 percent, are in near negative equity, resulting in a total of 14.2 percent* of all outstanding mortgages in negative equity and near negative equity for Salem.

During the fourth quarter of 2008, a monthly average of nearly 230,000 borrowers became "upside down." California led the way with a monthly average of 43,000 newly negative equity borrowers, followed by Texas (16,000), Nevada (15,000), Florida (14,000) and Virginia (14,000).

Nationwide, the distribution of negative equity is heavily skewed to a small number of states. Nevada has by far the highest percentage of negative equity – more than half of mortgage borrowers in that state are now upside down.

The average loan to value (LTV) ratio for properties with a mortgage in Nevada was 97 percent, or less than $8,000 in equity leaving the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values. Michigan was ranked second in the nation with a negative equity share of 40 percent, which is double the national negative equity share.

Following these two states are Arizona at 32 percent, Florida at 30 percent, and California at 30 percent rounding out the top five states with the highest negative equity (Table 1 and Figure 1). The average negative equity for the top five states was 31.9 percent. If the top five ranked states are excluded, the negative equity share for the remaining states was 13.9 percent.

In terms of the number of borrowers "underwater," California ranked first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million) and Texas (498,000) (Figure 1).

More than 2.2 million, or 5.3 percent, of all mortgaged properties are in a severe negative equity position with LTVs of 125 percent or more (Figure 2). More than 70 percent of these mortgages are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000).

Future changes in the negative equity shares will be driven by two components, the distribution of equity and home price declines. Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines.

The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices. This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states.

"The accelerating share of negative equity, combined with deteriorating economic conditions, means that mortgage risk will continue to increase until home prices and the economy begin to stabilize. Going forward, the worrisome issue is not just the severity of negative equity in the 'sand' states, but the geographic broadening of negative equity that is expected to occur throughout the year," said Mark Fleming, chief economist for First American CoreLogic.

* Data and percentage point differences are rounded to the nearest tenth and may appear to affect calculations.

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Methodology*:

First American CoreLogic has created state-level negative equity estimates for all single-family residential properties in the US. The data includes nearly 45 million properties with a mortgage, which accounts for more than 85% of all mortgages in the US *.

First American CoreLogic used its public record data as the source of the mortgage debt outstanding (MDO) and it includes 1st mortgage liens and junior mortgage liens in order to capture the true level of mortgage debt outstanding for each property. The current value was estimated by using the First American CoreLogic Automated Valuation Models (AVM) for every residential property in the US. The data was filtered to include only properties valued between $70,000 and $1.25 million because AVM accuracy tends to quickly worsen outside of that value range.

The amount of equity for each property was determined by subtracting the property's estimated current value from the mortgage debt outstanding. If the mortgage debt was greater than the estimated value, then the property is in a negative equity position. The data was created at the zip code level and aggregated to the state and US totals.

*Note: Only data for mortgaged residential properties that have an AVM value is presented. There are several states where the public record, AVM or mortgage coverage is very thin. Although coverage is thin, these states account for fewer than 5% of the total population of the US. The mortgage debt outstanding was not adjusted for amortization, however the majority of mortgages were originated within the last 5 years where the difference between the original mortgage debt outstanding and current mortgage debt outstanding would be small. The exclusions criteria of $70,000 and $1.25 million resulted in several million mortgaged properties being excluded from the analysis.