Decline in underwater mortgages credited to surge in foreclosures

negative equity

Underwater mortgages declined as foreclosures increased, while negative equity is expected to grow as home prices continue to slide. Image:; CC 666isMONEY/Flickr

Underwater mortgages in the U.S. declined for the third straight quarter for the period ending Sept. 30. The decline in negative equity is a result of increasing foreclosures. Negative equity is expected to increase in the near future as U.S. home values continue to decline.

Decline in negative equity deceiving

The number of homeowners with underwater mortgages fell from 23 percent in the second quarter to 22.5 percent in the third. According to CoreLogic, a housing market research firm, in a healthy housing market only 5 percent of homeowners owe more on their mortgages than the house is worth. The decline in negative equity was credited mainly to a surge in foreclosures taking people out of their mortgages. CoreLogic said homes for sale in foreclosure auctions averaged 110,000 a month from July to September, an increase from 98,000 in the same period last year. Banks foreclosed on a record 288,345 homes in the third quarter, a 7 percent increase from the second quarter and a 22 percent year-to-year increase.

Negative equity feeds on falling home prices

Total negative equity in the third quarter was $744 billion, declining from $800 billion a year ago. Negative equity is expected to rise because about 2.4 million homeowners hold equity of 5 percent or less. Any further decline in prices will pull their mortgages underwater. CoreLogic estimates that home values in the U.S. will have dropped by $1.7 trillion in 2010. The Federal Reserve said the value of residential real estate fell $649 billion in the third quarter to $16.6 trillion. Morgan Stanley issued a report last week stating that home prices could drop another 11 percent before finally hitting bottom in the first quarter of 2012.

A solution to negative equity

Underwater mortgages have a detrimental effect on residential real estate. Homeowners with negative equity quit maintaining their property and many are motivated to default on their mortgages. The Obama administration has been pressuring Fannie Mae and Freddie Mac to give underwater homeowners a few percentage points back on their mortgage. Real estate experts say such an equity handout is a temporary, hollow gesture. The only real solution to the negative equity problem, which is holding back the entire economy, is significant price appreciation in a competitive housing market.

Sources

Bloomberg

Associated Press

MSNBC

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