California has more property owners with negative equity followed by Texas, Nevada, Florida and then Virginia, the report from Loan Performance, a company that tracks mortgage data, shows.
'Given that we've never seen house price declines of this magnitude, this is probably one of the highest negative equity levels we've ever seen. House price declines have taken hold everywhere,' said Mark Fleming, chief economist for First Amercian CoreLogic, LoanPerformance's parent company.
The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all US mortgages. The data was filtered to include only properties valued between $70,000 and $1.25 million.
The most severe underwater mortgages that is loans that are 125% or higher than the value of the property are in five states. California ranked first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million) and Texas (498,000).
Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater.
The negative equity conundrum appears poised to get worse. LoanPerformance calculates that there are another 2 million houses that are approaching the danger zone, that is, within 5% of being in a negative equity position.
In states where unemployment is high and rising, such as Michigan, the problem of upside down mortgages is acute. 'It's the combination of underwater and losing a job that is of most concern at this point. If you're underwater but can still pay your mortgage, you're okay. And if there's equity in the home and you lose a job, you can always refinance to tap into that to make ends meet, providing a bank will approve a new loan,' explained Fleming.
For states that haven't seen a widespread problem in declining prices and therefore upside down mortgages, the worst may be in store. Fleming forecasts that the largest increases in the share of negative equity mortgages will likely occur in states that have not yet experienced deep declines.
'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,' added Fleming.
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).
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. 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.
New York had the lowest proportion of homeowners paying off above-value mortgages, with just 4.75 of homeowners holding negative equity.
