Negative Equity Dips Slightly, 10.7 Million Homes Still Underwater

Yesterday CoreLogic published its Third Quarter Negative Equity Report.  Although negative equity declined somewhat, 10.7 million homes with mortgages are still underwater, comprising 22.1 percent of all residential homes with mortgages.  This is down from the second quarter, where 10.9 million homes and 22.5% of homeowners with mortgages were underwater.  An additional 2.4 million homes have less than five percent equity.

Mark Fleming, the chief economist for CoreLogic commented on the report:

“Although slightly down, negative equity remains very high and renders many borrowers vulnerable when negative economic shocks occur, such as job loss or illness.  the nearly $700 billion mortgage debt overhand has touched many corners of the market, and this overhand is holding back the recovery of the housing market and the broader economy”. 

It is notable that 22 million borrowers have loan-t0-value ratios higher than 80%.  Of these people, 69% have mortgages with interest rates above 5 percent.  Generally speaking, it is much more difficult to refinance your mortgage with an LTV above 80%, and it can become impossible to refinance above 105%.  The recent changes to HARP are supposed to make it easier for those with negative equity to refinance at today’s lower rates, but it remains to be seen how effective that program will be.

Negative equity is concentrated in a few states that experienced the most dramatic price drops.  The states with the highest percentages of negative equity are Nevada (58% of all mortgaged residential homes underwater), Arizona (47%), Florida (44%), Michigan (35%), Georgia (30%), and California (30%).

Negative equity is the biggest problem facing the housing market, and has been so for some time now.  None of the housing plans that have been enacted by the government have done anything whatsoever to cut the amount of negative equity in the housing market (for an excellent read on this matter, I recommend this article by Georgetown Law Professor Adam Levitin).  This is frustrating to me, because the problem is glaringly obvious. At one time negative equity could have been addressed through bankruptcy, but bankruptcy laws were gutted.  At another time, the banks issuing loans could have written down the principal balances on mortgages that were still viable, but securitization of mortgages made this difficult or impossible.  It seems very unlikely that we will grow our way out of this problem in the near future.  Now the main ways of clearing negative equity are foreclosure or short sales, and foreclosure is largely wasteful, while short sales are extremely difficult to complete.

For the good of everybody, the time has come to write down at least some of this negative equity, moral hazard arguments be damned.  Winston Churchill once said that “America will always do the right thing, but only after exhausting all other options” – we have just about reached that point.