New CoreLogic Data Shows 23 Percent of Borrowers Underwater with $750 Billion Dollars of Negative Equity
Email Dan Smith
March 08, 2011, Santa Ana, Calif. –
PROPOSED DOWN PAYMENT RULES WILL IMPACT ALREADY HARD-HIT STATES
CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released negative equity data showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide.
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.
- Nevada had the highest negative equity percentage with 65 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent).
- At 118 percent, Nevada had the highest average loan-to-value (LTV) ratios for properties with a mortgage, followed by Arizona (95 percent), Florida (91 percent), Michigan (84 percent), and Georgia (81 percent). New York had the lowest LTV at 50 percent, followed by Hawaii (54 percent), District of Columbia (58 percent), Connecticut (60 percent), and North Dakota (60 percent).
- The distribution of LTV varies greatly by state. For example, California has a higher share of borrowers with 60 percent or less LTV compared to Texas even though California has a negative equity share that is 3 times higher than Texas. Florida and Michigan have fairly similar concentrations of low LTV loans, but above 70 percent LTV the profiles of the states begin to diverge with Florida significantly worse than Michigan.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 set forth the qualified residential mortgage (QRM) designation, which exempts lenders from risk retention requirements for the loans to be securitized, making those loans cheaper to originate. While there are many aspects to the definition, an emerging consensus is that a 20 percent down payment will be one of the features. Clearly, higher down payments are necessary to reduce credit risk for lenders and securitizers, but given the majority of homebuyers are repeat buyers who use current equity as the bulk of their equity, states that have a lower proportion of borrowers with 80 percent LTV or less will be adversely affected because repeat buyers will not have sufficient down payments to buy new homes1 with QRMs. In the U.S., 54 percent of homeowners with mortgages would qualify for the exemption using the 20 percent definition. But more than 70 percent of borrowers in New York, Hawaii and North Dakota would qualify, so the impact in those states will be smaller than the impact on the U.S. Conversely, Nevada will be the most negatively impacted by the QRM exemption, because few homeowners have 20 percent equity or more in their home. Other hard-hit foreclosure states that would be negatively impacted include Georgia and Colorado.
- The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal2. What’s important is not just the share of at-risk loans (i.e., loans with less than 10 percent equity) but current price movements. At the safe end of the spectrum, New York, North Dakota and Hawaii have very low shares of at risk loans (less than 7 percent) and prices are still increasing, so the risk is minimal (Figure 5). Colorado, Tennessee and North Carolina appear to be the riskiest because they each have the largest percent of loans at risk (16 percent or more). However, each is only experiencing moderate price declines so the impact in these states will be small to moderate. Given price declines, the largest risk to future increases in negative equity lies in Alabama, Idaho, and Oregon which have a high share of loans that are near negative equity and rapid home price depreciation.
- The aggregate level of negative equity increased to $751 billion in Q4, up from $744 billion last quarter but still below $800 billion a year ago. Over $450 billion of the aggregate negative equity dollars include borrowers who are upside down by more than 50 percent (Figure 6).
"Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties. Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish," said Mark Fleming, chief economist with CoreLogic.
Download the full Q4 2010 negative equity report, with charts and state-level data, from corelogic.com.
CoreLogic data includes 48 million properties with a mortgage, which accounts for over 85 percent of all mortgages in the U.S.** CoreLogic used its public record data as the source of the mortgage debt outstanding (MDO) and it includes first mortgage liens and junior mortgage liens and is adjusted for amortization and home equity utilization in order to capture the true level of mortgage debt outstanding for each property. The current value was estimated by using the CoreLogic Automated Valuation Models (AVM) for residential properties. The data was filtered to include only properties valued between $30,000 and $30 million because AVM accuracy tends to quickly worsen outside of this 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 property level and aggregated to higher levels of geography.
** 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 thin. Although coverage is thin, these states account for fewer than 5 percent of the total population of the U.S.
The data provided is for use only by the primary recipient or the primary recipient's publication or broadcast. This data may not be re-sold, republished or licensed to any other source, including publications and sources owned by the primary recipient's parent company without prior written permission from CoreLogic. Any CoreLogic data used for publication or broadcast, in whole or in part, must be sourced as coming from CoreLogic, a real estate data and analytics company. For use with broadcast or web content, the citation must directly accompany first reference of the data. If the data is illustrated with maps, charts, graphs or other visual elements, the CoreLogic logo must be included on screen or web site. For questions, analysis or interpretation of the data contact Lori Guyton at firstname.lastname@example.org or Bill Campbell at email@example.com. Data provided may not be modified without the prior written permission of CoreLogic. Do not use the data in any unlawful manner. This data is compiled from public records, contributory databases and proprietary analytics, and its accuracy is dependent upon these sources.
CoreLogic is a leading provider of consumer, financial and property information, analytics and services to business and government. The company combines public, contributory and proprietary data to develop predictive decision analytics and provide business services that bring dynamic insight and transparency to the markets it serves. CoreLogic has built the largest and most comprehensive U.S. real estate, mortgage application, fraud, and loan performance databases and is a recognized leading provider of mortgage and automotive credit reporting, property tax, valuation, flood determination, and geospatial analytics and services. More than one million users rely on CoreLogic to assess risk, support underwriting, investment and marketing decisions, prevent fraud, and improve business performance in their daily operations. Formerly the information solutions group of The First American Corporation, CoreLogic began trading under the ticker CLGX on the NYSE on June 2, 2010. The company, headquartered in Santa Ana, Calif., has more than 10,000 employees globally with 2010 revenues of $1.6 billion. For more information visit www.corelogic.com.
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1This analysis is about the typical future homebuyer who is an owner with a mortgage. We implicitly assume that the majority of future homebuyers’ downpayment will come from their current equity and will purchase a similarly priced home. These borrowers typically represent the majority of homebuyers in normal markets.
2Most likely even if prices decline 10 percent in 2011, negative equity will rise by less than that because foreclosures are removing negative equity borrowers.