Number of ‘Underwater’ Borrowers Drops Below 10 Million

By Nick Timiraos


Rising home prices are easing one of the biggest headaches from the housing bust: the high level of homeowners owing more than their homes are worth.

The share of mortgages that are underwater dropped to 19.8% at the end of March, down from 21.7% at the end of December and 25.2% at the end of 2011, according to a report released Wednesday by CoreLogic CLGX -0.40%.

The report shows just how important rising home prices are for the nation’s battered housing markets. When home prices neared a bottom in late 2011, there were 12.1 million properties that were underwater. Now, that number has fallen to 9.7 million. During the first quarter, CoreLogic estimates that some 850,000 households escaped negative equity.

The improvement is due largely to rising home prices, though foreclosures and short sales have also eliminated some underwater households. The improvement follows a period in which government and industry officials have had a heated debate over the merits of principal write-downs, where banks modify mortgages by slashing loan balances. While various legal settlements and government programs have encouraged—and in some cases, forced—banks to adopt write-downs, principal reductions haven’t figured heavily into the equity-restoration story so far.

The effects of the housing bust could still linger for many years. CoreLogic estimates that on top of the 19.8% of underwater homes, another 23% of homes with a mortgage have less than 20% equity, meaning those borrowers may be less likely to move because they don’t have enough money to make a down payment on a home that’s comparable to the one they own. Around 4.4% of borrowers have just 5% equity, meaning they could fall back underwater should prices drop. (Around one-third of U.S. homes don’t have a mortgage, and the CoreLogic figures don’t include mortgage-free properties.)

The report shows that among major U.S. metro areas, negative equity is highest in Tampa, where 41.4% of borrowers are underwater, followed by Miami (40.7%), Atlanta (34.5%), Chicago (34.2%) and Warren, Mich. (33.6%).

Rising home prices are likely to encourage more owners to test the market in the coming years, though inventories of for-sale homes remain below their levels of a year ago in the majority of U.S. housing markets.

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