Fewer Homes Underwater, But Foreclosures Account For Drop


The number of U.S. homeowners who owe more on their homes than the homes are worth dipped slightly in the last quarter to 10.8 million.

But the drop was driven mostly by homes slipping into foreclosure rather than any good economic news, such as increases in home prices, says analytics firm CoreLogic.

CoreLogic said Monday that 22.5% of mortgaged homes were underwater as of Sept. 30, down from 23%, or 11 million, in the second quarter.

From October to November, home prices slid by 0.2% after declining 0.1% in October, Standard & Poor’s/Case-Shiller home price index says. That means the trend toward fewer underwater buyers may not last, says Mark Fleming, CoreLogic chief economist. “Price declines are accelerating, which may put a stop to or reverse the recent improvement in negative equity,” he says.

The ramifications of so many underwater borrowers will cause problems for real estate markets for years, says Joel Naroff, president of Naroff Economic Advisors.

Those markets may recover more slowly because fewer homeowners will be in position to move into more expensive homes. Underwater borrowers are at higher risk of foreclosure, which drives down real estate values. As homeowners sink deeper, concerns rise that more will choose to default on loans.

The U.S. government has several fledgling programs to help underwater borrowers. But getting lenders to reduce what’s owed on mortgages has been a tough sell. They’re not convinced that forgiving debt to potentially avoid a foreclosure makes good economic sense, says Patrick Newport, economist at IHS Global Insight.

The Federal Housing Administration, as of Sept. 7, started offering some underwater borrowers the chance to qualify for new FHA-insured mortgages if lenders wrote off at least 10% of the principal.

The program is off to a slow start. Only 100 applications are underway. Lenders lack systems to carry out reductions and lack confidence that mortgage-owning investors will agree to reductions so are reluctant to invest in the systems, says Vicki Bott of the Department of Housing and Urban Development.

Government programs may help a fraction of underwater borrowers, Naroff says. “People will have to get used to living underwater,” he says.

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(Source: USA Today)