Number of St Louis Homeowners with Negative Equity Drops Almost 9 Percent in Past Year


As of the end of the second quarter of this year, there are 90,937 underwater St Louis homeowners, according to a report just released by Corelogic.  This represents a slight increase from the prior quarter when there were 90,196 underwater St Louis homeowners and a decrease of almost 9 percent (8.8 percent) from the 2nd quarter of 2011 when St Louis underwater homeowners numbered almost 100,000 (99,792).  One is said to be “underwater” on their mortgage when they owe more on their mortgage than their home is currently worth, which is also referred to as having “negative equity”.

Playing a large part in this reduction of homeowners with negative equity has been a combination of both an increasing number of foreclosures (which thereby removes the underwater loan from existence) and increasing home prices.  As you can see by the chart I produced below, St Louis home prices have been increasing in the past year.  The current price trend shown on the chart indicates an upward trend that, if continues, will help pull more underwater borrowers back above water. Continue reading “Number of St Louis Homeowners with Negative Equity Drops Almost 9 Percent in Past Year

Should you consider a strategic default if you are underwater on your mortgage?


Over one in four homeowners in the U.S. with a mortgage are “underwatermeaning they owe more on their homes than they are currently worth and, according to data just released from a survey by Zillow, 75 percent of them are underwater by 40 percent or more meaning it will most likely be many years until they even have the hope of seeing equity in their home again. Nonetheless, this has not deterred the majority of these underwater homeowners from “staying the course” as 59 percent said would not consider a strategic default in order to get out from under their home. Continue reading “Should you consider a strategic default if you are underwater on your mortgage?

Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth

But Negative Equity is a Paper Loss for Most, As 90% of Underwater Homeowners Pay Mortgage on Time

Nearly one-third (31.4 percent) of U.S. homeowners with mortgages – or 15.7 million – were underwater on their mortgage in the first quarter of 2012, despite rising home values, according to the first quarter Zillow® Negative Equity Report[1]. Collectively, underwater homeowners owed $1.2 trillion more than their homes were worth. Negative equity rose slightly from 31.1 percent in the fourth quarter, and declined from 32.4 percent one year ago.

Continue reading “Despite Home Value Gains, Underwater Homeowners Owe $1.2 Trillion More than Homes’ Worth

Report Shows Little Improvement in Underwater Homeowners

Dennis Norman St Louis

Negative equity is the dominant factor driving the real estate market according to CoreLogic in it’s “U.S. Housing and Market Trends” report that was released today. According to the report, as of the 4th quarter of 2010, over 11 million (23 percent) of U.S. homeowners with a mortgage were in a negative equity position, meaning they owe more on their mortgages than the current value of their home. Continue reading “Report Shows Little Improvement in Underwater Homeowners

Should homeowners walk away from underwater mortgages?

Most Americans are opposed to the idea according to recent survey

Dennis Norman St LouisThere have been several stories published on this site concerning borrowers that are “underwater” (owe more on their home than it is currently worth) and whether they should simply “walk-away” or do a “strategic default” in order to get out from under their problem. We have published views from both sides of this argument and both sides have made good points in support of their position. However, according to a survey conducted by, it is clear that the majority of Americans, 60 percent to be exact, believe it is “never OK” for homeowners to walk away. Continue reading “Should homeowners walk away from underwater mortgages?

Number of Homeowners Underwater on Mortgage Increases

Dennis Norman St Louis

A report released this morning by CoreLogic shows negative equity, after decreasing for the three prior quarters,  increased in the fourth quarter of 2010 for residential properties.  The CoreLogic reports that 11.1 million, or 23.1 percent, of all residential properties with mortgages were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million and 22.5 percent in the prior quarter. Continue reading “Number of Homeowners Underwater on Mortgage Increases

Slight Decline In Number of Underwater Homeowners

Dennis Norman

According to a report released by CoreLogic, there were 11.2 million homeowners that were in a negative equity, or “underwater“, position on their mortgages as of the end of the first quarter of this year. This number is equal to 24 percent of all homeowners with a mortgage in the U.S., which is the same percentage as the prior quarter, however the actual number of underwater borrowers was down slightly from 11.3 million borrowers that were underwater in the prior quarter. In addition, there are an additional 2.3 million borrowers that have less than five percent equity in their homes, bring the total of negative equity and near-negative borrowers to over 28 percent of all homeowners with a mortgage nationwide.

A serious decrease in the percentage of mortgages underwater would be better news, but this news is still positive as it shows the rate of borrowers going underwater has stalled out and hopefully we have seen the worst of it.

Highlights of the report:

  • Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (34 percent).
  • In terms of metro areas Las Vegas continues to have the highest percentage of negative equity with 75% of mortgaged properties being underwater, followed by Stockton (65%), Modesto (62%), Vallejo-Fairfield (60%) and Phoenix (58%).
  • Phoenix had more than 550,000 underwater borrowers, the most households of any metropolitan market in the country. Riverside (463,000), Los Angeles (406,000) Atlanta (399,000) and Chicago (365,000) round out the top five markets.

The share of borrowers whose mortgage debt exceeds the property value by 25% or more fell slightly to 10.4% or 4.9 million borrowers, down from 10.6% or 5 million borrowers.

The two most important triggers of default, negative equity and unemployment, have stabilized over the last six months. As house prices grow again and borrowers pay down their mortgage debt negative equity levels will begin to diminish. The typical underwater borrower is likely to regain their lost equity over the next five to seven years,” said Mark Fleming, chief economist with CoreLogic.



Source: CoreLogic


What Should Be Done To Help Underwater Borrowers?

Dennis Norman
Dennis Norman

Last week I did a post about the Obama Administrations’ Home Affordable Modification Program (HAMP) and showed how it really has not been effective in helping keep families in their homes and avoid foreclosure as was the intention by the administration. When my kids tell me they don’t like the way I want them to do something I usually challenge them with “if you don’t like my way, tell me a better way to do it“. So with this in mind I went looking for an answer to this question.

In my search I ran accross a report title “Strategic Mortgage Default and the Role for Incentive-Based Solutions” (yeah, I know…sounds dull…probably won’t ever be made into a movie) that was produced by the Loan Value Group. This report addresses many issues including:
  1. Why Do Homeowners Default on Mortgages?
  2. Issues With Current Solutions to Mortgage Default
  3. An Alternative Approach to Mortgage Default

I focused primarly on number two as it addressed the problem I was looking for the answer to. Their (Loan Value Group) analysis of the situation was consistent with my post last week in that they determined that government programs to provide solutions to borrowers defaulting on mortgages “have so far proven to be ineffiective for two main reasons…first, certain solutions are founded on the idea that default occurs becasuse households have no choice due to insufficient income, and thus fail to address deafult that is a rational choice that depends on the homeowner’s balance sheet. Second, certain solutions face substantial practical hurdles to implementation.”


  1. Some borrowers choose to default as they are underwater and tired of throwing good money after bad, not because they cannot make the payments.
  2. Government programs have too much red tape.

The report goes on to assess the effectiveness (or lack thereof) of various government programs that were supposed to be the answer. Here are the results:

  • Tax Credits. These improve the homeowner’s income, but are ineffective for balance sheet driven strategic default. First, the effect of tax credits is very small compared to the amount of negative equity, and so does little to repair the homeowner’s balance sheet. Second, the homeowner can use the tax credits to rent a new property, allowing him to default on his existing mortgage. In addition, if they fail to prevent default, they are simply a cost to the government. Finally, while the most recent plan to provide tax credits is relatively new, there is increasing evidence that fraud is being used to secure those credits.
  • HOPE for Homeowners Act of 2008. This involved the FHA insuring lenders that refinancetroubled loans into fixed-rate mortgages. As of February 2009, only 451 applications had been received and 25 loans finalized, compared to the expected participation of 400,000. The low participation has been mainly attributed to two issues of loan modifications discussed in the prior subsection: the fees associated with a modification, and the need for the lender to reduce loan principal to 90% of a property’s current value.
  • Home Affordable Modification Program (HAMP). This is similar to a payment reduction: the servicer modifies the loan to reduce monthly payments to 31% of a homeowner’s pre-tax income. As of August 2009, only 9% of delinquent borrowers (235,000 loans) were in trial modifications, compared to the goal of having 500,000 participants by November 2009.

This low take-up has been attributed to a number of causes. From the borrower’s side, the confusion and disclosure requirements described above have been an impediment; the New York Times (“Winning Lower Payments Takes Patience, and Luck”, 11/29/09) discusses “the confusing and frustrating ways of the Obama administration program aimed at keeping millions of troubled American borrowers in their homes.” One large institution tasked with using a third party to modify loans through HAMP has found that in Q2 2009, nearly 42% of loan modifications that would have resulted a monthly payment reduction were never completed by the borrower.

So what is the answer?

Almost 11 million homeowners underwater on their mortgage (they owe more than their homes are worth) and this is leading to the “strategic mortgage defaults” that are addressed in this report. In order to curtail these defaults there must be new thought given to how to prevent them. Since these underwater homeowners will be choosing to default there must be incentives for the homeowner to choose not to dafault and instead enable the borrower to make payments. In addition, since this decision is driven by negative equity rather than the inability to make payments, there must be something done to address the principal balance.

While reducing the principal balance of an underwater borrower’s loan (principal forgiveness) seems to be the answer to the problem the report does point out problems associated with principal forgiveness including:

  • It triggers a full and immediate accounting write-down to the value of the loan.
  • It is irreversible and cannot be subsequently “clawed back” for those who redefault or had committed fraud (e.g. when applying for the principal reduction).
  • The lower balance reduces the interest received by the lender. Thus, if the homeowner still ends up defaulting, the lender has been made worse off by the loan modification.
  • It creates a “moral hazard” problem: the homeowner may attempt to make further risky housing investments in the future, believing that he will receive principal forgiveness if he falls into negative equity
  • The impact on homeowner behavior may be limited for two reasons.
    • Even a large dollar reduction in absolute terms is small relative to the size of an existing mortgage. If the homeowner “frames” the reduction together with the mortgage (i.e. compares its magnitude to the size of the mortgage rather than evaluating it in isolation), he may feel that his overall position has changed little – for example, a $10,000 reduction on a $200,000 mortgage is only a 5% decrease.
    • The loan modification is “non-salient”: it is a one-time event which may be subsequently forgotten, and thus have little ongoing incentive effect.

The above practical and conceptual issues with a principal reduction are serious in reality. As a result, banks have been very reluctant to write off mortgage principal: only 10% of loan modifications involve principal forgiveness. Considering all types of loan modification, 58% of the modifications made in Q1 2008 ended up redefaulting.

So while we have identified the problem, negative equity, and even the solution, principal forgiveness, you can see from this report by Loan Value Group there are many hurdles along the way. What will happen first? Will the government figure out a way to address this issue without so much red tape that the program is actually successful? Or, will the real estate market come back to the point that underwater borrowers see light at the end of the tunnel? I hate to be pessimistic, and I am not pessimistic by nature, however I don’t have confidence in either of these things happening any time soon which is very unfortunate for all the homeowners that have found themselves underwater.

Obama administrations loan modification program ‘destined to fail’

Dennis Norman
Dennis Norman

Laurie Goodman, the Senior Managing Director at Amherst Securities, testified today before the House Financial Services Committee hearing on “The Private Sector and Government Response to the Mortgage Foreclosure Crisis“. Amherst Securities specializes in the trading of residential mortgage backed securities and charges Goodman with keeping them and their customers abreast of trends in the market.

Today, in her testimony, Goodman told the committee she hoped to make two primary points in her testimony:
  • “The housing market is fundamentally in very bad shape. The single largest problem is negative equity.”
  • “The current modication program does not address negative equity, and is therefore destined to fail. It must be amended to explicitly address this problem. And there is no single solution; it is a combination of policy measures. Clearly, the arsenal of solutions must include principal reduction and must explicitly address the loss allocation between first lien investors and second lien investors.”

In her testimony Goodman cited some very interesting (albeit it depressing) facts and figures, including:

  • They (Amherst) estimate that approximately 7 million of the 7.9 million homeowners that were reported by the MBA as not making their mortgage payments in 3rd quarter will be forced into vacating their properties.
  • 250,000 New borrowers per month stop making their payments

As a reason for estimating failure on such a large percentage (88.6 percent) of the 7.9 million borrowers that were delinquent, Goodman said;

“The real problem is that default transition rates are high and cure rates are low because the borrower has negative equity in their home. Most borrowers do not default because of negative equity alone. Generally, a borrower experiences a change in financial circumstances. If the home has substantial negative equity, they will choose to walk.”

To prove her point, Goodman cited a study that was done by Amherst which looked at Prime borrowers that were 30 days delinquent on their mortgage 6 months ago. They then sorted the loans by the amount of equity the borrowers had, then came back 6 months later to see which borrowers were at least 60 days delinquent. For borrowers with 20 percent equity, only 38 percent had become 60+ days delinquent. For borrowers with substantial negative equity (owed 41-50 percent more on their homes than the value) 75 percent had become 60+ days delinquent.

During her testimony, Goodman said “there is a substantial group of people who have argued that the primary problem is not negative equity, it is unemployment. This argument is not supported by the evidence. First, the increase in delinquencies for subprime, Alt-A and pay option ARM mortgages began to accelerate in Q2, 2007. By contrast, we did not begin to see large increases in unemployment until Q3, 2008.”

Goodman goes on to point out the results of another study done by Amherst Securities entitled “Negative Equity Trumps Unemployment in Predicting Defaults” which included the following:

  • The combined loan-to-value ratio or CLTV plays a critical role. For prime and Alt-A loans in low unemployment areas the default frequency was at least 4 times greater for borrowers underwater by 20 percent than it was for borrowers with at least a 20 percent equity position.
  • If a borrower has positive equity, unemployment plays a negligible role. We found that all borrowers with positive equity performed similarly no matter the local level of unemployment.
  • If a borrower has substantial negative equity, unemployment plays a role, but less than CLTV. If the borrower has a CLTV greater than 120, the default frequency was 50 percent to 100 percent higher in a high unemployment area versus a low unemployment area.

The evidence is irrefutable. Negative equity is the most important predictor of default,” said Laurie Goodman.

In addition to Laurie Goodman, there was testimony today from Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance, Professor of Finance School of Management, George Mason University. Dr. Sanders also paints a pretty dismal picture of the success of the Obama administration loan modification program. Dr. Sanders said “it is a real challenge to servicers to make loan modifications succeed when 70 percent of modifications that have only interest rate cuts have gone into re-default after 12 months.

Dr. Sanders goes on to state that “only 12.5 percent of eligible borrowers receiving permanent loan modifications are able to keep them current. And it is entirely possible that the “success” rate could enve fall below 10 percent of eligible loans.” Dr. Sanders says the reason for this is:

“the degree to which many residential loans in the United States are in a negative equity situation. According to a Deutsche Bank research report, they are expecting 25 million homes to be in negative equity position.”

The second reason Dr. Sanders gave as the cause for such a bleak outlook for successful permanent loan modifications is the unemployment rate. He said “while 10 percent report(ed) unemployment rate is bad enough, the true unemployment rate (including wage and salary curtailment) is closer to 17.5 percent. “

I am glad to see testimony by these two professionals, and others, to help convince Congress that the loan modification plan, in it’s present form, is not effective. I think the evidence is overwhelming that negative equity is the major problem and must addressed in their “stimulus” and “recovery” programs.