Despite economic thaw, many stuck in negative equity trap

By
Diana Olick, CNBC.com
March 10, 2012, 9:54 AM ET
2 min read

— -- As home sales begin a slow recovery and potential buyers dip their toes back in real estate's still-troubled waters, many of them face a huge barrier to entry: Negative equity, that is, borrowers who owe more on their mortgages than their homes are currently worth.

At the end of the fourth quarter of 2011, 1.1 million, or 22.8%, of all residential properties with a mortgage were in negative equity, according to a new report from CoreLogic.

This is up from 10.7 million properties, 22.1%, in the previous quarter. Worse yet, another 2.5 million borrowers had less than 5% equity, referred to as near-negative equity, in the fourth quarter.

Combine negative equity and near-negative equity, and about one third of all borrowers cannot sell their homes without either putting up some cash to pay off the mortgage or the closing costs or without the bank agreeing to a short sale. That's when the home is sold for less than the value of the mortgage.

The prime culprit in rising negative equity is falling home prices, and home prices are falling because distressed property sales are rising. Sales of properties in some stage of foreclosure made up a full 24% of all home sales in the fourth quarter, up from 20% a quarter earlier, according to RealtyTrac.

While negative equity is most prevalent in the sand states, like Nevada, where 61% of all borrowers are underwater and Florida, where 44% are, it is rising in other states, like Georgia, which is also seeing rising foreclosures. "The top five states combined have an average negative equity share of 44.3%, while the remaining states have a combined average negative equity share of 15.3%," according to CoreLogic.

A new government refinance program allows borrowers with Fannie Mae and Freddie Mac loans to get lower rates no matter how underwater they are, but a proposal by President Obama to do the same thing for borrowers with non-GSE loans, through the FHA, needs congressional approval, and isn't getting much support there.

As previously noted, home sales are rising, but largely on the backs of investors buying distressed, low-end properties. With one third of borrowers stuck in their underwater homes, there is unlikely to be much movement at all this spring in the move-up market.

Copyright 2012 CNBC.com.