Housing values: Why the divide isn't narrowing

The number of borrowers who owe more on their mortgages than their homes are worth fell to the lowest level in eight years, but those who are still "underwater" are drowning faster than ever in foreclosure.

By March, 1.6 million borrowers had crossed back into a positive equity position on their home loans compared to a year ago, according to Black Knight Financial Services, a mortgage data and technology firm. The reason? Home values have sharply increased.

The yard around a foreclosed home is maintained by a bank-hired worker in Miami.
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The yard around a foreclosed home is maintained by a bank-hired worker in Miami.

Still, more than 4 million borrowers, or 8 percent of all homeowners with a mortgage, remain underwater. While that is a 30 percent drop from a year ago, the numbers are considerably higher in states where values fell the most during the housing crash. Nevada and Florida have the highest rates of negative equity at 16 percent and 15 percent, respectively.

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The improvements are certainly welcome, but they are benefiting those in higher housing brackets. Borrowers whose homes fall into the lowest 20 percent of home values are nine times more likely to be underwater than those in the top fifth, according to Black Knight.

Negative equity is the leading cause of foreclosure. Homes where the borrowers are underwater make up more than two-thirds of active foreclosures.

"In fact, 1 of every 3 borrowers in active foreclosure has a current loan-to-value ratio of 150 or more, meaning they owe 50 percent more than their homes are worth," Black Knight's Ben Graboske said.

The numbers are indicative of how much the housing market has recovered, and of how desperate the situation still is for some. While lenders have modified millions of loans, serious negative equity is driving foreclosures in the lowest-priced markets, with little-to-no relief. As much as we see home values soaring in hot markets, they are going nowhere in lower-income markets.

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While overall foreclosure activity is now at the lowest level in eight years, lenders are ramping up foreclosures in markets where home equity is not returning. Bank repossessions, the final stage of foreclosure, jumped 17 percent nationally in March from a year ago, according to RealtyTrac. In states where home prices are only moderately higher, the jump in repossessions is even more dramatic.

"The March increase is continued cleanup of distress still lingering from the previous housing crisis; not the beginning of a new crisis by any means," said RealtyTrac vice president Daren Blomquist. "Some of most stubborn foreclosure cases are finally being flushed out of the foreclosure pipeline, and we would expect to see more noise in the numbers over the next few months as national foreclosure activity makes its way back to more stable patterns by the end of this year."

States with the biggest increases in bank repossessions were Ohio, Maryland, Missouri, New Jersey and Illinois. These states are not seeing the kind of robust home price appreciation that states like California, Texas, New York, and even Arizona are.