Many Homeowners Owe More Than House Is Worth

Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

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About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states—Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio—had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages. "This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

"Most of the country is not in bad shape," he continued. "Things seem to be stabilizing in Michigan, but the big bubble states—Florida, California, Arizona and Nevada—are still very overpriced."

About 68 percent of U.S. adults own their own homes, and about two-thirds of them have mortgages. JPMorgan Chase , one of the biggest mortgage lenders, Friday offered to modify $70 billion of mortgages to keep a potential 400,000 homeowners out of foreclosure. Bank of America Corp, which bought Countrywide Financial Corp in July, also has a large loan modification program.

Home Prices, Economy Under Pressure

U.S. home prices fell a record 16.6 percent in August from a year earlier, with declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller Home Price Indices. Foreclosure filings rose 71 percent in the third quarter to a record 765,558, according to RealtyTrac.

Meanwhile, the Commerce Department said gross domestic product fell at a 0.3 percent rate in the third quarter. Some experts expect the worst U.S. recession since the early 1980s. Yet despite a series of expensive government programs to spur lending, mortgage rates are rising, making it tougher to borrow or refinance. The rate on a 30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a week earlier, Freddie Mac said.

Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages are expected to reset higher in the coming months. The problem may be particularly serious for borrowers with rates tied to the London Interbank Offered Rate, or Libor, which is abnormally high relative to benchmark U.S. rates.

Last week, Wachovia said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth. Wells Fargo & Co is buying Wachovia.

Nevada Hard Hit, New York At Risk

First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp, said states with large numbers of homes with negative equity either had rapid price appreciation, many homes bought with subprime mortgages or as speculative investments, steep manufacturing declines, or a combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

"We're going to see home prices coming down pretty significantly in New York," Wyss said. "A lot of people are losing jobs, and won't be getting their usual bonuses, and that leaves less money for housing."

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