22.5 percent of U.S. borrowers were in a negative equity positionon their homes at the end of Q3, according to a new report from CoreLogic .
That is actually an improvement from Q2, but only because many severely underwater homes went into foreclosure in the quarter, thereby taking them out of the pool.
The authors of the study warn that deteriorating home prices now will likely push the percentage back up in Q4.
The definition of home ownership, at least according to the Census, includes homeowners in a negative equity position. "However, homeowners in negative equity are not likely to behave similarly to homeowners with equity, because their financial interest (the equity) has disappeared and has only a small prospect of returning soon, given price trends," note CoreLogic authors. Underwater borrowers are more likely to behave like renters, which means they're not going to invest much in home improvement. They are also more likely to walk away from their commitment, although not in the waves some had predicted.
So what happens if you take those underwater borrowers out of the homeownership equation? It pushes the homeownership rate down to 56.6 percent, down 10 percentage points from the current reported rate, according to CoreLogic. That rate was over 69 percent during the housing boom.
The Obama Administration has been pushing lenders, Fannie Mae and Freddie Mac to write down principal on underwater mortgages in order to put borrowers back into a positive equity position. Interestingly, the latest push is for borrowers who are current on their mortgages. They lenders argue, why should they give money voluntarily if the loans are still performing? They don't even do that very often when the loans are in trouble!