Negative Equity Traps One Third of American Borrowers


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.

One point 1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011, according to a new report from CoreLogic.

This is up from 10.7 million properties, 22.1 percent, in the previous quarter. Worse yet, another 2.5 million borrowers have less than five percent 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 foreclosuremade up a full 24 percent of all home sales in Q4, up from 20 percent in Q3, according to RealtyTrac.

While negative equity is most prevalent in the sand states, like Nevada, where 61 percent of all borrowers are underwater and Florida, where 44 percent 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 percent, while the remaining states have a combined average negative equity share of 15.3 percent," 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.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick