Negative Equity: A Growing Problem

With the rise in foreclosures, there are a number of studies pointing to the fact that when a homeowner has negative equity (owes more on the home than it is worth), the chance of default increases. Earlier this week, a report from Deutsche Bank indicated that there may be a growing number of people across the US who will have negative equity by 2011.

Which doesn’t bode well for foreclosure numbers.

“We project the next phase of the housing decline will have a far greater impact on prime borrowers,” Deutsche analysts Karen Weaver and Ying Shen said in the report.

According to the Deutsche Bank report:

• By 2011, 48 percent of homeowners will have negative equity
• The 48% is up from 26% at the end of Q1 of 2009
• The conforming loan sector will be hit hard – there will be 41% of all conforming loans with negative equity in 2011 vs 16% in Q1 2009
• Even harder hit will be the subprime sector – 69% will be have negative equity in 2001 vs 50% in Q1 2009
• In less than two years, negative equity will climb to 90 percent or more in certain parts of California and Florida, along with Las Vegas.

The coastal regions of Florida and California along with the “sand states” of Arizona and Nevada will be the hardest hit according to the report. Many people in these areas chose to finance their homes with 100% financing which was widely available regardless of credit scores (almost).

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

“For many, the home has morphed from piggy bank to albatross,” the analysts said.

Justin McHood is a loan officer living in the Phoenix, Arizona area. You can find Justin on Facebook, Twitter, ActiveRain or LinkedIn and he is happy to answer any mortgage-related questions that you may have.