'Underwater' Mortgages Decline in 3rd Quarter

The most recent data shows that 10.7 million, or 22.1 percent, of all residential properties with a mortgage were in negative equity at the end of the third quarter (Q3) of 2011, according to CoreLogic, a provider of  property information and analytics.

The slightly good news is this number is down from 10.9 million properties, or 22.5 percent, in the second quarter (Q2) of 2011. The combination of people with negative equity and near-negative equity mortgages (borrowers who have less than 5 percent equity) was 27.1 percent in Q3, down from 27.5 percent in Q2.

I say “slightly good news” because these numbers are still huge and at the heart of why so many homeowners are struggling and the housing market is not bouncing back. California is no longer in the top five states with the largest number of people with negative equity, but it’s not far behind.

Reduced equity, or being totally underwater in one’s home mortgage, makes it difficult if not impossible to re-finance at today’s historic low interest rates. If a homeowner happens to get hit with additional financial hardship, they’re more likely to go into default.

More homes in default drag down prices further. Even homeowners who don’t get hit with additional financial woes are having trouble bettering their financial situation through a conventional re-finance or by purchasing up in the market.

It seems like there are very few ways out of this mess, on a large scale at least, until conventional lenders start loosening their lending criteria.

Banks fueled the real estate bubble with ultra-lax lending standards. The bubble burst and homeowners ended up being the ones who got hit where it hurts. Banks got propped-up by the Federal government, and in turn held on to their cash instead of stepping-up lending.

Buyers who over-stretched during the bubble no doubt also bear some responsibility for the current housing downturn. But in my opinion banks still need to loosen their purse strings.

There are some options for over-encumbered homeowners. Fannie Mae has a program that provides mortgage refinances for current loan-to-values up to 125 percent, and mortgage insurance flexibilities. Some owners with equity are swapping out their conventional loans with FHA-backed mortgages that require less money down.

And many people looking to move-up in the market are renting out their existing properties. That allows them to pay the mortgage until such a time that equity increases and they can refinance at a better rate or sell at a better price. In the meanwhile, and assuming they have good credit and a job, they can use the extra income to buy elsewhere.

All negative, or near-negative, equity cases are different. So I recommend talking to your real estate agent and a trusted mortgage lender to learn about the options.