The over-whelming majority of homeowners with underwater mortgages are stuck with high interest rate loans and are unable to refinance their mortgages, according to real estate research firm CoreLogic.
Some 10.9 million home mortgages were in negative equity in the second quarter of the year, and another 2.4 million were close or within 5% of being upside down, representing 27.5% of U.S. residential properties with a mortgage. A huge 75% of homes with mortgages had above market interest rates.
Homeowners with mortgage rates above prevailing market rates, especially in tough economic times with levels of high unemployment, are more likely to default on mortgages because they feel trapped and are likely to see no other way out other than walking away from their mortgage.
“High negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery,” said CoreLogic chief economist Mark Fleming.
Underwater mortgages halt homeowners from being able to refinance mortgages since they lack the necessary equity in their homes to refinance at lower rates. Record high foreclosures in many areas on the country are pressuring home values, sending housing resale prices lower.
Many of the states that are the hardest hit in the real estate collapse also have the highest level of underwater mortgages. Nevada had the highest negative equity percentage in the nation with 60% of its mortgaged properties underwater. Arizona was second at 49%, followed by Florida (45%), Michigan (36%) and California (30%). A total of 28 million homes with mortgages have above market interest rates.
More than 40% of home mortgages with 125% or higher loan-to-value ratios have mortgages with interest rates of 6% or higher.
Since the peak in real estate sales in 2005, non-distressed home sales in zip codes with low negative equity have fallen 61%, compared to a massive 83% drop in areas with high negative equity levels. The harder hit a neighborhood is also usually means the more homes that are vacant or un-kept damaging adjoining homes values.