Fewer Mass. homeowners ‘underwater’ on mortgages

By Jenifer B. McKim | The Boston Globe | September 12, 2012

Nearly 232,000 Massachusetts homeowners were “underwater” at the end of the second quarter of this year, meaning they owed more to lenders than their properties were worth. That was down from 250,166 during the first three months of 2012, an indicator that the state’s housing market remains on track to make a slow recovery.

According to data released Wednesday by California-based CoreLogic, property values here continue to fare better than those in many areas of the United States. In Massachusetts, 15.6 percent of borrowers had mortgage balances that trump what they could recoup in a home sale — down from 16.8 percent in the first quarter of the year. Nationwide, 22.3 percent of homeowners were saddled with so-called negative equity, a decline from 23.7 percent after the first three months of 2012.

The drop in underwater borrowers benefits the housing market and overall economy by increasing consumer confidence and reducing the number of mortgage holders at risk of heading into foreclosure, according to many economists. They say borrowers who have home equity are more likely to spend money, fix up their properties, and eventually move on to other homes.

“Negative equity has been the giant anchor that has been holding back the housing market and the broader economy,’’ said Sam Khater, deputy chief economist at CoreLogic. “If equity is suddenly rising and rising rapidly, it is a good sign.”

Historically, Khater said, less than 2 percent of homes are valued below their mortgage at a given time.

Most underwater borrowers live in homes that had steep value declines during the housing crash that started in late 2005. In some cases, buyers were allowed to make minimal down payments, which pushed them into negative territory quickly when the market started sliding. Others added more debt by taking home equity loans at a time when lenders were approving such borrowing without much scrutiny.

CoreLogic said that 10.8 million homeowners nationwide were underwater at the end of June, down from 11.4 million at the end of of the first quarter of 2012. Of those, 6.6 million held single mortgages without equity loans. On average, their properties were valued at $51,000 below the size of their loans.

Another 4.2 million homeowners held two mortgage loans and were underwater by an average of $84,000, CoreLogic said.

Barry Bluestone, director of the Kitty and Michael Dukakis Center for Urban and Regional Policy at Northeastern University, said the huge number of US borrowers who owe more than their homes could fetch in a sale is unprecedented. Traditionally, housing downturns have been regional rather than nationwide, he said. But between 2006 and 2009, home values across the United States fell about 50 percent, data show.

The nation’s housing market has been showing signs of a recovery during the past six months, fueled by low interest rates and a tight inventory of homes for sale. According to the S&P/Case-Shiller Home Price Indices, home values rose 6.9 percent in the second quarter of 2012 compared with the first quarter.

Bluestone said some homeowners are starting to accrue more equity in their properties by paying down their mortgages just as home values rebound.

But homeowners who remain underwater feel poorer and are less likely to spend money, he said. “A lot of people who are underwater haven’t lost their jobs, they are buying less. They feel less wealthy,” Bluestone said. “That is human behavior.”

Regardless, most borrowers who whose homes are worth less than their debt obligation keep paying their mortgages. Nearly 85 percent of underwater borrowers nationwide are still current on their home loans, CoreLogic said.

In Massachusetts — where real estate values are among the highest in the country — the average underwater borrower’s home value is 61.5 percent of the size of the mortgage loan, according to CoreLogic. Nationwide, the average underwater home is 69.6 percent of the size of the loan, CoreLogic said.

Khater, CoreLogic’s deputy chief economist, said if values continue to rise, the number of underwater homes obviously will recede, but the process will be stretched out for a long time.

“The movement is glacial,’’ he said. “We are moving down, but we are still very high.”

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