Despite Progress, Little Help for Underwater Borrowers

Despite the declining share of underwater mortgages as a percentage of all mortgages in the United States, which has fallen below 8 percent, about four million borrowers are still underwater, according to Black Knight Financial Services' October 2014 Mortgage Monitor.

Those four million underwater homeowners combined for about $157 billion in negative equity in October, according to Black Knight. That averages out to slightly more than $39,000 in negative equity per home. Underwater homeowners also combined for approximately $800 billion in unpaid balances.

"Over the past two-and-a-half years, there has been sustained and continual improvement in the number of underwater borrowers in this country," said Trey Barnes, Black Knight's SVP of Loan Data Products. "From 33.5 percent of borrowers being in negative equity positions in January 2012, we’re now looking at less than eight percent of borrowers underwater. However, there are still four million borrowers who owe more on their mortgages than their homes are worth, despite more than two years of relatively steady home price appreciation. Borrowers in negative equity positions represent $800 billion dollars of mortgage debt overall, with some $157 billion of that being underwater, and the data shows these borrowers are 10 times more likely to be delinquent than those with positive equity."

Black Knight found in its report that more than three-quarters (77 percent) of loans with combined loan-to-value ratios of 150 percent or greater were delinquent, representing about 1.2 percent of active mortgages.

Approximately 1.3 million GSE-backed mortgages were underwater in October, according to Black Knight. These underwater borrowers combined for $39 billion in negative equity, an average of about $30,000 per borrower. About 365,000 of the underwater GSE-backed mortgages were delinquent, according to Black Knight.

"There is understandably a great deal of debate around the issue of principal reductions for these delinquent borrowers," Barnes said. "With an aggregate 40 percent delinquency rate among borrowers with current combined loan-to-value ratios above 100 percent—a number that rises to over three out of every four for severely underwater borrowers (those with CLTVs of 150 percent or higher)—the scope and cost of such write-downs would be immense. Some $89 billion in principal reductions would be required to right-side these borrowers. For the 365,000 delinquent underwater loans backed by Fannie Mae and Freddie Mac alone, nearly $18 billion in write-downs would be called for."