CoreLogic said one of the main reasons why the real estate industry and finance markets continue to have problems is negative equity for a borrower.
As of 4Q10, over 11 million or 23% borrowers were in negative equity. Nationwide, the aggregate negative equity was $750 billion.
Out of this negative equity, $355 billion comes from first liens and $395 billion is composed of first liens that contain one or more junior liens. More than 38% ($135 billion) of first lien negative equity occurred at properties valued between $100,000 to $200,000, while 24% ($95 billion) of homes with more than one lien are valued between $300,000 and $700,000.
Currently, $60 billion of the total negative equity is in the foreclosure process with the other borrowers not delinquent. Similarly to borrowers who have only one lien on a property, 38% of the foreclosures due to negative equity were homes valued between $100,000 and $200,000.
“The lack of home equity has prevented borrowers from refinancing or selling and left many homeowners vulnerable to default,” CoreLogic said.
CoreLogic said another factor that could cause a slowdown in housing sales is shadow inventory. As of January 2011, the shadow inventory was 1.8 million distressed properties that were 90 days or more late in their mortgage, in foreclosure or REO on the books of a financial institution. CoreLogic also estimates that an additional two million non-delinquent or negative equity loans that are more than 50% upside down will likely become shadow inventory in the near future.
According to CoreLogic, home sales fluctuated in every price segment between 2009 and 2010 as the federal tax credit that was set to expire was extended. The biggest increases in 2009 were seen for properties valued between $50,000 to $250,000, where sales were 45% higher than the previous year. In 2010, home sales were higher for homes valued at $650,000 and above.
However, the volume of distressed sales—short sales and REO—which are sold for lower prices compared to non-distressed sales, has impacted home prices and sales over the last few years.
“A key factor influencing the future volumes of distressed sales is the stock of seriously delinquent mortgages and the rates at which these loans cure from delinquency or transition to more severe delinquency or foreclosure,” CoreLogic said. “In today’s environment, seriously delinquent loans are more likely to eventually default than self-cure. To the extent that they are successful, modifications can impact the rate at which seriously delinquent loans default. Unsuccessful modifications delay the eventual default.”
In other housing news, in April second mortgage default rates increased for the first time in at least five months, from 1.42% in March to 1.51%, according to the Standard & Poor’s and Experian Customer Credit Default Index.
S&P analysts said however that this deviation on what appeared to be a downward trend in both first and second mortgage default rates is to be expected and may not reverse previous gains.
They argue that during most economic recoveries there are differences to general trends “across loan classes and regions.”
In fact year-over-year second mortgage default rates decreased by 39.39% compared to April 2010.
Also, the first mortgage default rate decreased from 2.33% in March to 2.16% in April and a significant 41.75% on a year-over-year basis.
The bank card default rate also increased in April for the first time in 11 months but decreased by 35.45% year-over-year again indicating the recovery is still fragile.
The composite S&P/Experian Customer Credit Default index which includes the auto loan default rate in addition to mortgage and bank card data, varied across major cities and regions but consistently declined both month-to-month and year-over-year.