As the government weighs bold steps to aid homeowners facing foreclosure, new data shows how big the problem has become.
According to data expected to be released today, nearly one in five borrowers owe more than their homes are worth.
A state-by-state negative-equity breakdown compiled by First American CoreLogic Inc. offers an in-depth look at how falling home prices have disrupted the mortgage market. The report comes as government officials hammer out a new plan to help these "underwater" borrowers by offering guarantees against losses to lenders that agree to modify loans.
"The most troubling finding from a risk perspective is that many borrowers have no house price appreciation at all," said Mark Fleming, First American CoreLogic's chief economist. "So no lender is going to refinance an existing loan balance if it's more than the house is worth, and particularly as home prices continue to decline."
The report found that 7.6 million U.S. mortgages, or 18% of all properties with a first or second lien, were in a negative-equity position at Sept. 30. Another 2.1 million mortgage were nearing that point.
Mr. Fleming's biggest concern is that unemployment, which hit a five-year high of 6.1% in September, would rise to 7% or higher.
"As people lose their jobs and face trouble paying their mortgage there's a much higher chance that they can't refinance or sell their homes" and could default, he said.
Six states account for 58% of all negative-equity mortgages: Arizona, California, Florida, Michigan, Nevada, and Ohio. Those states are also among the ones with the highest number of foreclosures.
New York has the lowest rate of mortgages with negative equity, 7%, followed by Hawaii, Pennsylvania, and Montana.
Mr. Fleming said he was particularly concerned about Nevada, where 48% of properties with first and second liens had negative equity. He blamed a speculative building boom in Las Vegas over the last five years.
The report found that states with high percentages of negative equity fell into three distinct groups. Values are off sharply in states like California and Florida after a housing boom that included a large number of speculators.
Prices for homes in Midwestern states such as Michigan and Ohio, which are in the middle of a manufacturing-driven economic downturn, have come under stress as consumers leave the region.
In a third group, Southern states, home prices have slid because of national economic trends rather than local factors.
Mr. Fleming attributed many of the industry's problems to the number of borrowers with stated-income loans or no-documentation loans, which enabled people to buy homes with little down.
The data can be used by servicers and investors at "the ZIP code level," to allow risk managers to determine the future risk to their portfolios, he said. "This gives risk managers more insight into what's going to happen in the future," he said.
First American CoreLogic, a unit of First American Corp., examined public records of 42 million outstanding first- and second-lien mortgages. It used an automated valuation model to determine values for properties, and subtracted these values from the total debt outstanding.
This report was not as bearish as one released this month by Moody's Economy.com, which estimated that 12 million homeowners owe more than their homes are worth, double the 6.6 million at the end of 2007, and four times the estimated 3 million who were underwater in 2006.
Gus Faucher, a director of macroeconomics at Moody's Economy.com, said his company's higher estimate was based on a sample of credit files from the credit bureau Equifax Inc., which was combined with regional pricing data to generate an estimate of the number of borrowers with negative equity.
"This is as bad as it gets," Mr. Faucher said. "People are much more vulnerable because they got these stated-income and no-documentation loans and they were relying on rising housing prices to bail them out, and that's not going to happen."
Investors will "take a hit" from the latest government proposal offering incentives to servicers, Mr. Faucher said, because investors will have to lower the principal value of the loan in exchange for a government guarantee.