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Underwater Mortgages Tick Up But Trend Down

The number of underwater mortgages ticked up in Q4 compared with Q3, as U.S. home prices moderated and mortgage rates increased, according to CoreLogic (CLGX).

Nearly 6.5 million homes — 13.3% of all U.S. residential properties with a mortgage — were in negative equity at the end of last year, the Irvine, Calif.-based real estate information provider said. At the end of Q3, borrowers on nearly 6.4 million homes, or 13%, owed more than the property is worth.

The national aggregate value of negative equity was $398.4 billion for Q4, down 0.7% from the prior quarter.

Q4 was the first quarter when the rate of negative equity in the U.S. residential real estate market didn't materially decline since Q4 of 2011, Sam Khater, deputy chief economist at CoreLogic, told IBD.

Still, the numbers are trending in a more positive fashion overall. The negative equity rate was 21.6% in Q4 of 2012, and an estimated 4 million homes returned to positive equity last year, CoreLogic said.

Down From A Zenith Of 26%

Historically, the normal range for the underwater mortgage rate is 3%-4%, Khater said. The all-time high was 26%, which occurred in Q4 of 2009.

Home prices have moderated in recent months, due in part to rising mortgage rates. A reduction in investment activity in the U.S. residential real estate market and fewer cash buyers also have had the effect of slowing the growth of home prices.

"The rebound in home prices in 2013 helped 4 million property owners regain at least some positive equity in their largest asset — their home.

"We still have a long way to go to eliminate the negative equity overhang, but significant progress is being made every day across most of the country," CoreLogic CEO Anand Nallathambi said in a statement.

Worst In Nevada

The states with the highest rates of underwater mortgages in Q4 were Nevada (30.4%), Florida (28.1%), Arizona (21.5%), Ohio (19%) and Illinois (18.7%).

The metropolitan areas with the highest rates were Orlando, Fla. (31.5%); Tampa, Fla. (30.4%); Phoenix (22.1%); Chicago (21.4%) and Atlanta (19.9%).

Meanwhile, states such as California, with a 12.6% negative equity rate, don't require courts to process foreclosures and have recovered more quickly. States such as Florida, however, require judicial proceedings.

"The lack of ability to flush out the distressed homes has held back prices in the judicial foreclosure states," Khater said.

Also, states that have been slower to recover from the recession, like Ohio, Illinois and Michigan, which has 18% of its homes underwater, are moving up the negative equity list.

In contrast, the two states with the strongest employment growth — Texas and North Dakota — have the lowest rates of negative equity, 3.9% and 4.2% respectively, Khater noted.

"The fundamental economy is what's driving this as well," he said.