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Home equity loans blamed for underwater mortgages

A study released today by CoreLogic, a real estate data and analysis firm, indicates that 38% of homeowners who took out home equity loans on their houses were “underwater” at the end of the first quarter of 2011, compared with 18% of borrowers with no home equity loans. More than 40% (4.5 million) of all negative equity borrowers have home equity loans.

In total, 10.9 million, or 22.7%, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011, down slightly from 11.1 million, or 23.1%, in the fourth quarter.

Las Vegas led the nation with a 66% negative equity share, followed by Stockton (56%), Phoenix (55%), Modesto (55%) and Reno (54%). Outside metropolitan areas in the top five negative equity states, the metropolitan markets with the highest negative equity shares include Greeley, Colo. (38%), Boise (36%) and Atlanta (35%).

While the average negative equity borrower was upside down by $65,000, there were wide disparities by state. New York borrowers were upside down by an average of $129,000, the highest average in the nation, followed by other high housing cost states: Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000) and California ($93,000). Ohio's negative equity borrowers were upside down by $31,000, the lowest average in the nation, followed by Indiana ($34,000) and Minnesota ($38,000).

"Many borrowers in negative equity are still able and willing to make their mortgage payments,” said Mark Fleming, chief economist with CoreLogic. “Those in negative equity and impacted by an income shock of some kind, such as a job loss, divorce or death, are much more likely to be at risk of foreclosure or a short sale. The current economic indicators point to slow yet positive economic growth, which will slowly reduce the risk of borrowers experiencing income shocks. Yet the existence of negative equity for the foreseeable future will weigh on the housing market recovery by holding back sale and refinance activity." 

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