Home equity is gone for many mortgage holders

Talk about drowning in debt.

Almost 8 percent of Washington state homeowners with mortgages are "under water" — that is, they owe more than their home is worth.

An additional 11 percent are close to the waterline, a new report shows.

Startling as that may sound, the percentage of underwater Washington state mortgage holders is less than half the national average — and that positions state homeowners to better withstand the threat of foreclosure than those in Nevada, California and other states where home prices have taken precipitous tumbles.

"You are less sensitive than the U.S. when it comes to home-price declines, which is a good thing," said Sam Khater, senior economist for First American CoreLogic, a California mortgage-data firm.

On Friday, Khater's firm released the first state-by-state report of negative-equity estimates. It covers 42 million homes with first or second mortgages. That includes about 80 percent of all U.S. mortgages, Khater said.

About one-third of all homeowners own their homes outright, an often-overlooked fact that drives down the total percentage of underwater homeowners. In other words, when all who own homes are included, far fewer than 8 percent of Washingtonians owe more money their property is worth.

First American CoreLogic's study examined equity as of Sept. 30. It found that 18 percent of all mortgaged properties in the United States were under water. That reflects 7.6 million mortgages; Washington state accounted for 96,604 of them.

About 2.1 million mortgages — 139,515 in Washington — had so little equity they were within 5 percent of being under water.

The national numbers are heavily skewed by the housing ills of six states: Nevada, where almost half of all mortgage holders are under water, Michigan, Florida, Arizona, California and Georgia.

Those six states account for more than 58 percent of all negative-equity mortgages, although they have only 36 percent of the nation's total mortgages.

If those six states are excluded, the remaining states' average negative equity is 12 percent — still higher than Washington's 7.6 percent.

First American CoreLogic didn't analyze its numbers by county. Nor did it cross reference underwater mortgages with those in foreclosure, although it plans to do both soon, Khater said. However, he felt confident saying that some negative-equity mortgages "are in the process of foreclosure now."

Foreclosures in Washington have been declining, according to real-estate data provider RealtyTrac. In September, 1,952 Washington homeowners were in some stage of foreclosure, it said. That represents a 16 percent decline from the previous September.

But as long as home prices continue dropping — which some economists predict could go on well into next year — there will be more homes going under water and more owners in jeopardy of foreclosure.

Nationwide, home prices have dropped roughly 20 percent since their peak in mid-2006 and could slide another 20 percent, leaving 40 percent of homeowners under water, said Nouriel Roubini, a New York University economics professor.

"There is a huge incentive to walk away from your mortgage," Roubini said.

Until recently, Seattle-area prices defied the downturn. Another recent First American CoreLogic study showed that house prices in the Seattle metro area fell 8.4 percent for the year ending in August.

The majority of the country's mortgages were written within the past five or six years, Khater said.

That corresponds to the unprecedented national run-up in house prices and the widespread use of creative financing, including subprime mortgages to credit impaired borrowers and loans with no documentation for those who didn't want to document their earnings.

As prices began their slide, first in places such as California and Nevada, owners began seeing their equity evaporate.

Those who bought with little or no money down, or refinanced to take equity of their home, were most in jeopardy of ending up under water.

Most homeowners who refinanced within the past four years use their equity as a piggy bank, according to Freddie Mac, a quasi-governmental mortgage money source.

In the third quarter of this year, 78 percent of Freddie Mac-owned loans were refinanced into loan amounts at least 5 percent higher than the old mortgage — and that's down from a year earlier, when 86 percent of loan applicants elected to tap 5 percent or more of their equity.

In Washington, the average owner with a mortgage has a 41 percent equity cushion. That means they actually own 41 percent of their home's market value. Nationally, the equity cushion is 34 percent.

The more equity owners have, the more insulated they are from the effects of declining prices. So Washington is better off than many states, Khater said.

Nevadans' equity cushion, for example, is 11 percent, making them particularly susceptible to home-price declines.

Evaporating home equity affects not only homeowners but society as a whole, Khater said.

Owners who are under water often cannot sell their homes. That reduces their mobility — an important consideration when jobs are being slashed and the jobless may need to move to find employment. From a government perspective, lower home values mean lower taxes and less money for schools, roads and other services, he said.

Elizabeth Rhodes: erhodes@seattletimes.com

Material from The Associated Press

was included in this report.