40% of underwater borrowers took cash out of homes

CoreLogic: Owners with home equity loans more than twice as likely to be upside down

Homeowners with home equity loans are more than twice as likely to be “underwater” as those who didn’t take cash out of their homes, according to statistics compiled by real estate and loan data aggregator CoreLogic.

CoreLogic estimates that at the end of March, 22.7 percent of homeowners with mortgages — about 10.9 million borrowers — owed more on their mortgage than their home was worth. That’s down slightly from an estimated 11.1 million underwater borrowers at the end of December.

Falling home prices can put borrowers who have little equity in their homes underwater. By allowing homeowners to convert equity they have in their homes into cash, home equity loans reduce the cushion borrowers have against price declines.

CoreLogic said that 38 percent of borrowers with home equity loans were underwater at the end of March, compared with 18 percent of homeowners who had no home equity loan. More than 40 percent of all underwater homeowners (4.5 million) have home equity loans, CoreLogic said.

As might be expected, CoreLogic found that the presence of a home equity loan also increased the amount of negative equity. Underwater homeowners who had taken out home equity loans owed $83,000 more than their home was worth, on average, compared with $52,000 for those who hadn’t taken cash out of their home.

Past studies have shown that the higher a borrower’s combined loan-to-value ratio (CLTV), the more likely they are to stop making payments on their loan. In many cases, borrowers will opt for a “strategic default” — not because they can’t afford the monthly payments, but because they don’t believe their home will regain its value anytime soon.

CoreLogic found that borrowers with home equity loans were slightly more likely to default at “moderate” levels of negative equity, up to 115 percent CLTV. Beyond that point, the relationship reverses, and default rates were slightly higher among homeowners without home equity loans.

Among all underwater borrowers nationwide, the average amount of negative equity was $65,000. In states with higher-cost housing, the average was considerably higher. In New York, underwater borrowers had an average of $129,000 in negative equity, followed by Massachusetts ($120,000), Connecticut ($111,000), Hawaii ($98,000), and California ($93,000).

At the other end of the scale, underwater borrowers in Ohio had the lowest negative equity — $31,000, on average — followed by Indiana ($34,000), and Minnesota ($38,000).

Nevada led all states in the proportion of underwater borrowers — 63 percent of Silver State homeowners with mortgages owed more than their home was worth — followed by Arizona (50 percent), Florida (46 percent), Michigan (36 percent), and California (31 percent).

At the metro level, Las Vegas led the nation, with 66 percent of mortgaged properties underwater, followed by Stockton (56 percent), Phoenix and Modesto (55 percent), and Reno (54 percent).

Metropolitan markets located outside of the five states with the highest negative equity shares include Greeley, Colo. (38 percent); Boise (36 percent); and Atlanta (35 percent)