More than 7.5 million single-family homes are worth less than what’s owed on their mortgages, and another 2.1 million were very close to being upside down at the end of September, according to an analysis by First American CoreLogic.

First American CoreLogic used automated valuation models to analyze its huge database of public records and produce what it claims is the industry’s first state-level assessment of households with negative equity (click to download spreadsheet).

The analyses, of 42 million properties with mortgages, found the states with the highest percentage of upside-down mortgages were Nevada (48 percent), Michigan (39 percent), Florida (29 percent), Arizona (29 percent), California (27 percent), and Georgia (23 percent).

Those six states are home to about one in three U.S. mortgages, but account for more than 58 percent of the nation’s upside-down homes, First American CoreLogic estimated.

Take those six states out of the equation, and the percentage of U.S. homes with a negative-equity mortgage is 12 percent, rather than 18 percent, the analysis found.

Some homeowners own their property outright and do not have a mortgage. But add the 2.1 million mortgages that are within 5 percent of being upside down, and 23 percent of single-family homes with mortgages are upside down or near upside down, First American CoreLogic estimates.

Being upside down — owing more on a mortgage than a home would fetch in a sale — does not necessarily mean a homeowner will end up in foreclosure.

But for homeowners who are having trouble making their mortgage payments because of a job loss or a rate reset on an adjustable-rate mortgage, being upside down can make it difficult or impossible to pay off a loan by selling a home or refinancing it.

Analysts at Fitch Ratings this week said 1.8 million subprime ARM loans totalling $347 billion are on average six months away from their initial or next monthly payment reset.

Fitch analysts said those borrowers face an increased risk of payment shock because of the recent volatility of a benchmark interest rate used to calculate their rates.

The six-month London Interbank Offered Rate, or LIBOR, spiked between mid-September and mid-October as loans between banks became more scarce.

Although six-month LIBOR is trending down from recent highs, at its recent peak it would have caused monthly payments for many subprime borrowers to increase by 30 to 50 percent, Fitch analysts said.

Another 1.4 million subprime loans totaling $245 billion are past their initial rate reset but are also affected by changes in LIBOR, Fitch said.

An increase in workouts and loan modifications by lenders could help ease the payment shock of rate resets, Fitch analysts said. The 98,000 loan modifications granted in September by HOPE NOW loan servicers represented a 22.5 percent increase from the previous month, Fitch noted.

If the loan workouts continue at the pace seen this year, then more than 1 million of the 1.8 million subprime borrowers facing resets could be granted relief over the next six months, Fitch said.

The Bush administration is reportedly weighing a proposal that the government guarantee as many as 3 million existing loans when lenders agree to restructure them based on a borrower’s ability to repay (see story). 


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