$1 trillion in mortgage debt still underwater


(MoneyWatch) More people have been lifted out of the shadow of negative equity over the last year, but collectively homeowners still carry $1 trillion in underwater mortgage debt.

Nearly 2 million homeowners emerged from negative equity last year, according to a new report from Zillow.com. About 13.8 million people were still underwater at the end of the year, compared to 15.7 million at the end of 2011 - a drop of 3.6 percent.

Using price appreciation and depreciation indices, Zillow is forecasting that by the end of this year, the number of homeowners who are underwater will be down another 2 percent, putting a little less than 1 million more homeowners into positive home equity.

But the level of negative homeowner equity is still extremely high on a historic basis, and these 14 million homeowners have a long way to go to get back above water, even with current levels of home value appreciation. To put this into context, the survey found around 27 percent of homeowners still carry negative equity -- that's one in four homes. That's still a high percentage considering that the number should hover around zero percent.

"High rates of negative equity were caused by the steep declines in home values during the housing bust," Zillow senior economist Svenja Gudell said. "In times of home value increases, especially in the years leading up to the peak of the market where we saw extremely high rates of appreciation, negative equity is virtually nonexistent."

What's interesting is how the emergence of more homeowners from negative equity could affect the housing market.

According to Zillow, home values rose 5.9 percent year-over-year,  largely due to very limited inventory, which could change if more homeowners decide to sell their property. And while having more home sellers in the game is overall a positive trend, that in itself could temporarily push housing prices down again, particularly in economically fragile metropolitan areas.

"Freed from negative equity, homeowners will have more flexibility, and some will likely choose to list their home for sale, helping to ease inventory constraints and moderating sometimes dramatic, demand-driven price increases in some markets," said Zillow Chief Economist Dr. Stan Humphries in an e-mail.

While most of the decrease in negative equity can be attributed to increasing home values, some is also due to homeowners who dropped that negative equity through the foreclosure process.

And while foreclosures are down nationally, they remain high in states where foreclosures go through the courts, meaning there is a backlog of foreclosures still working their way through the system, particularly in Florida.

"Twelve percent of the mortgages in Florida are in the process of foreclosure, down from a peak of 14.5 percent last year but still an extraordinarily high rate that is impacting the national rate," said Jay Brinkmann, MBA's chief economist.

Nevertheless, the Miami area and other areas that saw huge drops in home prices have also seen the greatest number of people emerge from underwater. Of the nation's 30 largest metro areas, those with the highest number of homeowners freed from negative equity last year were some of the areas hardest hit during the Great Recession. In 2012, Phoenix had 135,099 homeowners freed from negative equity; Los Angeles 72,936; Miami-Fort Lauderdale 70,484; Dallas-Fort Worth 59,461; and Riverside, Calif. saw 58,417 homeowners emerge from underwater.

In a sign that the economy may be reviving slightly, the Mortgage Bankers Association recently reported that fewer homeowners are delinquent on their mortgage payments. The delinquency rate for mortgage loans on residential properties that are 30 days past due fell to a seasonally adjusted rate of 7.09 percent of all loans outstanding at the end of the fourth quarter of 2012, the lowest level since 2008. A normal level of delinquency is around 2 percent.

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    Ilyce R. Glink is an award-winning, nationally-syndicated columnist, best-selling book author and founder of Best Money Moves, an employee benefit program that helps reduce financial stress. She also owns ThinkGlink.com, where readers can find real estate and personal finance resources.