Borrowers With Home Equity Loans Much More Likely to Be Underwater

June 7, 2011 No Comments »

underwater

You may want to think twice about that second mortgage.

A new report released today by CoreLogic revealed that 38 percent of borrowers with home equity loans were in an underwater position (owe more on mortgage than home is worth) as of the end of the first quarter.

That compares to 18 percent of borrowers with no home equity loans, which are typically second mortgages and home equity lines of credit.

CoreLogic also found that over 40 percent of all negative equity borrowers have home equity loans.

What’s the deal?

Well, it’s not really that much of a surprise, as many of these types of loans were used as piggyback seconds to obtain 100% financing during the real estate boom.

For example, a borrower would take out a first mortgage at 80 percent loan-to-value (LTV), and a corresponding second mortgage for the remaining 20 percent.

Unfortunately, coupled with an option arm first mortgages and other adjustable-rate mortgages, homeowners quickly saw their home equity slip into the red as home prices plummeted.

Some borrowers may have opened non-purchase money second mortgages as well to extract equity when home prices were flying high, as opposed to refinancing their first mortgage.

Presence of Home Equity Loans Raises Severity of Negative Equity Position

An upside down borrower with a home equity loan had average negative equity of $83,000, versus $52,000 for an upside down borrower without a home equity loan.

Again, not a big surprise, since two mortgages are worse than one, when we’re talking about home equity and loan-to-value ratios.

Overall, 10.9 million, or 22.7 percent of all residential properties with a mortgage were in a negative equity position as of the end of the first quarter of 2011.

This compares to 11.1 million, or 23.1 percent, in the fourth quarter.

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