One in nine mortgages in Provo-Orem 'underwater'

Falling home values in the wake of a deepening housing crisis have resulted in a rising number of homes with upside down mortgages nationwide, with one local analyst warning that the problem could be especially serious for some homeowners and investors in Utah County.

Nearly 11 percent of all homes with a mortgage in the Provo-Orem area are in negative equity in the fourth quarter of 2008, and that number is likely to grow, according to a report released Wednesday by First American CoreLogic, a Santa Ana, Calif.-based seller of mortgage and economic data. In the third quarter, 7.9 percent were upside down.

Negative equity, also referred to as underwater or upside down, means borrowers owe more on their mortgage than their home is worth.

Of a total of 72,522 Provo-Orem properties with a mortgage in the fourth quarter, 7,713 were underwater. In Salt Lake City, 27,031, or 15.2 percent, of all properties with a mortgage were in negative equity in the fourth quarter.

"Being underwater is a necessary but not sufficient condition for default and foreclosure," said Mark Fleming, chief economist for First American in Washington, D.C. "The other necessary condition is inability to make your mortgage payment due to job loss, divorce, a significant change in the payment because of an adjustable loan. The problem occurs when those two combine."

Those who didn't put any money down for high-end homes (above $400,000) bought during the boom years of 2006 and 2007 in Utah County are most likely at risk of going underwater, said Jason Eldredge, vice president of sales with Newreach. The Salt Lake City company tracks pre-foreclosure statistics in Utah.

"If you've got a 100 percent-funded loan, and the market depreciates just a few years after you purchased at the peak, you may find yourself in a negative equity situation, if you didn't put any money down," he said.

In Utah, as in most areas nationwide, higher-end homes are seeing the biggest price drops as rising foreclosures and unemployment take their toll.

"A lot of new construction over the $400,000 price range in Utah County could be in negative equity," Eldredge said. "Much of the new home inventory in this price range was built in 2005, 2006 and 2007. Many of these homes were also funded at 100 percent. Now that the upper-end homes are seeing the biggest price declines, they are turning into negative equity homes."

Increasingly, he is seeing more homeowners having difficulty refinancing loans of more than $400,000 despite having good credit and secure jobs, because their loan-to-home values have dropped sharply.

"People who did 100 percent financing, where the first 80 percent is on a fixed rate, and the second 20 percent loan on a variable rate, could have some problems if the 20 percent rate starts to adjust upward. That could mean a couple hundred dollars per month increase," he said.

Still, the situation in Utah isn't as dire compared with what's happening nationally.

Across the nation, households with negative equity or near it account for a quarter of all mortgage holders. More than 8.3 million or 20 percent of all U.S. mortgage holders are now underwater as the recession cut home values by $2.4 trillion last year, the report said. Three months ago, 18 percent were underwater.

New negative equity borrowers may rise to 250,000 a month in the first half of the year if prices continue falling, the CoreLogic report said.

But Eldredge maintains the problem in Utah isn't anywhere as serious as in Las Vegas, Arizona, California and Florida.

"How serious the negative equity situation becomes depends on how and when you bought the home. Did you put money down on your home? Did you buy in markets that are now depreciating faster than others? If you put 20 percent or more down, you will be fine because you came to the table with some equity," he said.

Also, most of the investor speculation in Utah's housing market began in 2005, at least two years after the market started heating up in states like Nevada and California, he said.

"We didn't have as much time to get as deep in trouble as some states like Nevada, which began heating up in 2003. We were lucky we did not start earlier in the boom like those markets," he said.

Still, the number of default notices, or notices issued to homeowners who are at least 60 days late on their mortgage payments in Utah County, has jumped to 252 in February, up from 45 a year ago, Eldredge said.

"Once a homeowner goes into default, nine times out of 10, their homes will have a new owner within 12 to 14 months," he said. Eagle Mountain and Saratoga Springs, located in the former fast-growing north Utah County area, had the highest number of default notices in 2008, he said.

The CoreLogic report also found an additional 2,951 mortgages, or 4.1 percent, of all mortgages in the Provo-Orem area are nearly underwater, bringing the total to 14.7 percent of all outstanding mortgages that are now underwater or nearing it.

These borrowers, analysts say, may be prime candidates for refinancing under President Barack Obama's foreclosure prevention plan announced Wednesday

President Obama's plan aims to help as many as 9 million troubled borrowers refinance or restructure their loans. About $75 billion would be used to rescue homeowners by agreeing to pay lenders for altering troubled mortgages while reducing borrowers' interest rates as low as 2 percent, according to an Associated Press report Wednesday.

Obama also supports revising U.S. bankruptcy rules that would let judges reduce mortgages on primary residences to fair-market value, if borrowers pay their debts under a court-ordered plan.

But, here's the rub.

At least 7.6 million mortgage holders won't qualify because they are underwater by more than the 5 percent threshold allowed in Obama's proposals, according to an estimate by online valuation service Zillow.com.

More than 2.2 million U.S. borrowers have "severe negative equity," or loans worth 125 percent or more of the property's value, according to CoreLogic.

Some analysts say the plan also focuses mainly on owner-occupied homes and not investors, which account for as much as 40 percent of home sales during the housing bubble.

"The real worry is that we may have a Catch-22 position, where if you help the owner-occupieds and not the investors, you run the risk of these homes going back to the banks, and home values tanking further when these homes are reintroduced into the market at much lower prices in short sales or foreclosure sales," Eldredge said.

Grace Leong - DAILY HERALD