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Originally published Friday, September 16, 2011 at 5:00 PM

Negative equity often paired with high interest-rate mortgages

Three of four homeowners who owed more than the value of their house were paying mortgage interest rates above market rates.

Los Angeles Times

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LOS ANGELES — The vast majority of Americans with mortgages worth more than their homes are also stuck with high-interest-rate loans, putting them in precarious financial situations, according to data out last week.

A total of 10.9 million homes with a mortgage were in a negative-equity position at the end of the second quarter, making up 22.5 percent of all residential properties with a mortgage, according to Santa Ana, Calif., research firm CoreLogic. That was a slight decline from 22.7 percent during the first three months of the year.

Of those underwater homeowners in the second quarter, three of four were paying interest at above the market rate, the data show.

Economists consider high mortgage payments on homes that are "underwater," or worth less than the debt owed on them, to be more likely to lead to foreclosure. The reason is that these homeowners can feel hopelessly trapped by the bad decisions made during the boom years and more willing to give up paying.

"High negative equity is holding back refinancing and sales activity and is a major impediment to the housing-market recovery," CoreLogic Chief Economist Mark Fleming said. "The hardest-hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices."

Negative equity keeps borrowers from being able to refinance and benefit from current low interest rates. It also restricts home sales because would-be sellers and move-up buyers remain stuck in their homes.

The share of negative-equity properties in the hardest-hit states has improved, CoreLogic said, but the primary reason was because borrowers lost their homes to foreclosure, which removed the home from the market.

Compared with the second quarter of 2010, the average negative-equity share for the top five states combined declined to 38 percent from 41 percent.

Nevada had the largest decline, falling from 68 percent of homes in a negative equity position to 60 percent.

In Washington, 17.2 percent of homes with mortgages were worth less last quarter than the debt owed on them, according to CoreLogic.

That figure was slightly lower, 16.5 percent, in the Seattle-Bellevue-Everett area.

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