Could half of the mortgages in the US be underwater by 2011?

August 6, 2009 – 1:40 pm – No Comment

The number of United States homeowners that owe more than their home is worth will likely double to 48% in 2011 from 26% at the conclusion of March. This would lead to another blow to the housing market. This is all according to Deutsche Bank.

Home prices have been on a huge decline and will have the biggest impact on prime loans that have met the underwriting and size requirements of Fannie Mae and Freddie Mac. Prime loans make up 2/3 of mortgages and tend to be less risky because of their harsher requirements for someone to get a loan.

Analysts Karen Weaver and Ying Shen said, “We project the next phase of the housing decline will have a far greater impact on prime borrowers.” Of the loans they are talking about, 41% will likely be underwater by the first quarter in 2011, while only 16% will be underwater by the end of 2009.

The weird thing about this news coming out is that news has been coming out for months that report a stabilization of the housing market after three straight years of price declines. Just this week, the National Association of Realtors said that pending home sales had risen for a 5th straight month.

Also, a very popular index showed (in July) that home prices rose for the first time since 2006 in May.

Of course, the decline in home prices across the country has led to further foreclosures because some people just can’t afford to pay what they owe on the house when the house isn’t worth what they paid. For example, in California are bad. People were paying $500,000 to $1 million for homes that are worth half of what they were when the owner purchased them. The people who bought their houses at that time are the ones facing the greatest losses.

The places that are having the worst negative equity are places in Florida, Arizona, Ohio, California, Nevada, Massachusetts, Illinois, West Virginia, and Wisconsin. Some homeowners in Florida and California will see 90 percent of the homes in their areas with underwater mortgages.