By Tim Reid ,Reuters
More than one million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration (FHA) loans that require only a tiny down payment are partly to blame. That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period. It is a sobering indication the U.S. housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk. As of December 2011, the latest figures available, 31 percent of the U.S. home loans that were in negative equity — in which the outstanding loan balance exceeds the value of the home — were FHA-insured mortgages, according to CoreLogic. Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America. Even for loans taken out in December — less than four months ago and the last month for which data is available — nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water. “The overwhelming majority of the U.S. is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.” The problem is not uniform around the country. In some areas, such as Washington, Miami and parts of northern California, prices are on the rise. CoreLogic predicts the overall U.S. housing market will finally bottom out this year. And the number of homeowners falling under water each month has decreased significantly since the peak of the financial crisis in 2008 and early 2009. Still, Khater said, since October 2010 average home prices have fallen 7.4 percent. Overall, CoreLogic data shows that 11.1 million, or 22.8 percent, of U.S. residential properties with a mortgage are in negative equity, unchanged from the summer of 2010. According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major U.S. metropolitan areas, U.S. home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines. CoreLogic says a significant factor causing recent home loans to slide under water has been the availability of government-insured mortgages that require only a small down payment.
These loans, insured by the FHA, require a down payment of as little as 3.5 percent of the purchase price, providing only a small cushion of protection against a drop in home prices that could drive a borrower into negative equity. “This is creating a new wave of under water borrowers,” said Gary Shilling, a veteran financial analyst and well-known housing market bear. “We have all three branches of government trying to keep people in four bedroom houses who can’t afford chicken coops.” The U.S. Federal Reserve, in a report delivered to Congress in January, estimated that 12 million American homeowners had negative equity. Of those, the Federal Reserve said, three million were borrowers with FHA-insured loans. CoreLogic’s Khater said: “Low down payment lending in a weak housing market and weak economy begs the question whether we are setting up the FHA to have a multitude of failures down the line.”