The Myth Of The Underwater Mortgage

Just over 11 million homes had underwater mortgages at the end of the final quarter of 2010. The precise figure is 11.1 million, which represents 23.1% of all properties with a mortgage. The value of this homeowner “negative equity” totals $750 billion nationwide according to Corelogic which compiles the numbers.

The actual figure for the percent of mortgages which are underwater and the total value of the equity involved is impossible to calculate, so Corelogic makes an educated guess which is taken by most of the press as gospel.

Corelogic only reviews 48 million mortgages, or about 85% of all home loans.

CoreLogic used its public record data as the source of the mortgage debt outstanding (MDO) and it includes first mortgage liens and junior mortgage liens and is adjusted for amortization and home equity utilization in order to capture the true level of mortgage debt outstanding for each property.

So far, the methodology is acceptable, but not completely precise. That is when Corelogic begins to move to educated guessing to finalize its figures.

The current value was estimated by using the CoreLogic Automated Valuation Models (AVM) for residential properties. The data was filtered to include only properties valued between $30,000 and $30 million because AVM accuracy tends to quickly worsen outside of this value range.

This is not entirely different from the Black Box methods used for proprietary economic forecasts or by brand valuation companies like Interbrand that issue data for products like Marlboro and Apple.

The negative equity problem is one of the most serious to face consumers, banks, and government policy makers in decades. It has remained unsolved despite programs like HAMP. State attorneys general have proposed to settle claims about improper foreclosures by banks in part by forcing these banks to write down the principle of home loans. That would have to be done on a massive scale to have much effect on the nationwide problem.

Solving the mortgage problems is not aided by figures on underwater mortgages which are estimates presented as precise numbers. Corelogic has not encouraged the public to read between its lines, which clouds a problem that  could use more precise examination.

Douglas A. McIntyre