"For many, the home has morphed from piggy bank to albatross," wrote analysts Karen Weaver and Ying Shen in a research report.
More and more strapped homeowners are finding that the amount they owe on the mortgage exceeds the house's value as prices and sales continue to drop in many parts of the country. This situation is known as negative equity or being underwater on the mortgage.
Deutsche Bank estimated that 14 million U.S. homeowners had negative equity at the end of the first quarter, or about 27% of owners with a mortgage. More Americans could go underwater on their mortgage if prices continue to fall, which makes it more difficult to refinance.
There have been lukewarm signs recently that the residential market is stabilizing after peaking in 2006. However, job losses, mounting foreclosures and depressed credit markets could delay the recovery, economists say. In particular, many worry about a wave of coming mortgage resets that could spike foreclosure rates.
Although subprime and option adjustable rate mortgages "are currently the worst cohorts with underwater borrowers, we project that the next phase of the housing decline will have a far greater impact on prime borrowers," the Deutsche Bank analysts wrote.
They projected that 41% of prime conforming borrowers and 46% of prime jumbo borrowers will be underwater by the first quarter of 2011. "The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," Deutsche Bank said.
Mark Zandi, chief economist at Moody's Economy.com, this week said negative equity and foreclosures are the main threats to an economic recovery. "That such a high proportion of homeowners are underwater is testimony to the severity of the foreclosure crisis and the risk that it still poses to the broader economy," he said. See WSJ.com blog.
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