Nearly 50 percent of all residential mortgages in the U.S. will be underwater by 2011 as house prices continue to drop, according to Deutsche Bank.
The bank explained that the continued drop in house prices has been driving the continued increase in bank repo homes as borrowers walk away from their underwater mortgages.
In June, Deutsche Bank predicted that home prices will fall by 14 percent in the first quarter of 2011 in at least 100 metro areas, bringing the total home price decline to 41.7 percent.
The projected increase in the volume of underwater mortgages to about 48 percent by 2011 marks a staggering increase from the 26-percent share on March 31 this year.
Deutsche Bank also said that conforming mortgages which met Freddie Mac and Fannie Mae lending guidelines and which comprise most of the mortgages originated will be battered most by home price declines. Prime conforming mortgage loans comprise around 67 percent of all mortgages and usually are less risky than other types of loans because these are given to borrowers with high credit scores and complete and qualified financial documentation.
Of all conforming home loans, about 41 percent shall be underwater during the first 3 months of 2011, an increase from the 16 percent share in the first 3 months of 2009.
Borrowers who took out risky home loans during the boom years will also be hit hard in 2011 because they are suffering the biggest erosion in home value and in equity, according to Deutsche. Of all subprime mortgages, 69 percent will become underwater in 2011, a substantial increase from the 50-percent share in March.
Of all option adjustable-rate mortgages, 89 percent will become underwater in 2011, another substantial increase from the 77-percent share in March. Option ARMs allow borrowers to make very low payments during the first years of their loan terms.
Deutsche analysts Ying Shen and Karen Weaver made the projections despite indications of improvements in the housing market, as increases in home prices were reported in many areas of the country after 3 years of price declines. They said that the next wave of house price declines will affect prime mortgage borrowers the most.
According to the analysts, around 90 percent of all mortgages in Las Vegas and in other cities in California and Florida will be underwater by 2011 and the states that will suffer negative equity the most will be California, Florida, Nevada, Arizona, Ohio, Illinois, Michigan, Massachusetts, Wisconsin and West Virginia.
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