Housing Recovery Bailed Out 1.4 Million Underwater Homeowners in 2012

Through the third quarter of 2012, more than a million borrowers escaped the negative equity trap.

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One of the most significant effects of the nation's housing bust has been the swelling ranks of underwater borrowers trapped in homes worth far less than they are worth.

But thanks to sustained rises in home prices, the number of homeowners stuck in the negative equity trap is dwindling. According to analytics firm CoreLogic, 100,000 borrowers edged into the positive equity territory in the third quarter of 2012, adding to the more than 1.3 million borrowers that rose above water on their mortgages through the second quarter of last year.

"The number of underwater borrowers declined significantly," said Mark Fleming, chief economist for CoreLogic, in a press release. "The substantive gain in house prices made in 2012, partly due to tight inventory caused by negative equity's lock-out effect, has paradoxically alleviated some of the pain."

Overall, 22 percent of residential properties remained underwater at the end of the third quarter, down slightly from numbers through the end of the second quarter. Still, as many as 1.8 million borrowers could have equity in their homes again over the next year if home prices continue to rise, the firm reported.

As the report noted, much of the progress in reducing the number of underwater homeowners depends on continued increases in home prices, a trend experts largely credit to tight inventory conditions in many parts of the country. The lack of foreclosure inventory contributed to the overall lack of inventory, with investors and hedge funds vying for a limited number of properties.

According to foreclosure information website RealtyTrac, the average discount for foreclosure properties across the nation was about 32 percent through the third quarter of 2012. While that's still a sizable discount, according to RealtyTrac Vice President Daren Blomquist, discounts as much as 40 percent were customary just a couple of years ago.

But where discounts really become relevant is at a more specific, metro-area market level, Blomquist says.

"In cities that have been hit hard by foreclosures, the discount is much less than the national average," Blomquist says. "That's because foreclosures are such a dominant part of the market and non-foreclosures have to compete with foreclosure sellers."

Las Vegas, which was hard hit by the foreclosure crisis, posted only a 16 percent discount on foreclosures through the third quarter of 2012 according to RealtyTrac, half the national average discount. Stockton, Calif., is another foreclosure-ridden market, and it posted just a 9.5 percent discount.

The trend is even more stark when looking at foreclosure discounts by lenders over the past several years. At the height of the housing bust, Bank of America discounted foreclosures 34 percent on average according to RealtyTrac data. By 2012, the discount had shrunk to just 6 percent. On average, Wells Fargo offered no discount in 2012.

Lender/Servicer 2008 discount 2009 discount 2010 discount 2011 discount 2012 discount
Bank of America -14 percent -34 percent -24 percent -7 percent -6 percent
Chase -22 percent -38 percent -29 percent -4 percent 4 percent
CitiGroup -27 percent -40 percent -46 percent -9 percent -10 percent
GMAC Mortgage -33 percent -28 percent -30 percent -7 percent 3 percent
US BankCorp -30 percent -41 percent -34 percent -6 percent -6 percent
Wells Fargo -16 percent -33 percent -43 percent -8 percent 0 percent
Source: RealtyTrac

"The trend is that discounts are getting less and less, especially when you look through the lens of the lender," Blomquist says. "With the shortage of inventory, they have the upper hand in getting a better price."

While that might be bad news for investors looking for a deal, it bodes well for the millions of Americans still struggling with underwater mortgages and for the broader housing market and economy.