More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, according to First American CoreLogic.
An additional 2.2 million borrowers will be "underwater" if home prices decline another 5 percent, said First American, a Santa Ana, Calif.-based seller of mortgage and economic data, in a report Wednesday. Households with negative equity or near it account for a quarter of all mortgage holders.
"People aren't going to purchase a home as long as prices keep falling, and someone who is worried about their job isn't going to purchase a home either," said Sam Khater, senior economist for First American
Prices in 20 U.S. cities fell 18.5 percent in December from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest since 1997, and new-home sales plunged to the lowest since records began in 1963, the National Association of Realtors and Commerce Department said.
U.S. foreclosure filings exceeded 250,000 for the 10th straight month in January, RealtyTrac Inc. reported, and payrolls plunged by 598,000, pushing the unemployment rate to the highest since 1992, according to the Labor Department.
An average of 230,000 borrowers a month slid to negative equity in the fourth quarter of 2008, First American said. New negative-equity borrowers may rise to 250,000 a month in the first half of the year if prices continue falling, Khater said.
President Obama has proposed a $275 billion plan intended to help as many as 9 million troubled borrowers refinance or restructure their loans. About $75 billion would be used to rescue homeowners by paying lenders for altering troubled mortgages while reducing borrowers' interest rates as low as 2 percent.
The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.
Obama also supports revised U.S. bankruptcy rules that would let judges reduce mortgages on primary residences to fair-market value, if borrowers pay their debts under a court-ordered plan.
At least 7.6 million mortgage holders won't qualify because they are underwater by more than the 5 percent threshold allowed in Obama's proposals, according to an estimate by online valuation service Zillow.com.
"None of this is enough for people who are so upside down that they won't have positive equity," Khater said. More than 2.2 million U.S. borrowers have "severe negative equity," or loans worth 125 percent or more of the property's value.