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Negative home equity predicts defaults

Negative equity is the best predictor for loan defaults, said Sam Khater, a senior economist for First American. Still, "a majority of people who are underwater probably will not default," he said, "because if you have your job and don't encounter economic shock, you'll most likely keep paying your mortgage on your home."

Real estate values in the greater New York area may suffer less from underwater mortgages than in other parts of the nation, said Mr. Khater, of First American, because homeowners are less likely to fall into foreclosure.

That is because this area was less popular among people who bought homes as investments rather than for their own use. In Arizona, Nevada, California and Florida, where speculative buying was much more common, homeowners who owe much more than their homes are worth generally have less incentive to keep paying the mortgage.

Another set of recent statistics underscores the idea that having an underwater mortgage diminishes a borrower's mobility. According to the Census Bureau, fewer people moved in 2007 and 2008 than in any other two-year period since 1959 and 1960. Compared with 2006 and 2007 census data, 19 percent fewer homeowners moved in 2007 and 2008.

Aside from causing people to stay put, the diminished equity situation has induced homeowners to save more money, since they cannot depend on second mortgages for emergency funds.

The Depths of Mortgage Debt
Published: August 30, 2009
Homeowners are in better financial condition in New York, Connecticut and New Jersey than in many other parts of the country.


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