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Borrowers in Hardest-Hit Areas Could Remain Underwater for Years: Zillow

The effective negative equity rate declined in the second quarter to 41.9% from 43.6% in the first quarter. Still, it means roughly 42% of homeowners with a mortgage are unable to sell their homes. About a third of homeowners do not have a mortgage at all.

Zillow expects rising prices will lift an additional 1.9 million borrowers out of negative equity over the next year, with the majority of the freed homeowners anticipated in Los Angeles, Riverside, Calif. And Atlanta.

Zillow calculates negative equity by looking at current outstanding loan amounts for individual owner-occupied homes with those homes' current estimated values.

Estimates of underwater borrowers vary. According to CoreLogic, the number of underwater borrowers was 9.7 million at the end of the first quarter. An additional 11.2 million have less than 20% equity in their homes.

But the Zillow analysis is significant because cities hardest hit by the housing bust are still crying for more relief. But rising home prices has made mortgage relief a less urgent issue in Washington than it once was at the peak of the crisis.

That has pushed some cities such as Richmond, Calif to consider seizing mortgages from investors via eminent domain and writing them down for borrowers, a plan that has been vigorously contested by the mortgage industry.

As Humphries noted, deep negative equity discourages borrowers from selling homes, thereby constraining supply.

Underwater borrowers are also considered more likely to default, though it is worth noting that the majority of the borrowers continue to meet their mortgage obligations.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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