Rising Home Prices Might Help 8.3 Million Borrowers Avoid Short Sales

NEW YORK ( TheStreet) -- Underwater borrowers have reason to hope.

According to a new report from RealtyTrac, if home prices continue to gain at this pace, an estimated 8.3 million borrowers could be on track to regain equity in their homes allowing them to sell.

These borrowers have a loan to value ratio of between 90% and 110% -- that is, they have between 10% positive equity and 10% negative equity. They represent 18% of the population with a mortgage.

These borrowers may currently not be in a position to sell. Those who are slightly underwater might have to do a short sale.

In a short sale, the bank allows the borrower to sell the property at a price less than the value of the mortgage. The balance is usually forgiven but the borrower's credit score takes a hit, making it more difficult for him to qualify for a new mortgage.

Those with insufficient equity - less than 20% -- might also find it tough to sell because they will need enough money after the sale to afford the downpayment on their new mortgage, unless they choose to rent.

The ability of these homeowners to sell could make a significant difference to the supply in the market, which is currently unusually tight.

Steadily rising home prices are lifting all boats in this housing market and should spill over into more inventory of homes for sale in the coming months," said Daren Blomquist, vice president at RealtyTrac. "Homeowners who already have ample equity are quickly building on that equity, while the 8.3 million homeowners on the fence with little or no equity are on track to regain enough equity to sell before 2015 if home prices continue to increase at the rate of 1.33 % per month that they have since bottoming out in March 2012."

Still, as of September, 10.7 million borrowers remain deeply underwater -- borrowers whose loan exceeds property value by 25%. For these borrowers, it could still take years before homeowners regain enough equity to sell their homes.

But the number of deeply underwater borrowers is on the decline, down from 11.3 million in May and 12.5 million in Sept. 2012.

Also, one in four borrowers in the foreclosure process actually had some equity. That means they could still sell the home without a short sale and avoid foreclosure.

More than 126,000 properties in the foreclosure process nationwide had an LTV of 100 % or lower in September, representing 24 % of all homes in the foreclosure process.

Some states and cities still have a disproportionate number of underwater borrowers. States with the highest %age of deeply underwater homes (LTV of 125 % or higher) included Nevada (46 %), Illinois (40 %), Florida (40 %), Michigan (38 %), Rhode Island (34 %), and Ohio (31 %).

Nationwide 7.4 million homeowners with a mortgage had 50 % equity or more, representing 16 % of all homeowners with a mortgage. Metro markers with homeowners with at least 50% equity include Honolulu, San Jose, Calif., Poughkeepsie New York, Pittsburgh, San Francisco and New York.

-- Written by Shanthi Bharatwaj in New York.

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

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