More foreclosures result in lower rates of underwater mortgages

While the number of underwater mortgages in the U.S. have fallen during the third quarter quarter of this year, the drop is not due to rising home values, but increased foreclosure activity, according to CoreLogic.

The number of Americans in possession of an underwater mortgage - when a homeowner owes more on their mortgage than their homes' value - dropped from 11 million in January to 10.8 million at the end of September even though home values didn't rise in the third quarter. Many homeowners are hiring moving services because they have been foreclosed on, allowing banks to possess those houses and eliminate the debt.

An additional 5 percent decrease in home values could cause more than 2.4 million homeowners to have underwater mortgages.

Sam Khater, an economist at CoreLogic, told the Wall Street Journal that underwater mortgages are a "giant anchor that's holding back the economy" because those borrowers are more likely to default on their loan if they lose their jobs, and cannot sell the home unless they have the cash to cover the gap between the sale price and the amount owed on the mortgage.

Median home values have shrank across the country. Reeves, Texas had the lowest home values in the nation from 2005 to 2009, at an average of $29,400, while 32 additional counties have median home values that are less than $50,000 according to statistics from the U.S. Census Bureau.
 

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