48% of home loans will be underwater in 2011: Report

08.06.09
By Lewis Green

These days, a significant number of homeowners owe more on their mortgage loan than their property is worth - particularly if they bought during the housing boom.

This situation - known as being "underwater" - will only become more common over the next couple of years, according to a new report from Deutsche Bank.

While 26 percent of homeowners were underwater in the first quarter of this year, this proportion could rise to 48 percent in 2011 due to continued home prices drops, the bank said.

Furthermore, the report predicts that the crisis will move on from subprime borrowers and risky mortgages to prime borrowers with higher credit scores who have conforming home loans. Conforming mortgage loans are those that fit the guidelines of Fannie Mae and Freddie Mac.

Deutsche Bank predicts that as many as 41 percent of prime conforming home loans and 46 percent of prime jumbo loans will be underwater by the end of March 2011.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the bank said, as quoted by Reuters.

Although the Deutsche Bank report has a bleak forecast for the next couple of years, other housing market experts paint a sunnier picture when it comes to home prices.

Clear Capital's Home Data Index, released today, showed that home prices rose at a national level by 5 percent during the quarter ending July 25.

Meanwhile, the most recent data from Standard & Poor/Case-Schiller also showed a slight rise in May. But housing experts are cautioning that seasonal influences and other factors may be playing a role and it is too early to predict that the market is out of the woods.

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Some 41 percent of prime conforming home loans could be underwater by 2011.