Homeowners Start to Walk When They're Out $70,000

Tuesday, 02 Mar 2010 02:56 PM

By Dan Weil

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Homeowners begin to default on their mortgages and walk away from their homes when their negative equity reaches $70,000.

That’s according to First American Core Logic (FACL), one of the nation’s top real estate research firms, CNBC reports. A homeowner has negative equity when the value of the mortgage exceeds the value of the house.

A homeowner with negative equity is said to be “underwater.”

FACL estimates that the number of underwater loans rose to 11.3 million, or 24 percent of all borrowers, in the fourth quarter, from 10.7 million in the third quarter.

"The rise in negative equity is closely tied to increases in pre-foreclosure activity and is a major factor in changing homeowner default behavior,” FACL wrote in a report.

“Once negative equity exceeds 25 percent, or the mortgage balance is $70,000 higher than the current property values, owners begin to default with the same propensity as investors."

FACL economist Mark Fleming tells CNBC the defaulting homeowners are simply making a rational financial decision.

“They figure that they can default and repair their damaged credit while saving money faster than they can ride out the price recovery."

Many say the foreclosure wave will continue.

"If history repeats itself, we will see a surge in the next few months, as lenders foreclose where neither the loan modification programs nor the new short sale alternatives works," James Saccacio, CEO of research firm RealtyTrac, said in a statement.


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